Good morning, ladies and gentlemen, and welcome to the second quarter 2018 Welltower earnings conference call. My name is Lori, and I will be your operator today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by 0, and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. Now, I would like to turn the call over to Tim McHugh, Vice President, Finance and Investments. Please go ahead, sir.
Thank you, Lori. Good morning, everyone. Thank you for joining us today to discuss Welltower's second quarter 2018 results. Following the safe harbor, we'll hear prepared remarks from Thomas DeRosa, CEO, Mercedes Kerr, EVP, Business and Relationship Management, Shankh Mitra, Chief Investment Officer, and John Goodey, CFO. Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act of 1995. Although Welltower believes results projected in any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in this morning's press release, or from time to time in the company's filings with the SEC.
If you did not receive a copy of the press release, you may access it via the company's website at welltower.com. Before I hand the call over to Thomas DeRosa, I want to highlight a few significant points regarding our second quarter results. First, as announced last night, Welltower and ProMedica Health System completed the acquisition of Quality Care Properties and HCR ManorCare for $4.4 billion. Second, we are increasing our normalized FFO guidance for the year to a range of $3.99 per share-$4.06 per share from our previous guidance range of $3.95 per share-$4.05 per share. Third, as previously announced, we entered into a value-enhancing restructuring of our Brookdale relationship, which will provide improved triple-net lease coverage and operator diversification.
We also converted our existing 27-property triple-net relationship with Brandywine Living to an operating lease structure, which we anticipate will drive both long-term growth and value creation. Lastly, we closed on a new $3.7 billion unsecured credit facility, improving pricing across our line of credit and term loan facility, extending maturity out to 2022 and 2023, respectively. With that, I will hand the call over to Tom for his remarks on the quarter.
Thanks, Tim. Good morning. Earlier this year, I told you that Welltower was back in business. I hope you agree that last evening's announcement of the closing of our innovative ProMedica joint venture, our solid Q2 results, and the increase in 2018 FFO guidance all validate that statement. It's no secret that the operating environment for seniors housing remains challenging. Nevertheless, the benefit of owning a premier major urban market-focused portfolio is that we still managed to deliver some growth over last year. Mercedes will give you some perspective on the current state of the senior housing industry and some insights into why Welltower's operating platform continues to outperform. Welltower is well known for owning the best quality healthcare real estate in the REIT sector.
Owning great real estate allowed us to announce a value-enhancing restructuring of our Brookdale relationship that helps put Brookdale on a more positive path going forward and brings down our exposure to Brookdale from 7.6% to 2.9%. As part of this restructuring, we will move 37 buildings to a new operator, Pegasus, which is owned and operated by our friends and highly regarded industry veterans, Steven Vick and Chris Hollister. We are also bringing the Cogir team, run by the very talented Mathieu Duguay, down from Quebec to run 12 independent living buildings in the U.S. We have also restructured our relationship with one of our long-term triple-net senior housing operators to a RIDEA structure that will better enable Welltower to capture the long-term value in this excellent real estate located in the Super Zips of the Mid-Atlantic.
Shankh will tell you more about both transactions. These are examples of how Welltower continues to deliver creative solutions to challenges in the market, thereby creating opportunities to drive long-term shareholder value. In both cases, we will sell non-strategic real estate and hold on to some very good, highly strategic real estate. When you own bad real estate, you can only kick the can down the road for so long until you hit a wall. We are willing to face some short-term dilution related to both restructurings now, as these efforts will dramatically improve our operating platform in 2019 and beyond. We could not be more excited to announce the closing of our joint venture with ProMedica to acquire the operating business and real estate of HCR ManorCare and Arden Courts.
The structure of this transaction significantly improves the credit quality of our income stream and demonstrates how a healthcare REIT and a super-regional health system can work together to reimagine the settings where healthcare services will be delivered. You will be hearing much more about this in the coming months. As John Goodey will discuss, the accretive nature of this transaction allows Welltower to increase our 2018 normalized FFO guidance from $3.95 to $4.05, up to $3.99 to $4.06 per diluted share. We remain very excited by the prospects for Welltower in 2019 and beyond. Mercedes will now talk about the current senior housing environment. Mercedes.
Thank you, Tom. Senior housing operating performance in the U.S. market has been under pressure due to new supply, a severe flu season, and growing labor costs. According to NIC MAP's second quarter data, there was an 80 basis point year-over-year decline in occupancy as quarter-over-quarter net inventory growth of 3.3% outpaced an otherwise strong absorption rate of 2.4%. Construction starts over the last 12 months have been trading at or below the rate of projected deliveries. Furthermore, construction as a percentage of existing inventory in NIC's primary markets decreased from 6.9% to 6.3% sequentially. These data points are consistent with a slowing trend in new starts. While the market settles into this new supply offering, overall rates have continued to gain, with NIC reporting 2.7% same-store asking rate growth.
While not immune to these supply trends, Welltower's operating portfolio continues to show the resiliency we expect from our premier operators in top markets and sub-markets. Welltower's RevPOR growth has been strong and consistent throughout this challenging period, we expect that to continue. Construction as a percentage of existing inventory in our top 10 markets was 4.7% in the second quarter of 2018. That's 160 basis points lower than NIC's primary market statistics. In addition, our operating portfolio experienced 3.5% year-over-year growth in the quarter, or 80 basis points more than the market average. In addition to these reported statistics, our own real-time data indicates positive momentum in certain previously impacted cities such as Boston. That's a good example of this. A new supply is absorbed. Best-in-class locations and care continue to be the most important factors in resident decisions.
This helps us to maintain and drive rate while recovering occupancy. Our portfolio's solid footing on rate helps us to manage rising expenses more adequately, we continue to work closely with our operating partners to leverage Welltower's scale and manage costs. For years now, we have grown our operator advisory services platform, expanding the service offerings, driving greater partner participation. These programs target key operating expenses of labor, food, utilities, and insurance, drive improvements in service and resident satisfaction. We continue to expand and build upon this platform, the results are clear. Many operating expense categories were reported to be flat or lower this quarter compared to last. We are encouraged by the decelerating pace of construction and steady deliveries reported by NIC. These trends combined should result in more balanced absorption.
Our operating partners have a disciplined approach to managing the business, equally as important, they continue to provide best-in-class care for the residents and families that we serve. I'll turn the call now over to Shankh.
Thank you, Mercedes, and good morning, everyone. I will now review our quarterly operating results across all of our business segments, providing details on our senior housing triple net business with additional background on Brookdale and Brandywine restructurings. As we have described to you, the peak impact of senior housing supply cycle is flowing through our numbers right now, given the starts and delivery details that Mercedes described. Though we're not happy with our senior housing operating results on an absolute basis, within the context of peak supply, we think 0.1% growth is respectable performance at the bottom of the performance cycle. It speaks to the high quality of our real estate we own and the quality of our operating partners. We will not venture to guess how 2019 might look like at this point in the year, but our sense is we're bouncing along the bottom right now.
We're really excited about the growth trajectory of our cash flow when we come off this bottom as we are at 86% occupancy in our SHOW portfolio. Our triple net portfolio growth has been consistent and predictable. I would encourage you to look past the coverage change in the quarter as we had significant post-quarter transactions that makes the numbers stale, and we should see significant improvement next quarter. I also want to point out that we have significantly de-risked that cash flow stream as we have only $28 million of triple net senior housing and post-acute combined leases rolling before 2024. However, $22 million of that is a well-covered Brookdale sale lease, and we have effectively taken care of that. Last quarter, when we discussed with you the QCP ProMedica transaction, we encouraged you to think about the impact of the transaction beyond just a standalone deal.
This transaction has been transformational for our strategy and afforded us cash flow growth to offset short-term dilution from portfolio restructurings that we are finishing up to position the company for maximum near-term growth and long-term value creation. Moving on to Brookdale, we applaud their leadership team for their win-win transaction that rightsizes their relationship and leaves us with a Brookdale portfolio that's significantly covered, 1.3 times on EBITDA and 1.51 times on an EBITDAR basis. For the 60 assets that we're transitioning away from Brookdale, we see significant opportunity for growth as occupancy recovers from around 82% and rent levels are enhanced through the implementation of the new operating plans. We're very excited the senior housing industry's most well-respected turnaround specialist, Steven Vick, is partnering with Chris Hollister to form Pegasus and take over 37 of these buildings.
We're equally excited that one of the best independent living operator of North America, Cogir, led by Mathieu Duguay, is taking over 12 of the lower acuity buildings. The remaining 11 buildings are moving to the six of our operating partners in structures consistent with their existing lease or management agreements. This way, we'll be able to maximize the upside potential by matching location, acuity, and operating model to the appropriate operator. I'm also delighted to report that we have converted Brandywine Living from a triple net to a RIDEA structure. This portfolio of 27 communities centered around New York MSA is amongst the highest quality real estate in our portfolio. Brandywine portfolio has an average of 13 years with a RevPAR $7,500 plus, and through above average margins, generates an annual NOI per unit of approximately $29,000, placing them at the top of our portfolio.
Despite great operating metrics, the portfolio was over-leased and over-leveraged from day one and essentially was covering at 1.0. We executed a classic debt-to-equity swap in the PropCo, OpCo, and the management company. After this transaction, we'll own 99.3% of the PropCo and OpCo and 34.9% of the management and development company. Brandywine will operate these buildings under next-generation management contract but will share the upside and downside together. We believe this structure significantly improves the alignment of interests. We'll have near-term dilution mainly due to the conversion of rent to cash flow in recently developed lease-up assets in excellent infill locations. We believe our shareholders will enjoy significant upside from this extraordinarily well-located real estate in the near to medium term.
After this transaction, we'll improve the construction of our diversified and balanced portfolio led by SHOW at 47.8%, senior housing triple-net at 19%, post-acute at 10.4%, outpatient medical at 16.1%, and health systems at 6.7%. With significant embedded growth prospects from our 86% occupied SHOW portfolio, well-covered triple-net leases and a strong health system-affiliated OM portfolio, we will be positioned well to play both offense and defense. Our health system bucket, which is anchored today by ProMedica, is poised to grow in the future. We believe this investment-grade lease represents the highest quality of cash flow in our entire portfolio with substantial real estate value supported by our exceptionally low basis. As a reminder, we paid $93,700 per bed blended for senior housing and post-acute, and specifically $57,000 per bed for skilled nursing.
We believe this is close to a fourth of replacement cost and salvage values of these properties. As a newly energized HCR management team turns around the performance of this portfolio with full backing of the capital, healthcare delivery expertise, and the peer capabilities of ProMedica, our shareholders will enjoy significant value creation in this segment of our business. Over the last three years, we have made transformational improvement in our portfolio mix, asset quality, operating platform, and deal structures. We have dramatically changed our investment philosophy, built world-class data analytics capabilities that are integrated in our capital allocation process, and hired exceptional talent focused on our share cash flow and NAV growth as opposed to the balance sheet growth. With the significant effort that we have put into improving our platform, we're now poised to deliver outsized growth for our shareholders.
With that, I'll pass it on to John Goodey, our CFO. John?
Thank you, Shankh, good morning, everyone. It's my pleasure to provide you with the financial highlights of our second quarter 2018. As noted, we continue to see some challenges in our senior housing markets in Q2. However, as Q1's tough influenza season and winter conditions abated during the quarter, we have seen a relative stabilization in sequential occupancy. Despite the challenges, the quality of our chosen markets of operation, our superior portfolio and operating partnerships continue to deliver good RevPAR growth of 3.5% in Q2 year-over-year. Overall, expense growth remained elevated at 5%, driven by wage growth due to strength of labor markets in general and increased demand for senior care staff.
Same-store NOI growth was 1.4% for the quarter, near the midpoint of our full year guidance. SHOW portfolio same-store growth grew by 0.1% in Q2, which, as you would expect, we are not satisfied with, although it is within our full year guidance range of 0%-1.5%, it is behind our midpoint expectation for the year. Senior housing's triple net growth remained solid at 3.1%, with long-term post-acute being 2.3% and outpatient medical growing by 2%. This quarter's same-store growth was augmented with in-quarter acquisitions and joint ventures of $172 million, $75 million in development funding and loan advances of $5 million. 100% of our gross investments were completed with existing partners. We also placed four development projects into service totaling $89 million in value at a blended stabilized yield of 7.0%. In addition, we completed $67 million of divestments and loan payoffs.
Within Welltower, we continue to enact efficiency and automation programs and look for opportunities to focus and improve our operational excellence. These progressive measures enabled us to report G&A costs for the quarter of $32.8 million, being essentially the same as Q2 2017. We are therefore able to report a normalized second quarter 2018 FFO result of $1.00 per share. I would like to note that we do not include one-off income items such as the $58 million lease termination fee received from Brookdale in our normalized results. That alone could have seen a significant increase to this quarter's FFO. Turning to our balance sheet and capital activities, our Q2 2018 closing balance sheet position was strong, with $215 million of cash and equivalents and $2.5 billion of capacity under our primary unsecured credit facility.
Our leverage metrics were at robust levels, with net debt to adjusted EBITDA of 5.4 times and net debt to undepreciated book capitalization ratio of 35.6%, while our adjusted fixed charge cover ratio remained strong at 3.5 times. In April 2018, Welltower placed a new $550 million 10-year senior unsecured note at T plus 148. This is the tightest spread to 10-year Treasuries ever achieved by Welltower. Simultaneous with the notes offerings, we executed a U.S. dollar to GBP cross-currency swap, resulting in an effective rate on the bonds of 3.11%. Post our Q2 close, we executed a new $3.7 billion unsecured credit facility, improving the pricing across both the line of credit and the term loan facilities. The facility includes $3 billion of revolving capacity priced at LIBOR plus 82.5 basis points. We also signed a new $1 billion TLB in preparation for closing the QCP acquisition.
I would now like to turn to our guidance update for full year 2018. We are increasing our normalized FFO range to $3.99-$4.06 per share from $3.95-$4.05 per share prior. This is based upon the closing of this QCP acquisition and ProMedica joint venture on 26th July 2018, certain anticipated refinancing activity associated with the QCP acquisition, updated current operational performance expectations with the full year 2018 overall expected adjusted same-store NOI growth guidance range remaining at approximately 1%-2%, and disposition guidance increasing to $2.4 billion with a blended capitalization rate of 6.0%, primarily due to Welltower acquiring HCP held-for-sale assets due to the accelerated closing of the overall purchase. As usual, our guidance includes only announced acquisitions and includes all disposals anticipated in 2018.
Given the aforementioned projected changes in gains and losses from disposals and other normalizing factors, we are also increasing our expected full year 2018 net income attributable to common shareholders to $2.66-$2.73 per share from $2.55-$2.65 prior. On the 21st of August 2018, Welltower will pay its 189th consecutive cash dividend, valued at $0.87. This represents a current dividend yield of approximately 5.4%. With that, I will hand it back to Tom for final comments. Tom?
Thanks, John. Why don't we go right to questions? Lori, please open up the line. Thank you.
Ladies and gentlemen, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. To withdraw a question, please 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 1 again. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Jonathan Hughes of Raymond James.
Good morning. Thanks for the earlier commentary. Congrats on closing QCP and the other deals. I know that involves a lot of time and effort.
Thanks, Jonathan.
Yes, sir. Yeah. Obviously, QCP and partnering with ProMedica was a pretty unique transaction, and you're very optimistic there, and I share your view. I noticed in the investor deck from this morning, there's a new slide about the increasing involvement of healthcare systems in post-acute. I guess my question is, have you had more systems call you looking to partner on post-acute deals after seeing this one with ProMedica? What would be your appetite or target exposure to healthcare systems within the post-acute space?
Good question, Jonathan. Well, first of all, we are very much looking to increase our business with large regional health systems. There are a number of health systems that are currently engaged in the post-acute space and find it a very effective way of managing the path of their patients. We had one of those health systems, one of the largest regional health systems in the Northeast, was in our offices here in New York yesterday. This health system does have a post-acute care division, which includes assisted living and independent living. They are able to direct patient flow between the hospital and these assets and actually share staffing. It's a very efficient way of managing healthcare delivery. Your question, have we gotten a lot of inbounds? Yes, we have. Many health systems are now calling us because they've seen the ProMedica announcement.
They understand the power that ProMedica will now have with HCR ManorCare, having both a post-acute care as well as an assisted living focused on memory care business. These are challenges for health systems. They also have noted that ProMedica has a very successful insurance business, which also is something many health systems, if they're not already in that business, are looking to figure out how they are able to offer Medicare Advantage and manage Medicaid programs. Again, all with the idea of keeping the patient or consumer in a circle of wellness to minimize risk in the future. This is very topical. There are a number of large health systems that are already doing this. You don't hear a lot about that, but there are a lot of health systems that are already in the post-acute care.
I think you're going to see many of them looking to partner with Welltower in assisted living. I think that's one of the big opportunities. It's all about health systems moving away from the idea that they treat disease solely, that they meet their customer in the emergency room. That strategy is fraught with risk for a health system who've seen their margins increasingly compress. You will start to see more cooperation, more collaboration. Welltower is really the party that is convening these discussions as well as these opportunities.
That's great. I appreciate the color there. It sounds like a pretty interesting opportunity going forward. One more from me, and I'll cede the floor.
Sure.
With SHOW, the operating portfolio now almost half of the company after the Brandywine transition, I know I would find it helpful if we could maybe get additional disclosure on new and renewal leasing spreads within that segment, something we get from the apartment REITs pretty commonly. I know it's pretty stable in the low single-digit range on an overall basis, but is this something you would be willing to provide us, either right now or going forward?
Jonathan, absolutely. We always have considered the best disclosure practices. We definitely will consider that. We're very excited about where that business is going, given where it is in the performance cycle, so we'll definitely consider that.
Okay. That's it for me. Thanks very much for the time. I appreciate it.
Thanks, Jonathan.
Your next question comes from the line of Karin Ford of MUFG Securities.
Hi, good morning. I wanted to talk about the EBITDAR coverage on the triple net senior housing portfolio. It was 107 times with just over 6% below the 105 level. How much will these numbers improve post the Brandywine and Brookdale restructuring?
Karin, as I mentioned in my prepared remarks, it will significantly improve. Just remember that Brookdale was above our average coverage for the portfolio, Brandywine was lower, as I mentioned, but net-net, you will see significant improvement when we report next quarter.
Do you have an estimate as to where coverage will go?
I'm not going to venture a guess, but I think, once we get there, you will like it.
Okay, great. My second question is, can you update us as to the sources and the refinancings that are planned for the funding on the QCP deal?
Yes, certainly. To close the transaction, we restacked our credit line and term loan package, we also took on a new 2-year term to term loan B. Ultimately, that covers us for the transaction as it is today. You can imagine we are not intending to sit upon a line drawn to that level and a 2-year term loan B. We've historically been quite conservative for financing out acquisitions over time. We have great access to capital markets, and we'll look to access the markets as we see opportunities to get great pricing. The good news is we're fully financed. We have no significant sorts of financial issue with affording this and our go-forward business plan if there was not access to capital markets. I think you can anticipate us doing something in the future for obvious reasons.
Guidance assumes refinancing or no?
It does. It assumes refinancing. The transaction, given where the spreads in bond markets versus the spreads on short-term financing structures, it's not massively accretive to sit on short-term financing like it may have been in the past. We've built that into our reset of our guidance range today.
Makes sense. Thank you.
Your next question comes from the line of Jordan Sadler of KeyBanc Capital Markets.
Thanks. Good morning. I wanted to see if I could spend a second on Brandywine, or if you guys could help explain to me a little bit. I guess my perception was that Brandywine, and this may still be the case, was among the highest quality operators, owners, in the space and within your portfolio. I guess I'm struck by the fact that there's yet another, I don't know if the scenario was a default or some event that caused the restructuring here. I'm just curious, how do we and how do you get confidence that now is the right time to be taking incremental equity exposure at this point in the cycle from a RIDEA perspective in senior housing properties?
Yeah. If you think about it, we talked about Brandywine. You are correct that Brandywine is actually that real estate is the highest quality real estate in our portfolio. I talked about how the NOI per unit, if you look at is $29,000+ with a RevPAR of $7,500+ is literally the highest in our portfolio. As I mentioned, that deal was struck from day one. It was over-leased and over-leveraged. We absolutely have been talking to Brandywine for a long time about conversion from debt to equity. This was the right time we found because, if you think about it, you can, not just a Brandywine conversation, you can imagine that we absolutely are getting excited about where we are in the cycle.
Business cycles are different from supply cycles and a need-based product like assisted living. While I'm not going to tell you that I believe that we're exactly at the bottom, we believe we're close to the bottom, we're bouncing along the bottom. That's when you get equity exposure, not debt exposure, right? We absolutely think this is the right time. We're not trying to time it quarter to quarter.
Well, this is a conversation, by the way, that we've been having with Brandywine for quite some time. This is a very precious business to them, and they were really considering all of the options. They recognize this was not a, I think you asked if this was a default. This was not that kind of a conversation. It was a conversation about optimizing our relationship and the opportunity for growth together. It was about correcting the capital structure of that business in a way that really will drive growth. From that perspective, I think we see this as a great opportunity, and Brandywine is going to be a great partner.
This was not a default. Okay. What were the terms under which Brandywine's prior ownership decided to sacrifice their equity stake to the shareholders of Welltower? Obviously it wasn't out of the goodness of their hearts. What's the driver there?
If you think about it, effectively a one-time covered lease is you are at 100% LTV, right? From a Brandywine equity holder's perspective, that equity obviously is not worth a lot if you are in that scenario forever, right? You also think about the growth opportunities in front of us. Just I wouldn't want you to think that this is just Brandywine giving up. We have entered into a next-generation management contract so that if Brandywine performs, Brandywine's equity holders are going to make significant windfall. As I mentioned in my prepared remarks, now it's aligned, we'll rise and fall together, which was not the structure before. I don't think they have given up the upside. They will have significant upside, more upside than they had before, if they perform very well.
Jordan, there was an exchange. We have had loans in the Brandywine's management company that we've converted in equity as part of our stake, that 35% interest. There was a change of economics for the management company stake that we've come out of this with.
Is there a senior housing triple net lease within your portfolio that will survive this cycle without a RIDEA conversion or a recapitalization?
I think a lot of our triple net leases will survive this cycle.
Should we expect more conversions?
Not in any material amount. We're always looking to see what assets we want in what structures, where it should be a lease or a debt structure versus an equity structure. You can feel from our conversation with us in the last three to six months that we are getting excited about how the next cycle looks like. We definitely think that there will be leases where our interests are aligned, will survive the cycle.
Let me just add to that. When we talk about the future of this business, you hear us repeatedly talk about how assisted living will become much more consequential in the overall healthcare delivery perspective. We are very much driving that for our senior housing operators. In a RIDEA structure, we can, and our shareholders can capture the value that Welltower is driving to that senior housing operator. In a triple net lease, we don't capture the value. A lot of this is about our optimism about where this industry is going. If you look in the rear view mirror of the senior housing industry, an industry that was built by real estate developers who believed their wealth would be based on flipping real estate at low cap rates to REITs. That is not the future of this industry.
We are restructuring RIDEA relationships with the operating platforms that we believe have the best opportunity to increase in value because of the role this real estate will play in the overall healthcare delivery spectrum.
That's helpful. I think we all look to your guys' leadership and your voices and guidance on this topic because I think it is important, and it is a little bit uncharted territory. We are seeing, and as Shankh talked about, peak levels of supply at this point. While we all want to have that optimism and we all know the fundamental framework and the demographics, I think at the same time, we're seeing a lot of these leases being restructured, and who knows what happens in the downturn? This is a prolonged economic expansion. I think we're trying to understand the risk and gain comfort.
Jordan, I appreciate that. That's very valid. The issue here is that the population is shifting. This 85-plus demographic starts to increase at a rapid pace, starting in about 18 months. That's when you'll see the beginning of that. I appreciate the view, and we're concerned about the overall economy like everyone else is. If we don't have a solution to manage the health and wellness of an increasingly aging population, we have a lot of problems as a society. We believe that we are structuring Welltower to really capitalize on that threat and create opportunities around that. This is something that you'll be hearing more from us about. When you hear us say that we are talking to health systems, the major health systems in this country, about the assisted living business, that is a leading indicator that this business is changing.
It's changing, at least with respect to Welltower.
Thank you for the time.
Thanks, Jordan.
Your next question comes from Smedes Rose of Citi.
Hi, thanks. You talked about this a little bit, but I just wanted to understand a little bit better the change in the guidance, because your initial guidance was for $0.20 accretion from QCP, and it just seemed like it would be a little bit higher given the timing now of the closing. Is that accretion just being offset by some of the changes you just talked about with Brandywine, or is it more to do with timing of asset sales? If you could just speak to that a little bit.
Hi, Smedes, it's John. I can give you some guidance on that. Yes, basically the answer is yes. The long-term accretion we said would be in the range of $0.20 per share. The only slight change we have on that is we have a couple of extra dispositions. We've got the $400 million that we're essentially warehousing on their way through, so we have to finance those. That drags a little bit on FFO because remember, these are not particularly cash flowing to us on the income side, but we are having to finance those on the balance sheet side. We also put in an extra just over $100 million of dispositions that were not underway by QCP in their sort of tail portfolio. That will give us circa another $0.01 of sort of dilution for the remainder of this year.
You're right, the Brookdale and Brandywine restructurings and obviously the below midpoint performance to date of the SHOW portfolio are what basically make up the difference and why, if your math was why are we not at $4.08 but we're at $4.02 and a half, essentially they're the building blocks that sort of get you to that number. I think we're being a little bit conservative just for reasons of conservatism as well.
John, shouldn't you have a little bit more benefit? I think in that $0.20 you had, it was a 4.5% sort of long-term debt cost. Clearly you're financing at least initially short-term, then you're going to go out. That would have been a positive offset to warehousing some of these dilutive assets that you're bringing on balance sheet. It just seems like a pretty wide spread that the number should be closer to call it maybe 410 for the year versus the 402.5 midpoint. Maybe you can just be a little bit more specific in terms of the building blocks or each of the pieces of what's going on. Then wrapped around in that, I know you guys moved your earnings a week earlier.
I don't know if that is indicative of going out and wanting to be in the market, either debt and/or equity. Maybe just can you talk a little bit about bringing the earnings forward a week?
Yeah, sure. Certainly. Warehousing the $400 million doesn't unfortunately give us any upside from an earnings point of view, only downside because these are not income generating assets. We're just bridging the ownership of that. You're right that if we were to hold on the line and the TLB, we would have a small pickup. It genuinely is quite small when your LIBOR's obviously expanded quite a bit and we're sitting at 82.5 on the line and 90 on the TLB. There is a spread, but it's not as much as you'd think. We've built into the 402.5 midpoint a refinancing of those through the various actions that we believe we need to take. Moving the earnings up was because, A, we had the announcement of the closing, and we were essentially ready to announce our earnings for the quarter.
It seemed a bit discoordinated to have a closure of the QCP and ProMedica joint venture update our guidance because remember, we promised you once we closed and we knew the impact on 2018 full year, we'd give you guidance. We'd end up giving you guidance a week before giving you our financials, and that's always fraught with danger. We thought the best thing to do was accelerate it, was QCP to close before earnings would have otherwise been released. It gives us the opportunity to access the markets as we see fit. Again, I come back to my statement. We are expected to be judicious when we raise capital, we've given ourselves a long window technically to be able to refinance the short-term borrowing. As we see attractiveness in the various markets that we can access then we will do so.
the moving earnings up wasn't that we were anticipating doing something tomorrow as an example. It was just to do that.
Michael, I would just add that as we have told you, the equity portion of the ProMedica QCP deal will come from this position and our assumption continue to remain so. that's how we've been thinking about it and will continue to think about it. We're not anticipating common equity to fund that deal.
Right. Interesting. The building blocks on the transitions, that is like an $0.08 annual hit that we should think about for next year? I'm just trying to understand the accretion from the QCP transaction. I'm trying to understand the dilution to this year, but more importantly to 2019 from the Brookdale and other moves that you've made that will obviously annualize into next year.
Michael, from a building block perspective, I think maybe the easiest way to simplify it would be our original midpoint of guidance was $4. As John mentioned, year to date we're the lower end of our initial SHOP guidance range of 0 to 1.5%, and that's kind of the biggest variable when you think about our business lines and their impact on FFO. that's kind of taken us from $4 down about $0.015. we mentioned, so Brookdale restructuring we had beginning of July. We mentioned that was $5 million on a full year basis. That's a little front-end weighted, so about $3 million of that is impacting the second half of 2018. In Brandywine, about $0.02 impact to the back half of 2018.
Importantly on that front, a little less than $0.01 of that is from the conversion of the loans I spoke to earlier to Brandywine ManCo. We converted into equity in the management company. A little over $0.01 is from essentially a roll-down of rents to the actual cash flow level in a couple of very high-quality developments that Brandywine has. Those will actually be accretive to where rent was by 2019. If you take kind of the fundamental performance of our SHOW and the restructurings, you get kind of to the lower end of our initial guidance. To your point on this being a little more accretive than the original $0.20 given just the near-term financing, it probably does, where this would run on a $0.20 basis, this would run about $0.08 accretive to 2018.
You're right, it probably is closer to $0.10, just as it's financed right now. As John mentioned, we're warehousing $400 million in assets. That's about a $0.01 drag. That goes away towards the end of the year, not even into 2019, as we sell those assets. You mentioned we sold $107 million of former QCP assets that were obviously not part of the ProMedica side. That's about a $0.01 diluted to the back end of the year and $0.02 diluted to kind of that $0.20 original number, but obviously also brings us to a lower pro forma leverage point than the 5.6 that we highlighted initially in the transaction.
Perfect. Tim, thank you. That's the detail I was looking for. Thank you.
Thank you, guys.
Your next question comes from the line of Chad Vanacore of Stifel.
Hey, good morning. Sticking with Brandywine.
Hi, Chad.
For a second, I just want to get a few more details. You mentioned Brandywine covering about 1x.
Yeah.
How has that coverage changed over the past 12 months?
When I say Brandywine is covering at one time, so you think about that is the stabilized asset, not the development asset. Newark, New Jersey, as we have told you, has been under last six months or so under pressure. Last six months, direction was probably down. The one before that, if you go back and look at our calls, you will see those markets were doing very well, so it's up. Net, it's hard to pinpoint exactly in 12 months, but as you think about it's probably six months doing better and the last six months doing worse. Net, we probably land in a slightly worse position. Just, I'm talking about the stabilized asset.
All right. Hey, Tim pointed out that Brandywine, you expect a $0.02 impact of second half or dilution. Is that correct?
Yes. Something in that order, magnitude.
All right. Got it. If that's covering Well, I guess between stabilized and it's hard to get between stabilized and development. That dilution, that imply you expect further deterioration this year before improvement on that portfolio, is that correct?
No. If you think about that dilution that Tim talked about, we have three very large development assets that is dragging down that number. On a stabilized basis, we do think that portfolio will be fine this year and probably will add to the growth next year.
Shankh, fair to say you think the stable portfolio is going to get better, the developed portfolio is going to get better from here?
Yep.
Okay. Why not transition these properties to a new operator? What levers can that current Brandywine management pull to actually improve those operations?
Yeah. If you look at the operations, I want to make sure that you guys understand, we're talking about fixing a capital structure, not operations. Brandywine is a very good operator. If you look at the CAGR NOI growth of the Brandywine assets, it outpaced our portfolio by about 190 basis points. This is not a question of operation. This is a question of an over-leased, over-levered structure they want that we fixed. There is a difference. I want you to really focus on that. This is the highest quality portfolio we have.
Well, presumably it's a high quality real estate, but what's been the trend in occupancy and rate for them over the past 12 months?
Again, I want to make sure that you understand we don't make decisions based on last 12 months. If you look at the history of this relationship, their CAGR growth, NOI growth has been about 190 basis points better than our portfolio average. It has been very good. Operating trends have been very good. Last six months, nine months, New Jersey, New York region had a lot of supply, so that has not been good. We don't make decisions based on last six months, nine months. We think that Brandywine is a good operator, is a great real estate, and they deliver exceptional care. We're very confident that you will see significant improvement in these assets.
Yeah, Chad, Brandywine is just another example of fixing a broken capital structure that resulted from a period of time when healthcare REITs were valued based on how large they could grow their asset portfolios. I think if you now look back over what we've been doing over the last two years, we have been fixing a lot of over-levered situations. This has been what has gotten many good operators in trouble. What you have to do is figure out who are the good operators that are over-levered and who are the bad operators that are over-levered. If you've seen us exit operators, it's been the ones that we did not believe will be able to participate in this next cycle in the senior housing industry. When we see an operating platform That is over-levered, but that we believe can participate in this next operating cycle.
We're going to restructure that so we and our shareholders can capture the upside. Shankh Mitra said, we're not making decisions based on the next 12 months. We don't run this company for the last 12 months. We run this company for the long term and for driving shareholder value. I would ask you to look closely at what we're doing. We are being proactive. We're not acting out of desperation when we make these decisions and do these types of restructurings. It's all for how do we participate in the upside that we see coming just around the corner.
Chad Vanacore, if you go back and look at what we talked about when we did the Sagora restructuring, we mentioned that three of our best operators in our triple net business, triple net bucket, Sagora, Brandywine, and Legend. We have told you, as our shareholders are well aware of, that we always intended to have the equity upside in those assets, in those portfolios. It always depends on the management team, where they are in their cycle of growth from an expansion perspective, from an operating perspective. It's a relationship. We can't drive this decision just on our own. We have a great partnership with our operating platforms, and when the time is right, we do these transactions. Obviously, we're allocating capital for the shareholder benefit to maximize shareholder value.
I want you guys to think about not just the business cycle, but the demand and supply cycle of a need-based product called senior housing.
All right. I've just got one more quick question. Thomas DeRosa, your desire to expand partnerships with health systems, are these health systems calling you on post-acute primarily, or would these include hospitals and specialty hospitals as well?
Very rarely does anyone bring up the idea of owning a hospital. We're talking about the major super-regional health systems in this country. They're not really looking for us to partner around their hospitals. It's really everything but the hospital, is what they're talking about with us and exploring. I would stay tuned on that. There's a lot of discussions going on. ProMedica is the first real good example of what I believe you're going to see more of in the future. Again, it's important that we're positioned to participate in this next growth opportunity.
Your next question comes from the line of Richard Anderson of Mizuho Securities.
Thanks. Good morning. When I'm kind of listening to this call, it occurs to me there's a lot of kind of whack-the-mole type stuff going on here to kind of fix problems created by the REITs themselves. I'm not just speaking about you. I think everybody is a little bit guilty of over-investing at the heyday of the expansion. You have Genesis, wham, Brookdale, wham, Brandywine, wham. I'm just wondering, are there any more large-scale sort of items like that that have to be fixed, or you think it's more smaller scale stuff that has to get done to get through this cycle?
Rich, that's a great question. As I mentioned in my prepared remarks, we believe that we're towards the very end of that restructuring phase. We wanted to talk about, Tom mentioned last call and the call before, that we see 2019 onwards and earnings growth, cash flow growth, NAV growth. We wanted to obviously accelerate a lot of these things this year so that we're not looking back. As I mentioned and alluded to in my prepared remarks, we feel we're largely done. Your question was based on any large relationship we're largely done? We're active asset manager. There will always be something that we'll look at and think about what is the right structure. The crux of your question, well, absolutely, we think we're largely done.
Looking at the supplemental, I noticed the same store pool came down by 25 or so assets, 461 to 435. Can you just explain that to me and what implications it had on your same-store guidance?
I'm really glad you asked that question. I saw that in a bunch of notes. If you think about 12 of those assets in New England. We have been talking about New England is coming back. That particular operator in New England has mid-single-digit growth this year. Obviously, if you think about the NOI per door of New England versus the other assets, which are effectively Brookdale assets, they're very different. The New England portfolio would have been a positive impact. The Brookdale assets would have been a negative impact. I'm not going to give you the number exactly the impact would be, but I would like you to think about the NOI per door and the implication, and then you will get to the conclusion you're trying to get at.
Specifically, that particular New England operator, and as Mercedes mentioned, the Boston area is coming back strongly, had the highest growth in our portfolio.
Maybe a broad question for Tom. I think earlier in the call, someone asked about enhanced disclosure, sort of consistent with what we get from the multifamily REITs. Let's just say you're 100% RIDEA, or let's just look at the 40-some odd % of your portfolio is just RIDEA. Do you think that's worthy of a multifamily multiple, or do you acknowledge that maybe there should be some discount to the multifamily multiple for those assets?
I don't like to think any of our assets should trade at a discount to where high-quality real estate trades. I think, give it some time, Rich. I think that, again, the senior housing business, to me, is still being looked at in the rearview mirror. You've heard me say that a lot of the senior housing assets in the country were built for a generation of people that died five years ago. The business is changing, and we are in a transition phase. It's hard to demonstrate the true economic impact of this real estate right in this market we're in today. I'm going to tell you, I actually think this will trade at a premium in the future to many sectors of multifamily because of the demand and the need for this sector and for a reinvented asset to meet the demands of that sector.
I think it's one, Rich, where there's a lot of upside. That's how we think about it.
When you think about new lease rate growth in multifamily, the reasons why there's a new lease is different than why there's a new lease in senior housing. You would imagine that someone who leaves a senior housing asset, they are probably paying the most, and anyone who comes in to replace that person is going to pay sort of the least, the lowest acuity level until they kind of need more sort of care. It's always going to be a headwind, the same store relative to multifamily. Would you agree with that on that issue alone?
Well, John has me in a headlock here, so because he's chomping at the bit to answer your question.
It's a good question, Rich. Mostly, in assisted living, you're charging, if you like, for room and board and care. Obviously, on average, people move in at a lower care need than when they move out, because a lot of our move-outs are obviously unfortunately RIPs. When you've got thousands and thousands of units, obviously statistics apply. On average, you are sort of at the average point. We do look at, and I noted down the question here, what is the re-leasing spread on the unit, on the room? Because if there is a supply issue in the market, sometimes there will be a room rate discount, a transient room rate discount to induce someone to come in. I don't believe any of our operators ever discount care. Would you want to be on discounted care if someone was looking after you?
I know I wouldn't be. People don't discount care. There's a sort of a two-part equation to the revenue that a room generates. We do watch those statistics quite carefully because they're a bit of a diagnostic about how that individual building in that individual market, how that leasing is going. You can look beyond just what is occupancy in quotes. On average, of course, as a senior leaves a building, they leave behind on a higher revenue stream than the new senior moving in, mostly because of care. Again, you're talking about thousands and thousands of units from a statistical averaging point of view.
Look for that one
I would say if
Go ahead
I'll just add, if you think about a cap rate or a multiple question is a function of IRR, it's an output, not an input, right? If you think about an IRR is driven by growth. The thing about comparables are multifamily is it's a higher margin business. At the same growth rate, multifamily probably should have a higher multiple. When the growth rate changes, if you solve for the same IRR and lower downside, as you are thinking, look at where we are at the bottom of the cycle and compare that where multifamily was at the bottom of the cycle. You build IRR at the growth path of that IRR cycle, you'll get a lower cap rate or higher multiple. There's no specific question. It's just where you are in that life cycle of a product.
Fair enough. Thanks. Thanks for the feedback.
Your next question comes from the line of Kevin Egan of Morgan Stanley.
Hi. Just a quick question from me. On the QCP deal, a sizable portion was Arden Courts. That's definitely not in your core market. I was just curious, are you looking to tweak your strategy and maybe further expand into more of a mid-market product or non-coastal markets?
QCP, if you think about the Arden Courts portfolio, you're right that it is not in the coastal markets. I encourage you to think about that we do need a more affordable memory care. Affordable is a relative term. If you think about Silverado's of the world, which we own, is in the tens of thousands of dollar range, and Arden Courts will be $6,000, $7,000 range. Affordable, obviously, is a relative term. We do need that product in the affordable market. From our perspective, purely thinking about the cash flow, remember, it's an absolute triple net lease for 15 years with a growth rate baked into it. From a cash flow impact perspective, that's how we think about both sides of that equation.
Kevin, we have been looking for a mid-market memory care business for quite some time. We have had our eye on Arden Courts. In the memory care space, in the pure play memory care space, we have a very high-priced operator, which is Silverado. We really think Arden Courts is going to become a very important platform for us because of the needs that will be dramatically accelerating over the next three to five years and beyond. Because we believe the co-location of Arden Courts with the now ProMedica HCR ManorCare post-acute care assets will help drive census to those assets. We haven't talked a lot about Arden Courts. We think Arden Courts is a real, as John just said, hidden gem in this acquisition. We're very excited about this.
Okay. Thank you for that. Just in terms, just now that the deal is closed, can you talk about when we should expect to see the revenues and the cost synergies?
Kevin, say that one more time. We couldn't hear you properly.
Sorry about that. Just in terms of the cost synergies associated with ProMedica, now that the deal is closed, can you just talk about when we should expect to see those cost synergies be realized?
Kevin, we have nothing to add right at this point. I mean, you can imagine the deal closed yesterday, really nothing changed overnight. I mean, we're still thinking about the synergies that we talked about before, we'll have more to report soon. Just remember, the deal closed last night, really nothing changed overnight.
Makes sense. Sounds good. Thanks a lot.
Our next question comes from the line of Juan Sanabria of Bank of America Merrill Lynch.
Hi. Thanks for the time. Just wondering if you guys could clarify on the RIDEA business why the total number of assets went down in the same-store. I didn't get the explanation for that. Secondly, as part of that, how are you feeling about guidance? You didn't change the range. Are you just more comfortable at the low end at this point, given the first half trajectory? Are you expecting a ramp-up in the second half to get to the midpoint?
I will answer the first part of the question. If you think about the 26 assets or so, as I mentioned, that 12 of those are the assets that we're selling in New England. They're held for sale, so that's why they changed. The Brookdale assets, they're obviously being transferred to a different operator, so that's why they changed. I think you got the explanation of how that will impact NOI performance. Again, think about not just the number of assets, the NOI per door. As we mentioned to you, this particular operator with 12 assets that we're selling has that high single-digit growth rate. Brookdale would have been negative. Think about how that NOI per door calculation will impact the numbers. We'll get to a pretty good place. John, you have to answer the guidance question.
Yeah. Hi, Juan. On guidance, I think we noted in the remarks, Tim said, that we do not generally reforecast the component parts of same-store NOI in total during the year. We did say that with obviously a 0.6% print in Q1, a 0.1% print in Q2, that we're not anticipating that we will be in the upper end of our range, but more likely to be in the lower end of our range. That's why we said we'd probably be a penny and a half or so behind expectations on NOI for same-store. We're not anticipating, our numbers do not include a rebound in the second half of the year to get us back to midpoint.
Okay, great. Just a question for you, Shankh. You noted in the prepared remarks that you dramatically changed the acquisition focus. I think those were your words. I was just hoping you could talk us through the pecking order of investment opportunities, where you'd like to invest incremental dollars across the different property types and cap rates as you see them today. Any change there? I think you've talked about before an expansion in seniors housing and medical offices. Is that still what you're seeing in the market today?
Yeah. Juan, when I talked about dramatically changing the investment philosophy, I was not thinking about product types. We're agnostic of product that we buy. We would buy anything that makes money on a risk-adjusted return basis for our shareholders. From a product perspective, there is absolutely no change. The change in the investment process is one, where one, we're focused on total return, we're focused on per share growth, not just a balance sheet growth. We're focused on IRR. We're a total return-based investor. We're not just focused on what the cap rate investors or frankly speaking, from the go-go days of expanding balance sheet investor. That's what I intended to mean.
Any change in cap rates that you're seeing? Any evidence of that?
Cap rates are, again, a very difficult thing to talk about because what you are capping matters the most. Cap rate is a concept of stabilized asset, which I think most people miss in the public markets. We're not seeing much change in the IRR expectations. However, change in the growth rate assumptions of some of the models that we see in the auction deal where we don't necessarily participate, we do see that those are coming down. That would automatically imply that cap rates are going up. From our perspective, we don't necessarily participate on those. We do see cap rate pressure. We don't necessarily see IRR changes.
Just lastly, just fundamentally speaking from a seniors housing perspective, I know you guys don't want to get into 2019 and when exactly we'll trough, but hoping you could just maybe lay out the bull and bear case as we think about medium-term growth in seniors housing. What's the bull case for a 2019 recovery or what's the bear case in your mind and.
Just how you're thinking about the puts and takes there.
One, you know the answer, it's the supply obviously is the primary factor. Demand is starting to come back. Obviously, as Tom said, that you see bigger impact of that in 2020. It's very hard to say quarter to quarter. We do believe that we're seeing in the numbers that a lot of the markets that went into the supply cycle first is coming out and we'll see where it lands. Obviously, there's a law of large numbers on supply, but there's also a law of large numbers on the expenses. They have been going up for 5%+ TIGA for a long time. We'll see where it all really land together.
It's very hard to comment where it will be exactly, but if we didn't think that we are at the bottom, then we would not have made some of the portfolio changes that we have made.
Yeah. I would add two more things. First, I think I talked a little bit earlier about absorption, which continues to frankly be quite strong. We think that some of the trends in the pipeline are going to be helpful, if there's a slowing down, if you will, of new starts. Absorption should be taking hold, and I think that that's going to be helpful. Separately, I would also say that we really study this and some of our comments are really, I think, coming from a perspective that is very individual to our portfolio as opposed to sort of the generalized metrics that you might get from a NIC, for example. You probably already know that we do a lot of work that is very individual in terms of just reviewing our markets.
We look at new supply and study what the impact of new supply might be on a very particular basis. These are proprietary type of tools that have been created by our business insights team. That's really where we're coming from when we look at this, the comments that you've heard here today about the future.
Your next question comes from the line of Lukas Hartwich of Green Street Advisors.
Thank you. Hey, good morning, guys.
Morning.
Morning. Your valuation's improved quite a bit in recent months. I'm just curious if that's changed your view on capital allocation priorities, and if so, how?
Our capital allocation priorities have not changed. Regardless of our valuation, if there is an asset or a portfolio that's trading at a price that does not give us total return to improve long-term growth rate, we don't want to play that game. You have seen how that played out for a lot of these companies. We're not going to go back and do that. We only allocate capital if we can make money on a per share basis.
Great. Thank you.
Thanks, Lukas.
Your next question comes from the line of Steve Sakwa of Evercore ISI.
Hi, good morning. Most of my questions have been asked. I guess I just wanted to focus on the dispositions. You guys did raise that guidance by $500 million, the cap rate also on that blended average, dropped about 100 basis points. Year to date, you've done about $1 billion out of 7, you're now looking for $2.4 billion out of 6. Can you just kind of walk us through kind of what's coming and why the cap rates, I guess, are so low on the back-half dispositions?
Yeah, certainly. I think our original guidance, ex the QCP held for sale and the extra $100 million we've anticipated being still around the 7% number. The change entirely relates to the mathematics, including those sort of legacy QCP transactions into our overall disposition guidance.
Steve, on the QCP side, I'll just clarify this. In our original transaction when we outlined it, there's $500 million of assets that are former HCR ManorCare assets that are being sold and transitioned. We talked about this in the original transaction. It's kind of the mid-$50,000 per bed, that are largely under contract and going to be sold over the next two to three months. When we originally talked about the transaction closing at 9/30, a large majority will be closed and off of our balance sheet by then, they're non-rent paying in the meantime. There's $400 million left of these former HCR assets. They'll all be sold kind of between now and likely the end of October. For the meantime, the impact on earnings will be the drag from essentially that balance sitting in our line.
When I outlined kind of the impact on guidance to Michael earlier, that was kind of the penny drag, and it goes away. It doesn't long-term impact the creation of this deal. From a blended cap rate perspective, those are being sold at a zero cap rate.
Okay, got it. That makes sense. Thanks very much.
Your next question comes from the line of Daniel Bernstein of Capital One.
All right. Good morning. Real quick question. I'm just trying to reconcile the increase in SHOW versus comments about more collaboration or more interest from the hospital systems in assisted living. Are those hospital systems going to be thinking about triple net leases or maybe more RIDEA leases? Maybe from your investment philosophy, whether those should be in triple net or SHOW, if that happens going forward.
Dan, I would say that we're discussing both structures with health systems that are interested. I think it's early days for those who are not already in the business, and they don't really understand the RIDEA structure. I mean, this is all new to them.
Honestly, I think the RIDEA structure, we were literally in a discussion yesterday with a major health system about an assisted living project, and this was a new concept for them. I think they thought it was very interesting, and I think they come into the discussions thinking that we're talking about triple-net leases, and I think they walk away with perhaps a better appreciation for the fact that RIDEA may offer them a better longer-term return in that property.
I would also say that I don't want you guys to think that because we converted some triple-net to RIDEA, that we think that RIDEA is the structure and triple-net is not a good structure. What all we're trying to do is to align interest. A Welltower triple-net lease, it has significant alignment of interest. Where you get into trouble, when it's not covering, the operator is not making money. They're not investing in the asset. You are in sort of that vicious cycle. That's where the problem is. A Welltower triple-net lease can have significant alignment of interest from both parties, and we're absolutely open to that structure. We're just not going to do thinly capitalized, thinly covered leases. That's where we're not interested. If it is equity, just call it equity.
We don't want to put in some sort of a façade of debt when really it's equity.
Okay. No, I would think given the increase in leverage in the hospital space with all the mergers, they might be looking at ways to not over-leverage their balance sheet and over-monetize. I appreciate the call. I'll hop off. Thanks.
Yeah. This is Mark Shaver , I just want to add one point. Part of what we're also discussing with health systems is how are senior living platforms more consequential to their care delivery. Some of the conversations are not necessarily about the hospitals owning their own assisted living or joint venturing with us, but how do they become more consequential to their post-acute network? As we start to think about the rise in dementia that we're going to see in this market, our operators, Silverado, Sunrise, have seen where they can provide care to patients coming out of a hospital in a lower cost setting to free up those hospital beds. That is an extension of how we're trying to create linkages between our senior living platform and health system. There's multi phases to the conversations of how we're going to link these programs.
Your next question comes from the line of John Kim of BMO Capital Markets.
Thank you. Two-part question on your SHOP results. First, I think, Shankh, you mentioned in your prepared remarks that we're going to be bouncing along the bottom in the next couple of quarters. Do you think from an occupancy perspective that we will be going through a normal course of seasonality trends off of this lower occupancy base? Or will the impact of supply offset the typical pickup in the seasonality? Secondly, Canada also decelerated significantly this quarter, and just wanted some color on what was driving this.
I'll take the first part of your questions. We are seeing seasonality and improvement in the occupancy. John, you want to talk about Canada?
I think Canada equally had some tough flu and tough influenza. In selective markets, not like the U.S., there is selective market supply in Canada as well. You saw a little bit of rate pressure compared to sequential prior quarters and a little bit of occupancy pressure compared to prior quarters. The operating market there is just a little bit more difficult in the recent past than it has been in the longer-term past.
Secondly, on QCP, can you provide any color on who the competing bidder was?
Obviously, we're not going to get into the conversation of who. I'll tell you that overall it was a large private equity firm.
Got it. Okay. Thank you.
Your next question comes from the line of Michael Carroll of RBC Capital Markets.
Yeah, thanks. I just have, I guess, the bigger question, and Tom, maybe you can answer this. How do you guys think about your portfolio diversification? I know today you have a pretty high concentration to senior housing assets. Is that tilt something that Welltower likes, or is that some of the reasons why you pursued the QCP deal?
Well, we like the senior housing business, and what differentiates Welltower is that our senior housing portfolio is quite diversified by operator. It's a business we like, it's a business we believe in. The partnership with ProMedica to acquire HCR ManorCare is an example of how we're going to link this senior housing business more closely with the business of a health system, which includes post-acute care. I think you just heard a little bit about how assisted living and memory care may become more consequential in how a health system manages the journey of their patient or consumer. We're very focused on the fact that how healthcare is delivered, the settings by which where healthcare will be delivered in the future, it has to change, and it is changing. The ProMedica HCR ManorCare partnership with us is the best example that one can point to
Okay, great. Thank you.
Our next question comes from Michael Mueller of JPMorgan.
Yeah, hi. Most questions have been answered.
Hi, Michael.
I was just wondering, can you give us an update on the 56th Street project, where you are in terms of that? Are you also evaluating other sites in Manhattan as well?
We're very pleased with the progress that we've been making on East 56, and everything going according to plan. Timing is according to plan. I think one important milestone that we're looking forward to, at the end of the year, is the topping off of the site, which is a lot of progress. Again, everything as planned, on time. Our partnership with Hines and the work that Sunrise has done in the design and everything else is going as we were thinking. With respect to the rest of the market, we're always looking for opportunities in markets that we think are primed for demand and so on. There's nothing to speak about specifically, but certainly we look at New York, we look at Los Angeles, we look at Toronto, we look at all of those kinds of sub-markets.
Got it. Okay. That was it. Thank you.
Our next question comes from the line of Tayo Okusanya of Jefferies.
Yes, good morning. Two quick ones from me. First one, again, around the whole senior housing, and again, we've had a very long discussion about it on the call today, but given that the NIC data is still forecasting well into 2019 additional occupancy loss, how are you guys really kind of thinking about that? How are you stress testing different scenarios, to ensure that your portfolio kind of does okay through that process? The reason I ask is, clearly a lot of concern around kind of continued portfolio restructurings. Exactly what does that mean on a going forward basis?
Yeah. If you think about it, we don't obviously make investment decisions based on NIC data. We have a very sophisticated data analytics platform that we think is unmatched, not only in the healthcare real estate industry, we think it's unmatched in the real estate industry. We have a very, very granular view of supply, which clearly can give you a different answer from if you're just looking at a NIC data. That first I'll tell you, that's the first answer. The second answer is philosophically, you think about you guys are concerned about a liquid asset like a stock, so you're probably trying to exactly time when the performance is going to bottom, when the performance is going to come up. That's not what we do. We're focused on long-term capital allocation and making long-term decisions. If we're six months off, we're six months off.
There is a difference of the time horizon when we're allocating capital and making these decisions. We understand why you ask these questions, I want you to appreciate our focus is not, can we do this exactly at the bottom? We're a long-term capital allocator. That's not how we make decisions.
Yeah. Tayo, I want to add too, I just want to bring back two data points that I shared at the beginning of this call. That is, keep in mind that in our top 10 markets, the construction as a percentage of existing inventory is 160 basis points lower in our top 10 cities than it is for NIC as an average. Or their primary markets, I guess, is what they call them. In addition to that, I also talked about our rate growth, which is also superior to what is happening in the market. Consider that when we analyze next moves and how we're addressing market competition and so on, we don't only think about occupancy, we also think about rate, which we have been able to preserve and expand much, much quicker than the rest of the market is capable of.
We are always interplaying all of these different components to try to optimize what we think is the potential for each asset.
Okay. That is helpful. Number 2, the $10.8 million of termination fees you had in the quarter, what did that relate to?
As I said in my remarks, we do not take through our FFO line unusual items like termination fees or financing fees that we receive. On our cessation of the certain elements of the Brookdale transaction, as noted in the press release, we received $58 million in total. Some of that is offset against things like straight line. That was essentially a net profit on a book sense, if you like, a net profit from the cessation of those. We do again, we do not book things like that through our FFO line. We take them through unusual items and normalize them out. It is the Brookdale profit on lease termination.
Do you agree with that? Do you think that is a good policy?
I agree with the policy, for sure. I think, again, it's just when you kind of take a look at the number, again, you haven't had kind of termination fees in quite a while. I guess that's just why I kind of asked is that it is an unusual item, taking it out does make sense.
Yeah. If you look at our Brookdale press release a few weeks ago, it actually lays out the details. It's $58 million offset by the straight line they talked about. We do not think that, and I think I probably say this like a broken record every call, we do not take any fees and one-timers in our same store, in our FFO. We don't think that gives investors a more rounded view of the company.
My question for you, Tayo, is do you think we should take those one-time fees into earnings?
I don't think you should. I agree with Shankh. I don't think it presents a clear picture of the underlying fundamentals.
Well, thank you, because that's our perspective. I'm not sure that is shared, you're on our page. Thank you.
Great. That's it for me. Thank you.
Thank you.
Thank you.
Thank you for dialing in to the Welltower Earnings Conference Call. We appreciate your participation and ask that you please dislike