Good morning, ladies and gentlemen, and welcome to the first quarter 2018 Welltower's earnings conference call. My name is Kim, and I will be your operator today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star followed by zero, and the 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, Kim. Good morning, everyone, and thank you for joining us today to discuss Welltower's first quarter 2018 results. Following the safe harbor, you will hear prepared remarks from Thomas DeRosa, CEO, John Goodey, CFO, Shankh Mitra, Chief Investment Officer, and myself. Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act of 1995. Although Welltower believes results 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 and 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. With that, I will hand the call over to Tom for further remarks in the quarter.
Thanks, Tim. Good morning. I'm pleased to report to you a solid quarter, completely in line with our expectations. The Welltower business platform continued to deliver positive same-store growth through externally through completing over $600 million of acquisitions and developments, generated growth capital through profitable property sales and loan payoffs of approximately $1 billion, and further delevered our balance sheet to a ratio of 35.3% net debt to undepreciated book capital, the lowest level in our history. We run this company for our shareholders and never lose sight of our goal to deliver high quality, durable, and growing cash flow. Our commitment to delivering results from our core business is self-evident in these results. That said, the current operating and capital markets environments make this hard. You have to make hard decisions about where you invest shareholder capital. These decisions do not always make you popular.
Nevertheless, the easy money asset aggregation models of the past are not a strategy for the future. You have to work harder, and you have to work smarter. You've heard me discuss our strategy of aligning Welltower's seniors housing and post-acute assets more closely with health systems. We believe this is an imperative if we are to drive down the cost of healthcare delivery and improve health outcomes, particularly in view of the aging of the population. This is at the core of our strategy, and today we are excited to tell you about a transformational transaction that demonstrates our leadership position in driving the future of healthcare real estate. Before I turn the call over to Shankh to discuss our new ProMedica Health System joint venture that we announced in the wee hours of last evening, John Goodey will take you through the highlights of our first quarter. John?
Thank you, Tom, and good morning, everyone. It's my pleasure to provide you with the highlights of our first quarter 2018. As noted by Tom, we saw challenging conditions in our senior housing business in Q1 with new supply continuing to affect the U.S., which was also impacted by a tough influenza season. Canada was also challenged by flu, as was the U.K., which also had to contend with the worst weather seen there in over a decade. Despite these challenges, our high-quality real estate portfolio, superior operator relationships, and the strength of the Welltower platform managed to deliver solid growth for the quarter. Our SHOP portfolio same-store NOI grew by 0.6% in Q1, with senior housing triple net being 3.0%, long-term post-acute being 2.4%, and out patient medical growing at 2.9%. Overall, same-store NOI growth was 1.8% for the quarter.
As we have seen in previous quarters, our seniors housing operating portfolio's geographic diversity helped to stabilize our overall performance, with the U.S. growing at 1% and Canada at 1.8%, partially offsetting weaker performance in the U.K. Within the SHOP portfolio, strong RevPOR for growth of 3.5% exceeded our expectations for the quarter but was tempered by higher than anticipated occupancy loss of 1.9%. ExpPOR growth at 4.8% was at the higher end of our expectations, driven mainly by labor. This quarter's same-store growth was augmented with in-quarter acquisitions and joint ventures of $476 million, $59 million in development funding, and loan advances of $43 million alongside $987 million of divestments and loan payoffs. Total gross investments with existing partners accounted for 67% of capital deployed. Overall, we are able to report a normalized first quarter 2018 FFO result of $0.99 per share.
I would like to comment on the particularly strong returns achieved on our $895 million of Q1 divestments. Aggregate gain on disposition was $338 million, with an average unlevered IRR being 13%. In addition to this quarter's acquisitions, we completed developments totaling $137 million of total investment, with an average projected yield of 9.3%, and anticipate completions of total investment volume of $384 million for 2018, with an average projected yield of 8.2%. We continue to focus on our operational corporate efficiency. Our G&A for the quarter was $33.7 million, being slightly elevated due to LTIP accounting charges. Our balance sheet remains in great shape. During the quarter, we repaid $450 million of senior unsecured notes due in March and $183 million of secured debt.
We ended the quarter in a strong liquidity position, with cash of $203 million and $2.1 billion of credit line availability. Our leverage metrics are at strong levels, with net debt to adjusted EBITDA of 5.4 times and a net debt to undepreciated book capitalization ratio of 35.3%, while our fixed charge cover ratio remains strong at 3.5 times. After the quarter close, Welltower placed a new $550 million 10-year senior unsecured note. Despite volatile markets, the initial launch of the bond with a $400 million placement volume and pricing of T plus 170 area generated initial orders in excess of $2 billion, facilitating the upsizing of the bond by $150 million and tightening of price to T plus 148. This is the tightest spread to 10-year Treasuries ever achieved by Welltower.
Simultaneous with the notes offering, we executed a US dollar to sterling currency swap, resulting in an effective rate on the bond of 3.11%. With a committed bridge financing of $1 billion in place and our available credit line, we are fully financed to complete the acquisition of QCP and to complete our other business and investment plans. We anticipate turning out elements of the short-term financing structure before and after the closing of the acquisition by the bank and debt capital markets, dependent upon the availability of attractive financing. The completion of the QCP purchase, expected QCP dispositions, and increased Welltower dispositions will see our expected pro forma net debt to adjusted EBITDA ratio to increase slightly to approximately 5.6 times. This level is well within our governance and the construct of our BBB+ ratings.
Overall, despite tough senior housing operating conditions, we are maintaining our full year 2018 overall expected adjusted same store NOI growth guidance range of approximately 1% to 2%. We are also maintaining our full year 2018 expected overall normalized FFO range of $3.95 to $4.05 per diluted share. Due to gains made on dispositions and other normalizing factors, we are increasing our expected net income attributable to common shareholders to $2.55 to $2.65 per share from $2.38 to $2.48 prior. As noted in our earnings release, the purchase of QCP and our increased disposition guidance are not factored into the aforementioned 2018 guidance due to timing uncertainty. We will update guidance once timing and financial impacts are more certain. On May 23rd, 2018, Welltower will pay its 188th consecutive cash dividend of $0.87. This represents a current dividend yield of approximately 7%.
With that, I will hand it over to Shank to discuss the exciting joint venture with ProMedica and purchase of QCP.
Thanks, John. Shank will take you through the ProMedica transaction and the positive impact it will have on Welltower. Before I hand the mic over to Shank, I'm delighted to introduce Randy Oostra, President and CEO of ProMedica Health System, who will give you a brief overview of ProMedica and comment on our new joint venture. Randy?
Great. Good morning. Yes, I'm very excited to be with you today. For those of you that don't know a lot about ProMedica, we are an integrated delivery system, a mission-driven system that has really historically been offering acute and ambulatory care. We have an insurance company with a dental plan and have both post-acute and an academic business line. We have a strong management team that has been together for over 20 years, and historically we've operated our 13-hospital system. We have 17,000 employees. We work with about 2,700 physicians and advanced practice providers, then we employ more than 900 providers in our physicians group. Our core operations are in Ohio and Michigan and Indiana, but we also are in some other states as well. In addition, we have a payer, an insurance payer, that has over 600,000 members, both with our medical and dental plans.
Today, in our announcement, the acquisition of HCR ManorCare, which is the nation's second-largest provider of post-acute and long-term care, it really allows ProMedica to become one of the top 15 largest health systems in the U.S. As you know a lot about healthcare and some of the issues we have, it gives us immediate scale. Really, for us, doubles our revenue to $7 billion and gives us an employment base of about 70,000 people and really moves us from a Midwest six-state footprint to 30 states. As we've looked at this acquisition, we plan to be investing $400 million into HCR ManorCare over the next five years.
Really, I think as we talked with Tom and his team, what this acquisition does, it really positions us to really invest in this next generation of care that we believe is the next step to be delivered. We think we can do that in a very responsive, dignified, and cost-effective manner. What's great about it is we have three Toledo-based companies. Welltower shares our vision of improving outcomes through these kind of partnerships. Really, this is all about trying to drive efficiencies really across that whole continuum of care. The real estate capital and the transaction, the partnership with Welltower really is really transformational for us.
The partnership will enable us to expand our service offering. It really offers the ability for us to provide unique wellness-focused strategies beyond our traditional acute care focus. Really, I think helps us to really think about how we kind of redefine the settings in which healthcare is going to be provided in the future. As you can imagine, we're incredibly excited about the transaction. We're incredibly excited about partnering with Welltower. We really believe that this partnership is really going to set up a very long-term profitable partnership for both organizations.
Thanks, Randy. Now over to you, Shankh.
Thank you, Tom. Good morning, everyone. When we last spoke at our fourth quarter call, we talked about the early offshoots of significant shifts in the post-acute sector with the recapitalization of Genesis and the acquisition of Kindred. In these transactions, we saw both unique and sophisticated players such as Humana, Welsh Carson, TPG, and Apollo deploying their capital and expertise in the space. As we said, the post-acute industry needs to be reinvented with the proper capital structure provided by patient and strategic capital and health system sponsorship that believes in the lower cost care settings. Today, we're very pleased to announce the continuation of that trend with a first of its kind transformational transaction, which will define the future of this space.
For the first time ever, we have a leading health system, ProMedica, and a major real estate investor, Welltower, entering into a partnership which spans the full spectrum of care, from sub-acute to acute care to post-acute. It is an alignment between ProMedica and Welltower's vision of the future of healthcare delivery that brought us together. Yesterday, ProMedica announced their acquisition of HCR ManorCare in conjunction with forming a joint venture between ProMedica and Welltower to acquire the real estate assets of Quality Care Properties. As you may know, ProMedica is an A-plus rated health system that is headquartered here in Toledo, Ohio, with us. ProMedica owns and operates 13 acute care hospitals, as well as many outpatient medical facilities that you just heard from Randy. ProMedica is one of the two health systems in the country with three five-star rated hospitals other than Mayo Clinic.
After this transaction, ProMedica will have $7 billion of revenue, making it the 15th largest health system in elite company of many market names in the industry, such as Penn Medicine, Geisinger, Henry Ford's of the world. As part of this transaction, ProMedica will acquire HCR ManorCare, simultaneously, Welltower and ProMedica will acquire QCP's ManorCare Real Estate in an 80/20 joint venture. This real estate spans across 18 states and 160 post-acute communities and 58 assisted living facilities, with an EBITDA split of 70% to 30%. ProMedica will enter into a 15-year master lease with the joint venture. This lease will be fully backed by ProMedica's corporate guarantee and will include an annual escalator of 2.75% after a year one escalator of 1.375%, as ProMedica will undertake significant capital improvement plans of roughly about $200 million in the first two years.
ProMedica's business plan includes investing $400 million of growth and upgrade capital into the portfolio over the next five years. Welltower will also wholly own the non-ManorCare part of the portfolio, representing less than 10% of the transaction value. The transaction provides Welltower with an 8% cash yield with an investment of $2.2 billion and an above-market EBITDA coverage of 1.8 times. We will enjoy double-digit unlevered IRR out of this investment due to good going-in yields, attractive growth, and lack of CapEx in the base case scenario. We'll also believe there is significant upside to this base case as occupancy at its cycle lows. This is demonstrated by the very attractive basis that we're investing into this portfolio. We are doing this in a very creative structure where we are protected by significant creditworthiness, A-plus of our partner.
This transaction will also be very accretive to our cash flow to the tune of more than $0.20 per share. We'll also enjoy a secure and growing cash flow for years to come. HCR ManorCare and Arden Courts have long been considered premier operators in the industry. Now, with a substantial investment and a viable long-term capital structure, we're excited to see the performance that their management team can drive. We can see this partnership as an avenue for growth between ProMedica and Welltower across multiple property types and geographies, which will be greatly enhanced by the combined scale and expertise of ProMedica and Welltower teams. As dispassionate capital allocators, we believe you, our shareholders, pay us to produce alpha. Alpha can never be produced by investing capital in consensus ideas. Consensus, by definition, is priced in for risk and reward.
At the same time, we need to protect our downside with an appropriate structure, right, and basis. We strongly believe that this transaction, which diverges from popular belief, delivers on that promise of outsized risk-adjusted returns for our shareholders. We're extremely proud of our team, who pulled off one of the most complex transaction in the history of this industry by navigating the complications of two asset classes, a bankruptcy process involving an operator, four diverse parties ranging from publicly traded entities to a not-for-profit health system, and a private equity sponsor. Our ability to creatively manage and navigate the challenges is what allowing us to generate this significant outsized return for our investors. With that, I will pass it over to Tim, who will walk you through the financing aspect of the deal. Tim?
Thank you, Shankh. Before walking you through the sources and uses of last night's announced transaction, I want to emphasize two points that drove our financing strategy and our view of the levered economics of this transaction. First, we raised approximately $1 billion in equity over the 6 quarters from the third quarter of 2016 through year-end 2017, at an average net price more than 40% above where our stock closed yesterday. We took advantage of an excellent environment in the REIT equity capital markets over this period, despite the temptation to lever up to offset elusive asset sales and tighter late-cycle acquisition spreads. This very purposely put us in position to take advantage of a large, unique off-market deal like this without having to raise value-destructive equity or putting our balance sheet at risk.
Second, because of our excellent liquidity position and our ability to access efficiently priced flexible bank capital, we are able to pledge funding of this deal without taking any pre-funding risk. We did not underwrite this deal assuming short duration floating rate financing. We assume the entire $1.3 billion of permanent debt is financed consistent with our current long-term cost of debt. As highlighted on the sources and uses slide of the deck released last night, at $20.75 per share, total QCP equity and net debt equates to a $3.5 billion cash outlay. As an offset to this, the cash balance at QCP is expected to build significantly through the time of close as they execute on their previously disclosed non-core disposition program. They currently have 74 HCR ManorCare skilled nursing assets being sold, all of which have either signed PSAs or in later stage of negotiations.
We expect proceeds from these sales to reduce our required cash outlay to approximately $3.1 billion. For the remaining portfolio, ProMedica will contribute approximately $950 million in cash through a combination of the payment of HCR ManorCare's outstanding preferred rep obligation and their 20% ownership in the real estate joint venture. After ProMedica's contribution, Welltower will fund its share of the joint venture and its 100% ownership of the non-HCR ManorCare assets, totaling $2.2 billion through a combination of asset sales and debt. The details of Welltower's planned asset sales are as follows. As updated in our 1Q18 earnings release from last night, we increased our full year disposition guidance to indicate $895 million of further dispositions in the year.
This number consists of $428 million of properties held for sale at the end of the first quarter, $40 million of expected loan payoffs through the rest of 2018, and an additional two portfolios of properties identified post-quarter, representing another $428 million of expected proceeds. While asset sales always carry risk, the disposition processes for the held-for-sale assets are all in very late stage, and the additional assets we have identified for sale after the quarter represent high-quality portfolios, which have already garnered significant institutional interest. For the remaining debt financing, we have a fully committed $1 billion FRB facility in addition to our significant line capacity. We will actively look to place permanent financing as the transaction progresses. In closing, this transaction highlights why we aim to run our portfolio leverage counter to equity capital cycles.
Which allows us to use the balance sheet as a countercyclical tool to ensure we can take advantage of cycle-agnostic opportunities like today's, as well as be prepared to take advantage of any significant pricing breaks driven by capital market dislocations. With that, I'll hand the call back over to Tom for closing remarks.
Last quarter, I reminded you why we made the decision not to abandon the post-acute care sector. While the consensus view was to cut and run
We have always maintained post-acute is a critical component of the healthcare delivery continuum. However, we recognize that the broken capital structures of the past ultimately pushed over-levered post-acute operators to the edge. We also realized the sector needed sponsorship to reemerge, and a health system could be the most impactful sponsor. That is why we are establishing our joint venture with ProMedica. My earlier remarks reflected on the challenges of delivering growing cash flow and earnings in this macro environment. However, as you have heard from Shankh, we are bringing you a large investment that provides safe and growing cash flow and is strategically and significantly earnings accretive. Today, you just can't find accretion from bond-like healthcare assets sold through auctions. Opportunities like this come about through connectivity with the healthcare complex, innovative thinking, smart structuring, and good old-fashioned hard work. That's what differentiates Welltower.
We created and structured an investment here that is $0.20 accretive, backed by an A-rated health system. In order to do this, you have to be creative, roll up your sleeves, understand real estate deal structures, and yes, understand healthcare. Last quarter, you heard from Shankh that we expect 2019 to be an inflection point for senior housing fundamentals, resulting in accelerating Welltower NOI. What this transaction ensures, that 2019 will also be an inflection point for earnings growth. Welltower continues to be open for business. Our assets continue to perform, and we continue to execute on our strategy of partnering with the best-in-class health systems and operators to transform care while delivering superior returns to our shareholders. Thank you. Kim now 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 your question, please press the pound key. Please limit your questions to one question and related follow-up so that all callers may ask their questions. You may reenter the queue by pressing star one again. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Vikram Malhotra from Morgan Stanley. Your line is open.
Thanks, guys. It seems like a lot of work went into doing this deal, congrats on getting it done.
Thanks.
Can you talk about how you thought about the risk-adjusted return of this deal, given what's going on in SNF today? Maybe more specifically, what does this mean for the Genesis assets?
Vikram, if you think about, as you know, we're all about risk-adjusted returns. There are two ways to think about this investment. One, I would say from a cash flow view, another is a real estate view. The cash flow view is very simple. You can see that we are getting into this investment at a very attractive base yield, that cash flow grows about 2.75% per year, it's an absolute triple net master lease. The cash flow is extremely safe because of the credit rating and full backing of that credit rating to the cash flow, right? It's very significantly accretive from a cash flow perspective. When you think about this transaction from a real estate perspective, we're getting into this transaction at a very attractive basis.
The way we thought about is upside, downside, that if we think we garner that cash flow for next 15 years, then we write off in the worst-case scenario of the write-off of this real estate to the salvage value, we're still at a significant single-digit IRR. In the base case scenario, as we talked about, if the cash flow stays where it is, it will be a low double-digit IRR. As you know, as I mentioned before, the occupancy of this portfolio is at all-time low. There's a significant CapEx need. We have a silver tsunami coming. More importantly, now this health system and the operator will be backed by one of the top 15 health systems in the country.
All the upside and the synergies that comes with it and the cash flow upside that comes with it probably will put us in the very significant double-digit unlevered IRR range. We're very excited about this deal, and we think our shareholders will make massive amount of money from this deal.
Just to follow up on the Genesis.
We obviously do think that this is a very good transaction for the post-acute industry. The interest of the unique nature of this transaction, is that a acute care health system is showing its commitment to the post-acute sector. That's good for all operators, including Genesis. We obviously hope that Genesis will benefit significantly from that. Now from our perspective, obviously Genesis is now roughly, before this transaction, is about 5% of our cash flow. This will make Genesis about 4% of our cash flow. We are excited about what we retained with Genesis assets, and that's about 1.35 times covered today. We're excited what comes with it going forward. I don't have any more update on Genesis for you at this point.
Okay. Thank you.
Your next question comes from a line of Michael Knott, Green Street Advisors, your line is open.
Hey, guys, can you hear me?
Yeah, we hear you, Michael.
Okay, great. Just with the unusual nature of the QCP share price closing above the deal price yesterday, do you expect any issues with the vote there? Can you just maybe touch on the protections you might have with any termination fees and anything that would be relevant along those lines?
Michael, I'm going to ask Matthew McQueen, our General Counsel, to comment on that.
Hey, Mike. Yeah, obviously, you saw the spike in the middle of the day, we think that because there was a leak during the course of the day, that we're comfortable with all the deal protections. In terms of those specific protections, you'll see an 8-K later today that describes those in the agreement. We'll refer you to that for now.
Okay, thanks. If I can just throw two more quick questions out there for you at once.
Sure.
Tom, I'd love to hear you talk any more about implications, what you think this deal might mean for future opportunities with ProMedica, and then more broadly, in terms of investment, and then also any comments you guys can provide on how you're thinking about the SHOP business three months into the year, sort of on a net-net basis would be helpful. Thanks.
Great. Mike, I think this is a very compelling opportunity for both Welltower and ProMedica. ProMedica sees this real estate beyond the classic view of a skilled nursing facility. What these are delivering are new care sites for ProMedica to extend its healthcare delivery model now to 30 states. They think about this real estate as well-located, efficient sites of healthcare delivery, not using the pejorative, what's become a pejorative term, of a SNF. I would caution you to look at this investment and compare it to other SNF investments. This is really a health system investment. We have extraordinarily strong EBITDA coverage from at the asset level, as well as the backing of a strong A-rated health system, who will join the likes of names like Johns Hopkins, Cleveland Clinic, and Geisinger as one of the most consequential health systems in the U.S.
We also see the opportunity to link this network with our premium senior care operators. We see healthcare delivery moving out of the acute care hospital. ProMedica sees this as an opportunity, which again, extends its footprint, but they're not buying hospitals. They're investing in lower cost, efficient, consumer-friendly care delivery sites. You may have seen that one of the large health systems in the U.S., Deaconess, announced that they will be admitting seniors with hip replacements directly into SNFs that they own, doing the surgery in the SNFs and keeping that individual for its rehab in that skilled nursing facility. This is only the beginning. Healthcare delivery is changing. That's what's so exciting about this opportunity.
I'll make a quick comment just to follow up on Tom's point. If you think about looking at healthcare today, you're seeing vertical integration across the board. ProMedica, as you heard from Randy, is not only is a provider, an extremely well-respected provider, and they will be a provider from sub-acute to acute care to post-acute to home health and hospice, they're also a payer. That integration you're seeing across the value chain in healthcare. Going to your question on the SHOP, we still feel that the guidance we give you on our SHOP about three months ago, we feel very comfortable with that. The story remains the same. Occupancy, what we thought is worse, rates are better, and expenses are better. Net-net, we're in line of where we thought, we'll see what the rest of the year has for us.
Thank you.
Your next question comes from the line of Jordan Sadler from KeyBanc Capital. Your line is open.
Thank you. Good morning.
Morning.
I appreciate you guys making your partner available to make some comments. Hopefully, I'll be able to address a question to him. Otherwise, maybe you guys could answer. Just regarding the topic we just finished off on, I'm curious, one, what type of an expansion in the skilled nursing facility sector this represents for ProMedica? I know they own 13 hospitals. I'm not sure how many skilled nursing facilities prior to this. Then separately, as you're talking about the evolution of the delivery of care, what happens, and is there the potential for a change in the payment mix as it relates to these facilities because of ProMedica's ownership?
Well, Jordan, this is ProMedica's first major investment into the post-acute care and assisted living and sectors. This is a significant new venture for them. We should also remind you that the historic management team at HCR ManorCare, led by Steven Cavanaugh, will be staying in place here. That's a key point here. There's no change in management. I think it's a little early to say exactly what ProMedica's plans are for how they might change what goes on inside these buildings. I could comfortably say that they're very excited to get their hands around this business with the HCR ManorCare management team and rethink the strategy for how you can drive service and profitable activities into these sites of care.
Okay. That's helpful. I guess one more for you, Tom. I'm curious on the thought process this time around. You said something like this could make you unpopular. You were on the board many years ago when HCN, formerly HCN, made the initial investment and purchase of the Genesis portfolio. At the time when HCP bought the HCR portfolio, I think you guys were close to that as well. I know the basis here looks like probably half the purchase price paid at that time, and that probably provides some level of comfort.
Correct.
I appreciate that. My question is more, what's your comfort level in the direction of fundamentals here? The trend in occupancy has been pretty poor for a while, driven by obvious factors, despite the fact that the bed count has been declining for 25 years. Any thoughts on that?
Well, the first thing I'd say, Jordan, is these assets and this business has been capital-starved for years. The problem with the deals that were done back almost 10 years ago is that that was a time when healthcare REITs were valued on how quickly they could aggregate assets versus what were the fundamentals of the business. I'm not going to sit here and recount a lot of changes that happened that made it more difficult to be in the skilled nursing business in terms of reimbursement. At the end of the day, Jordan, these companies were over-levered. I think we have maligned a business here based on profits that were made off of ridiculous levels of leverage. I think you have to put that aside and think about this is real estate where healthcare can be delivered effectively. You have to think about this differently.
yes, you're right. We are buying this at half of what HCP paid for it.
If you think about, as we said, every business is cyclical. We talked about this before, that post-acute dances to a different Washington cycle, and obviously 30% of the business of this cash flow comes from assisted living and memory care. That dances to a different more of a business and supply cycle. The key point is what we're paying for it. If you think about we're buying at the low point in the cycle, and we're not trying to suggest to you that we bought exactly at the bottom. That's what the protection is for. We have very significant coverage at the property level. We have obviously one of the best quality health systems that A-plus rated credit is backing that cash flow.
We also know that our view is not what has happened in the last five years, but what is going to happen in the next 15 years. If you look at the demographics and you see what's coming from a demand perspective, and Jordan, you mentioned the supply has been obviously not an issue for the post-acute sector. We think there's significant upside to that cash flow for various reasons. The capital that ProMedica is spending on this, the sponsorship of ProMedica, which is the most important here, understand where the patients come from. They come from health systems. That will bring to this business, obviously there'll be a shift of market share as the brand changes as well as the capital gets improved.
We're very excited about it, but we're not going to sit here and tell you that we think on the fundamental cycle this month, this quarter is the bottom. That's why we have the protection for, and we have extreme confidence Steven Cavanaugh and the team who runs HCR ManorCare as well as Randy and Mike, who runs ProMedica, to take this business at a very different level.
Okay. Thank you.
Your next question comes from Steve Sakwa from Evercore ISI. Your line is open.
Thanks. A lot of the questions on the deal have, I guess, been answered and asked. I guess one question just in terms of FFO guidance. I know that you guys didn't change it. I can understand why you wouldn't necessarily put this deal into earnings guidance just yet, given the uncertainty on timing of the closing plus the sales. You guys did and were active in the first quarter on the acquisition front, and I'm just trying to figure out what kept you from at least changing for that. Is there something else or is it just early in the year and you just want to roll things in maybe closer to mid-year?
Yeah, I think that's the case, Steve. I think 90 days doesn't give you a whole picture of how the year will run out. Obviously, as you said, with uncertainties around timing and financial impact of the transaction, it seemed premature to start changing the rest of the year's guidance when we will obviously have to update it for business evolution as well as transaction evolutions later on in the year. Yeah, the answer is it's just too early, really, to make substantive changes after 90 days of operations.
Steve, on the acquisition front. The transaction activity in the first quarter was disclosed as of the end of the year, it was factored in. The majority of that came through the Sunrise CCRC transaction that was announced at the end of 2017 and is closing in a few stages here. Cogir is a new operator we added up in Canada that was about a $200 million investment that closed in the first quarter as well. Both of those were factored into our full year guidance as they were disclosed in our fourth Q 2017 results.
Okay. I guess not to beat a dead horse on this regional operator now growing national, I guess, Tom, just to boil it down, is the comfort factor with having ProMedica expand into basically a national player, the fact that the HCR ManorCare management team is sort of staying in place there and running the business under the sort of guidance of ProMedica?
Exactly, Steve. HCR ManorCare has an excellent management team, this is breathing new life into their business model. The capital that ProMedica will invest in that business model and the real estate will truly propel it to its next generation of care.
I guess if you just think of the risks, just thinking about the downsides, what are the, I guess, obvious or maybe not so obvious challenges of trying to take a regional health system and expand them and do an expansion like this?
Well, from the beginning, again, you've got an in-place business that has been capital starved. We see investing new capital into the business will de-risk the current business model. As I said earlier, things are changing in healthcare delivery. Steve, let me just for a moment turn this to Mark Shaver, who I believe many of you have met. He's our head of strategy, who joins us from the Johns Hopkins Health System earlier this year. I think it'd be helpful to hear Mark's perspectives on it.
Good morning, everyone. Mark Shaver, first time here. Just joined the team after being at Hopkins for almost 20 years. What I'd like to share is this is exactly the type of transaction that brought me to Welltower. We're spending time thinking about the integration of HCR ManorCare into ProMedica, a traditional health system. The payer component that Randy mentioned earlier is important, and the combination of SNF plus memory care, plus home health to create that integrated network, this national platform for integrated care is very important. While there's been some capital starving, as Tom mentioned, and some challenges in SNF, memory care continues to grow, and we all know the demographics that are going to continue to grow nationally. To have a 58 site, 12 state platform for growth of memory care is quite exciting.
The growth nationally in home health is significant. What we're starting to see, both with our other operators and here, the opportunity to create integration across the healthcare delivery system is starting to accelerate the savings, but also improve quality and outcomes. What I think the ProMedica team did, and we're quite confident we will help accelerate, is the integration of care across that platform and the ability not just to work and coordinate with the ProMedica Health System, but other health systems across the country to really improve outcomes for patients.
Okay, thanks. That's it for me.
Thanks.
Your next question comes from the line of Daniel Bernstein from Capital One. Your line is open.
Hi, good morning.
Hi, Dan.
Hi. I wanted to go a little bit more into what kind of CapEx needs to be put into the facilities, and in particular, along the lines of that integrated health system within Michigan and Ohio, ProMedica's footprint. Well, what do you see the integration opportunities with the skilled nursing and memory care facilities and home health? Is that bundled payments? Is that some other kind of integration with managed care or other some type of insurance within ProMedica? Just trying to understand the upside that ProMedica and Welltower are seeing in these assets.
Hey, Dan. I think it's too early to comment on what the exact business plan is. As you know, for last 10 years of various ownerships, these assets are capital starved. Frankly, this is not just a new fresh injection of capital, but also investing in the people.
We do think that ProMedica, if you look at across the board, we talked about how they're an integrated payer and provider network. They have a business plan to significantly upgrade its assets and the various lines of businesses. It's important to understand that we believe that will drive significant amount of cash flow growth. However, we have not underwritten that in the numbers that we talked about. With that, I'll just pass it over to Mark to make some additional comments on the business plan.
Yes. Dan, it's Mark. I think you're exactly right in terms of the opportunity here. ProMedica having Paramount, which is their insurance managed care payer entity, and the increasing role that both skilled nursing and home health have nationally and regionally with regards to bundled rates and value-based care initiatives of getting patients both seen surgically in the hospital and then transitioned quickly to skilled nursing in the home is absolutely right where the nation is going and where we need to go to improve outcomes and lower costs. Absolutely, we think ProMedica has those components.
Okay. I just wanted to quickly ask, is the 1.8 EBITDA coverage, is that pro forma or is that in place?
That's in place.
Then one more quick question on the SHOP portfolio. Obviously, it was an early peak to the flu season. Is there any information you can give us on in terms of March, April occupancies? Did you see a turnaround there? Just trying to understand some of the trends that we've seen early on in the first half.
Okay, Dan. Mercedes, who's on the road, is going to answer that question for you.
Okay.
Mercedes.
Yes, Tom, thank you. The flu season, as you mentioned, was very significant. We are encouraged by how our operators responded. Like we mentioned in the past, following the 2015 season, the company's really improved the way that they respond to implement containment procedures. In our portfolio, for the most part, I think we saw the greatest impact in the higher acuity portfolios located in the West, particularly California and the Southwest. In some cases, vacancy due to death was higher this season than what we have seen before. Those operators will continue to be impacted, I think, for the short term. By all the measures that we're monitoring, such as outpatient visits due to flu and mortality rates and so on, the worst of the season, like you mentioned, is behind us.
The full impact will probably not be known to us until we collect April and May data. In the U.K., we can tell you that the outbreaks have declined in recent weeks too, but still remain elevated compared to recent seasons. Our operators are having to leverage their referral networks and sales processes to minimize the impact on census. We continue to monitor and we will report on that more definitive information as that comes into us.
Thanks, Mercedes.
Dan, it's John. I'll just add one comment alongside Mercedes there, which is, the way the actual industry works is, as the flu season rolls down and infection rates drop, you don't suddenly see a deferred rush into the buildings because of multiple reasons. One of them obviously is that the community infection rates in the general community, not in the senior communities, was extremely high this year, and deaths and hospitalizations in general community settings were extremely high, and you've seen that from some of the hospital operators in the U.S. and beyond. Overall, Q2 will still obviously be affected by flu, as well as Q1.
Again, we remain, as Mercedes said, watching like hawks the data from our operators and from the industry, but it is not a sort of a quick rebound in Q2 from Q1 because of flu. It does take a little time, in fact, often into Q3 or Q4 of a bad flu season for the operators to really get back to where they'd like to be.
Okay. That's reasonable. I'll hop off. I'm sure there are a lot of people in the queue. Thank you.
Thanks, Dan.
Your next question comes from Juan Sanabria from Bank of America. Your line is open.
Hi. Thanks for the time. Just going back to the CapEx that is planned to be invested in the ManorCare assets. Is there any return you guys expect to generate from that CapEx, or that's fully being funded and paid for by ProMedica? With regard to the CapEx, what gives you guys the certainty that that is in fact going to drive better performance? You guys had the history with the HealthLease and Mainstreet deal delivering new assets, and that didn't work out exactly as planned. I'm just a little curious as to why the CapEx would change the weaker trends in skilled nursing.
First, Juan, ProMedica is spending that capital. We're not spending the capital. I'm sure ProMedica is expecting return on that capital. They're very smart investor and very sophisticated investors. That's just not return as in financial return, but they're also strategic returns, investing in people, investing in systems and processes, and buildings and different business lines. I'm sure they're expecting that. I'm glad you brought up the HealthLease transaction. Again, as I mentioned in the last call, every asset is a buy, hold, or sell at a price. HealthLease transaction was done at an extraordinarily high basis, and I'm not surprised it didn't work out the way we hoped it would work out. This transaction is done at a very, very reasonable basis. If you do the math, you will figure that out.
It gives us the comfort that even in the worst downside scenario, we'll make high single-digit IRR, which you will not find in most transactions these days. It's a question of risk reward, it's a question of credit, it's a question of what kind of salvage value, even in the worst-case scenario, you think you can get, and that's what we do. We invest capital. Investing capital always comes with some risk. It's just how you structure that and how you protect yourself from the downside is fundamental tenets of our investing philosophy.
Just on the 180 EBITDA coverage, does that include any income from the home health and hospice business that you guys-- I'm not sure if you're owning that as well as part of the joint venture. It's unclear what's in the JV and kind of what's wholly owned and why that was split differently. Curious on the EBITDA backing of that 180, if it's just the SNF and seniors housing EBITDA, if it includes some of the home health and hospice earnings.
Another great question, Juan. ProMedica will own 100% of the home health and hospice business, and the coverage we mentioned is pure income from assisted living and post-acute business. It has no income above the line. It is facility level EBITDA that has no other income from the home health and hospice business.
Okay. Just one last quick question from me, just switching gears to the RIDEA business and just on the Vintage portfolio, if you could comment on how that's tracking relative to underwriting and kind of where the current occupancy is of that portfolio and any sort of update there.
Yep. Well, Juan, as you recall, we talked about this last call. We're spending CapEx in the Vintage portfolio right now, starting from fourth quarter. Occupancy is lower. As I mentioned, the growth of Vintage will be a detraction from our overall growth in the same store. As we get towards the end of the year, going into 2019, Vintage will be accretive to our growth. Obviously, that's how we're thinking about from a growth perspective. Vintage, as we said, it will take about five years. These buildings were also extremely CapEx starved. In that case, we have obviously baked in the CapEx in our numbers, and as we have spent too early to comment how it will trend relative to underwriting. Obviously, this is the first year we're expecting to see some growth in the second half.
More appropriate question as we are sitting here next year, and we'll see how it's starting to play out.
Thank you.
Your next question comes from the line of Michael Carroll from RBC Capital Markets. Your line is open.
Yeah. Thanks. Tom, I know you said that you didn't want to run away from the post-acute care space last quarter, and obviously you just agreed to buy QCP. Is the company interested in making additional investments in the post-acute care space after this deal? Was this transaction just more of a good opportunity that you saw in the marketplace?
We are long-term strategic investors in healthcare real estate, you have to understand where the industry is going. I don't think I would say unequivocally that we would not invest in any sector. The timing has to be right. As you heard, we're paying half for the real estate of what it was purchased for in the original transaction. I would say that we will continue to look to deploy capital in the best interest of our shareholders, that might be in seniors housing, it might be in medical office, it may be in post-acute. I caution you to think about this versus the post-acute care structures that exist today across the REIT sector. This is a very different investment. It has strong coverage and is backed by a high investment-grade credit health system.
One of the things, Mike, I will add to that is if you think about from our perspective, the underlying assets are obviously post-acute and seniors housing. We are not receiving the cash flow from these assets. We're receiving the cash flow from our partner, ProMedica, who is an integrated care provider health system. That's very important to understand that. That underlying asset base is important. The basis is important, purely as to think what's going to happen 15 years from now if the lease doesn't get renewed. For at least for next 15, that's why basis is important, I talked about that. It's important to understand there's no deal like this in the marketplace, if I can quote you. We created this opportunity with our partner. This deal was not shopped. This deal was not in the marketplace.
We and our partner created this opportunity for them and for our shareholders.
Okay, great. Shankh, on the 1.8 coverage ratio that was quoted, what does that imply in terms of an occupancy rate and a skill mix that's in the portfolio?
As I said, that's a current one. If you look at the coverage, that EBITDA coverage is the current one. As I also mentioned that it is at the lowest occupancy it has been in probably in more than a decade. I will not go more into it. QCP is a public company. You can get into its financial and look at it. From our perspective, as we think about, again, we're not going to comment whether this is the year of the lowest cash flow, but we do think that there's significant upside to that cash flow as we think about next five, 10, 15 years.
Okay. Just last question real quick on the Seniors Housing Operating Portfolio. Can you kind of describe what your team does researching supply within the portfolio? Were you surprised that NIC revised their supply data higher? It does look like your supply within five miles of your communities jumped a bit this quarter. Did you expect that to occur? Does that impact your outlook for your portfolio here in the near term?
Mike, we probably would do a investor day at some point, to introduce you to our data science team. We have mentioned that we have assembled an extraordinary data science team, from people from different backgrounds, from different industries. We jokingly, Tom says that we have hired more science and math PhDs in last few months than finance types. We do have a different view from NIC. We have seen two quarters ago, NIC has a different view. The view went up, now it has come back from where the supply is. Our view, NIC data is obviously one of the inputs, but obviously our systems and processes are not based on NIC data. We have a very granular view of where supply is.
The jump that you saw in our supplemental that you're talking about is a pure function of assets going in and out. Remember, this is a view of what's under construction, so when things get delivered, that changes. I would not read too much into it. As I mentioned to a previous question, our view of the year is still the same.
You're in Cleveland, right?
I am, yeah.
You should drive to Toledo, you spend a half day and you'll meet our data science team, they'll take you through the variety of sophisticated analytical tools that we use to manage our business. Happy to do that anytime.
Great. Sounds great. Thanks, guys.
Your next question comes from Vincent Chao from Deutsche Bank. Your line is open.
Hey, good morning, everyone. Just a bigger picture question. We've heard a lot about the sort of integration of healthcare delivery and how this is unique in that respect, given the vertical integration of ProMedica. At the same time, we've heard sort of a distaste for acute care, I think someone mentioned that ProMedica is also not investing in the acute care side, clearly that will be a part of the healthcare delivery system, to some degree. I'm just curious if a deal, similar to this one where the economics really made sense, would you consider investing in the acute care side of things? If not, just how is this different than, say, the post-acute investment?
I said earlier that we would never redline a sector of healthcare real estate because that's our business, is investing in healthcare real estate. We see the acute care sector as one that requires significant investment and is changing dramatically, almost at a rate that we're not quite sure where it will end up. I think for us, we haven't seen investments in acute care that makes sense for us. We see the future more for acute care systems to rationalize their acute care portfolios. Most CEOs, like Randy Oostra, would tell you they have too many acute care assets because that's how they grew. They grew by acquiring acute care hospitals.
Now that the whole healthcare delivery model is changing, I think many would tell you that they need to rationalize that and look for other ways to bring their healthcare delivery system to lower cost, more modern, consumer-friendly settings. That's the entire theme you are seeing across healthcare today, whether it's what Humana is doing, whether it's Aetna and CVS, whether it's Berkshire, Amazon, and JP Morgan. Healthcare delivery is being disrupted. Mark.
Vincent, if I could also add, if you recall last quarter, we announced a partnership with another top health system, with Providence St. Joseph's system, which is a top 3 system, to help them develop, we call it an outpatient medical, but that facility is 100,000 sq ft next generation oncology center. Complex care in this country is still going to be important, especially with the aging population. As Tom has mentioned, that our team continues to iterate, partnering with health systems to build out whatever that next generation needs to be it complex cancer or home-based skilled nursing and memory care. We're going to be there as a partner.
Right. If there's a real estate component of it, we need to figure out how to invest in that real estate in the best interest of our shareholders.
Vin, to your second question, you asked whether we would invest in other post-acute assets. I want to be abundantly clear, we would not do this transaction but for ProMedica. Again, every asset has a price. We would buy any asset at a price, but this structure is unique, and we're only going into this structure because of our partner and the presence of our partner. Will we ever buy another post-acute skilled nursing asset? Absolutely, if the price makes sense. You have to understand that it needs to be a risk-adjusted return, proper coverage, and the balance sheet of the operator needs to be correct. None of those exist today, generally in the post-acute industry. If we see something that we really like, we would. We have not seen something like that, at least today. If that changes, we'll let you know.
Okay, thanks. There's one last question just on the SHOP portfolio. One of the reasons, occupancy, I think was worse than expected, but expenses were a little bit better. Just looking at the line items, it looked like the all other bucket was down quite a bit, which helped the overall number. Curious if you could provide some color on what drove that bucket.
It just continues to be the same story that we talked about. Real estate taxes helped. workers' comp helped. Also management revenue helped. I talked about that, obviously, many of our contracts have provisions for outperformance, underperformance, and obviously, some of the underperformance in some specific sectors and operators have also helped. Those are the line items drove that particular line. Other than that, I just don't think we have anything else to report. We would prefer that we capture that cash flow at the revenue line, but at least our contract gives us the protection that if it doesn't play out on the revenue line, we can gain some on the expense line.
Okay. We're going to have to cut you off there-
Okay. Thanks.
We have a long line of questions. Thanks.
Thanks.
Your next question comes from Karin Ford, from MUFG Securities. Your line is open.
Hi, good morning. You are taking leverage up a bit with this deal. Is the long-term plan to bring that back down again and further ramp dispositions, or are you comfortable at 5.6 times?
I think, Karin, we've said before, we're very comfortable in the sort of mid-fives area. We were trending down into lower fives before, and that was a strategic move on our part to allow us the room to do exactly this type of transaction. We are sort of navigating within the channel that we've described that we feel comfortable with. We like being very solidly capitalized because it gives us flexibility to do things exactly like this. I think over time, you'll see our leverage drift down from this point over time. But I think we are navigating very comfortably at this level.
Karin, I would just add, go back and read the transcript from the last call. I think Tom said very specifically we're at the end of our disposition journey, from a portfolio mix perspective. Obviously, we have a large real estate footprint. There will always be things to buy, sell, and prune. But overall, as we think where we have come in the journey, we think the major dispositions are all done. From an asset management perspective, we'll always be selling some. And particularly if we see very strong pricing, we might sell some, but overall portfolio mix perspective, large billions of dollars of disposition should be considered roughly done.
Great. Thanks. My second question is just on government reimbursement. You're taking up your exposure there again a little bit. What do you expect to hear? What's your outlook on reimbursement, and what do you think we're going to hear in the next few days, weeks from CMS?
First is I'm glad you asked that question. We are not taking up that exposure. Remember, our cash flow comes from an A-plus rated health system. This is no different from what you would expect a cash flow from an MOB business, except many MOBs or medical office buildings have physician groups who necessarily do not have this type of credit. From our perspective, we receive the cash flow from ProMedica, and ProMedica as an integrated payer provider, is not thinking about a one quarter or one year of reimbursement. I'm not going to predict. They're the expert, and our partners are the expert, but we do believe that they have a significant plan for the improvement of the cash flow.
Karin, this is a health system investment, not a SNF investment. I think that is a very distinct point to make here. This is not like other SNF investments you see owned by healthcare REITs. This is a health system investment.
Okay, thanks very much.
Your next question comes from Chad Vanacore from Stifel. Your line is open.
All right. Good morning, all.
Morning.
Morning.
All right. Tom, because we touched on this, but I just want to get this explicit and your view. What value add do you see ProMedica bringing to the table in skilled nursing given that they're an acute care operator?
Chad, I think that you have to think about these very well-located buildings that they will have a joint venture interest in, and that they are investing in. They see them as alternate sites to deliver care. I've said this for now a couple of years. Skilled nursing has to be reinvented. The real estate is very good quality real estate. This real estate is in compelling markets where ProMedica can extend its service offerings. Don't think of the old model skilled nursing. This is going to be an evolving asset class. Post-acute is a very important part of the healthcare delivery system. If you sat here with health system CEOs, they will say, "I need viable post-acute partners to do what I do and not lose money." You can't keep people in acute care hospital beds Because you don't have a viable post-acute option.
I would tell you that you should look at this carefully and watch what will happen with this real estate, because it will become much more consequential in the healthcare delivery continuum.
I would add that we need to stop thinking about healthcare in buckets as you think about across healthcare going on across provider channels and across payer channels. As we think about sitting here, in the public real estate world, thinks in buckets, people like Randy don't necessarily think about these things in buckets. They think about these things as a continuum of where they can deliver healthcare at the most effective cost setting. With that, we'll go to the next question.
Okay. Is ProMedica on the line available for a quick question?
No, they're not.
Okay.
They're meeting with their employees right now.
All right. One other quick question from me then. You've structured the transaction. You've got 28 wholly owned assets. Can you tell us what's the asset mix there? Are those rented to ProMedica or other operators? Do you plan on retaining or disposing of those?
Those assets are skilled nursing assets. There's surgical hospitals and medical offices. They will not be rented to ProMedica. Will be 100% owned by us. Those assets are roughly 1.7 times covered, and we will decide what to do with those assets. We, again, depending on asset and the basis and the location, every asset is a buy, hold, or a sell.
Okay. Next question from on the line. Thank you.
Eric Fleming from SunTrust, your line is open.
Morning. Longer term question. With this venture with ProMedica and knowing that ProMedica, the rumors of them looking towards China, and then also your Chinese JV partners on the post-acute side, is China an expansion opportunity for you guys longer term?
We don't see that in the near term as a place that we would deploy capital. We're very happily, though, to take capital from China and bring it into the U.S. as you've seen us do, and also provide them some intellectual capital about how they can build a better healthcare delivery network back in China.
Okay, thanks.
Thanks.
Your next question comes from Nick Yulico from UBS. Your line is open.
Okay, thanks. Just going back to the rent coverage, you say 1.8 times EBITDA. I'm trying to reconcile that with the QCP numbers because they reported $280 million of EBITDA 2017. The facility level based on the new rent, it looks like that coverage then would be below 1.6, now 1.8. How do we reconcile that?
I'm not sure I understand that. What QCP's rent with ManorCare has to do with this?
No, no, sorry. I'm just saying that QCP reported for ManorCare $280 million of facility-level EBITDA last year. If I use that versus your $179 million rent, that would be coverage below 1.6. I'm trying to understand why you're citing 1.8, if there's some difference there, some assumption on operations improving, or how should we think about that?
The total rent is $170. Our rent is 80% of that. That's your difference of calculation.
Okay. That's very helpful. Thanks. I guess secondly was, you talked about the deal was not shopped. Can you talk a little bit more about how it came about? You do have three Toledo-based companies getting together here. Also looks like one of your directors, R. Scott Trumbull, is on your board and is also a trustee at ProMedica. Is that info up to date? Is that correct? Did he recuse himself from the board decision for the two companies?
Yeah. This is Matthew McQueen again. We're not going to get into the details of how the deal was shopped. There's going to be a proxy statement coming out in the next couple of weeks, which will have a detailed background of the merger. I think just stay tuned for that.
Okay. Well-
Scott Trumbull is no longer on the board of ProMedica.
Okay, thanks for clarification.
Your next question comes from Smedes Rose from Citi. Your line is open.
Hey, it's Michael Bilerman here with Smedes. I was wondering if we can just go through some of the numbers, just going through the $0.20 of accretion, about $75 million of FFO. Can you sort of walk through sort of going from the EBITDA down to how you're financing that to get to that FFO? It's more just a question that if you look on page 11 of the slide deck, you have adjusted EBITDA for the transaction at $201 million on a $2.2 billion purchase, which is a much greater than an 8% yield. I didn't know if that's a GAAP EBITDA versus a cash EBITDA. Just trying to tie that 201 versus the yield that you're receiving.
Michael, it's Tim here. On your first question on the FFO accretion, I think what you're getting at is just back of the envelope on, you run numbers on our yield and put some financing assumptions, you end up with likely greater than $0.20 that we've outlined. We put a number in there that we think is fairly conservative. We have disposition proceeds and financing that are both uncertain at this point and six months to close on the actual deal. I think that we view this as we'd rather put a number out there that underlines a conservative approach to it. Your question on page 11 of the presentation we put out last night, footnote one says that the EBITDA is a GAAP. You're correct that EBITDA yield on this transaction is a GAAP EBITDA yield, which is higher than the cash.
Should we think about the cash then at 8%? The $0.20 of FFO accretion is really like $0.13 on a cash basis. That assumes in that $0.13 some level of permanent financing or floating rate financing? Does that assume dispositions, in terms of funding cost, to get to those numbers?
Michael, $0.20 is a cash number. The GAAP number is a higher number. It's not lower, it's higher. The $0.20 we talked about is a cash number, and FFO impact will be higher. Tim, you want to answer the second question?
For financing, we assume a rate of, as I said in my prior remarks, $1.3 billion of permanent debt. That's at a rate consistent with our long-term cost of debt, and we do factor in the dilution from asset sales in our accretion math.
From a leverage perspective on a cash basis, leverage will go up a little bit higher than the 5.6 given the numbers presented on a GAAP basis?
Correct.
Okay. Just one on just skilled nursing overall. We continue to hear from SNF owners and operators that smaller regional footprints are working better in the space. What sort of gives you confidence that a regional player like ProMedica can operate a national footprint which clearly has struggled? I get the fact that this has been over-leveraged and it hasn't had a lot of capital, but how do you sort of get comfortable with a difference in the way this business seems to have transitioned to much more successful, pure play, regional focused operators versus someone trying to operate national in scope, especially someone coming into the space that isn't national today?
Michael, if you think about, there's a lot of heuristics in our business, and this is one of them, that we think that regional operators in, as a group, does better than national operator. Generally speaking, that is true in some states, not true in other states. If I think about directionally, you are correct. You will see that ManorCare is exiting a lot of states, just like you have seen in other national operators, and they're concentrating their footprint where they have significant local scale. This is no different from what we have seen. Tim talked about the dispositions that ManorCare is undertaking right now, the 75 assets. That's what reflects the direction of the industry that you're talking about. We do not believe there is any general rule that a national operator is better than local, vice versa. You need local scale.
If a national operator has a local scale in the market, they do very well.
Thank you.
Your next question comes from Todd Stender from Wells Fargo. Your line is open.
Hi, thanks. Are you guys providing any financing to ProMedica for their acquisition of HCR ManorCare? Are you funding or you're going to be lending them any money for their growth and upgrade capital?
The answer to your first question is no, we're not financing that. ProMedica, the A+ rated credit with $2 billion of cash on their balance sheet. Suffice to say, no. The answer to your second question is no, we're not funding any of their capital.
Okay. Thanks, Shank. The rent escalators, they seem on the high side. Now granted, they're not the 5% that HCP was getting and ManorCare couldn't cover those. How did you guys arrive at the rent escalators, the two and three quarters, beginning in year two?
Again, it is a master lease, and it's a mix of both asset classes, senior housing as well as post-acute. You have to understand what the cash flow is today versus the historical level of cash flow and understand why that has been the case and what is ProMedica's plan of improving the cash flow. There's certain things that are very simple. You have to invest capital in this business. There's a cyclicality aspect I talked about. Certain things are not so simple. You think about where patients come from in the post-acute sector. They come from hospitals, right? That's why we talked about the vertical integration. You also have to think about ProMedica is a major not-for-profit health system. There are significant benefits that comes with it. That is obviously will drive the cash flow growth. We're very comfortable.
ProMedica management team is a very sophisticated and smart management team. They obviously underwritten, they're very conservative. They have underwritten it in a very conservative way, we feel very comfortable over a period of time. You can see that first year rent escalator is half of that, and that's because of the disruption that comes with capital improvement. ProMedica intends to invest a couple of hundred million dollars in the assets, and it comes with it, the same answer we gave you on Vintage. That 1.375 escalator reflects that reality.
Okay. Thank you. Just the last question, I'm not sure if I missed this. Are you keeping the ManorCare name? Is there going to be a rebranding?
It is ProMedica's decision, not our decision.
When do you think that'll be handed down?
We have no idea.
Okay. Thank you.
Thanks.
Your next question comes from Tayo Okusanya from Jefferies. Your line is open.
Yes. Good morning, everyone. There's a lot going on here. I have a lot of questions, please just bear with me. First of all, I definitely want the same deal you guys are giving Rob Carroll to see your data group. I would love to come out and see that.
Oh, anytime, Tayo. Please come.
Great. Specifically questions around the transaction. First of all, on a pro forma basis, what will be your skilled nursing exposure? The reason I ask that is just going back to Jordan's question about with increased skilled exposure and all the headwinds around the sector, what concerns do you guys have about a certain part of your business now being a lower valuation multiple being associated with a larger part of your company and the potential negative implications for the stock?
As I've said repeatedly on this call today, I would caution you to look at this investment as we just bought a bunch of skilled nursing assets. What we invested in is a joint venture with an investment grade, A-rated health system. If you look at this as apples to apples with other REIT SNF investments, you're making a big mistake. Shankh, give Tayo some perspective on this structure.
Tayo, think about it. You cover a lot of probably triple net companies. What do you think a BBB+ rated CVS, Walgreens triple net lease rates for? Probably the low 5%. Usually, those leases do not have an escalators like this. You can think about what they should trade at. I would think with the A-plus rated credit, which will be now almost 7% of our cash flow, this will be significant enhancer of the multiple, not the other way around. Think about an IRR. An IRR drives a cap rate. Cap rate is obviously inverse of a multiple. Start from where the A-rated triple and absolute triple net lease trades and derive from there what the multiple should be. You can go at it both ways.
On a pro forma basis, what's the skilled exposure?
Pro forma basis, the skilled exposure is exactly the same. Health system will be about 7% of our cash flow.
Between that and Genesis, your total exposure still stays the same to skilled nursing?
It's because this is not a skilled nursing deal. Our exposure is not with skilled nursing operator. Our exposure, the credit, is a A+ rated health system. Just like you buy medical office buildings, your credit exposure is the health system behind it or a physician group.
Consider this. If every skilled nursing deal owned by a REIT was structured like what we just did, this would be the highest multiple component of our business. Where do you get this level of coverage and the full strength of a high investment grade company standing behind that rent? That's what you get here.
I get that, your rents are still being backed by skilled nursing cash flows from ManorCare's operations, correct?
No, it is not. That's the key. It is backed by an A+ rated credit, that is why we've repeatedly mentioned to you that we have the full backing of the balance sheet.
There's a corporate guarantee from ProMedica?
Yes.
It's ProMedica. Yes. We have the full guarantee of ProMedica. This is not a SNF deal that you're used to looking at with other REITs.
Okay. That's helpful. That's my first question. Second question is on the SHOP side. Could you talk a little bit just about the U.K.? It does feel like there was a little bit more pressure there with the negative same-store NOI growth that came out of the U.K. this quarter.
Yeah, Tayo. Shankh, I'll give you just a couple of minutes on that. I know we're running short of time. The U.K. had a bit of a perfect storm of operating environment. You've heard, obviously, the impact of flu, which was global. We also had unfortunately, a particularly virulent strain of essentially stomach viruses, which also impacted death rates and occupancy and tours and new entrants into those buildings as well. You probably saw, unusually for us, we actually had extremely bad weather from a snow point of view in both Q1 and Q2, probably a decade worst weather outcome for the U.K., which again, was significantly disruptive to operations.
You can see, if you want to sort of have a look on the market at some of the retailers in the U.K. talking about their operating performance in Q1, you'll see how impacted they were by days of sales lost. It's been a bit of a perfect storm there. That accumulates into that environment. I would also say that the U.K. had an extremely strong year last year, as you saw, including some quarters where we had double digit NOI growth. They have a pretty tough comparator this year across what is a fairly small collection of homes at 50 buildings.
Okay, that's helpful. Last quick one from me on the triple net senior housing side. Again, just kind of given some of these pressures on same store NOI, how do we think about the five, seven, 10% of your portfolio that has tight rent coverage today? Should we be thinking about those leases potentially being restructured? Do you think they can withstand the storm they're kind of going through? I'm just kind of curious about that.
Sure. No, good question. Look, I think they're also clearly impacted by operating environments that we've seen. We work closely with them as well as our Seniors Housing Operating Portfolio as well. We're obviously looking at how that will evolve over the course of this year. Most of them are operating in a pretty decent way. Some are struggling a little bit, it's hard to give you projections as to what may happen with individual operators at this stage.
Okay, great. I'll get off the phone. Thank you.
Thank you, Ty.
Your next question comes from Jonathan Hughes from Raymond James. Your line is open.
Hey, good morning. Do you see any risks to ProMedica's A-rated credit rating as they go from regional to national operator and move into a new, albeit related, industry?
I would say, Jonathan, that's not really for us to comment because we're not them or the rating agency. We will see what evolves.
Okay, fair enough. Then just one more. Curious if there was a similar Arden Courts demand supply analysis done for ManorCare assets, more so on that demand side, and maybe how those look relative to your existing post-acute portfolio.
Yeah. Arden Courts is a senior housing operator, the comparison would be our triple net senior housing portfolio, it looks very favorably. Of course, you would expect when we would invest that kind of capital, that will be one of the first thing we'll think about. It compares very favorably with our existing triple net senior housing portfolio.
Okay, fair enough. I'll jump off. Look forward to hearing more about the data analysis capabilities next month in Toledo.
Your next question comes from John Kim from BMO Capital Markets. Your line is open.
Thanks. Good morning. You had same-store growth in your SHOP portfolio this quarter, despite a 260 basis points loss in occupancy. Going forward, are you going to continue to push rents or at some point in your vacancy rates, do you give up some rates to gain some occupancy?
If you think about this, we don't sit here in Toledo and make those predicaments. We have very nimble operators and every market is different. Some market you have very significant pricing power, such as Southern California. Some markets you don't. Some markets, some assets come up very close to you. There is no macro answer. We do it in a very analytical way with our operators on a daily basis. We'll see what the market holds for us.
Okay. Can you provide some color on the $142 million of impairments this quarter? Is that related to assets held for sale or what asset types are they?
Yeah. If you look at the exhibits at the back of our financial release this morning. The answer is there are some of those. We also had some significant gains as we detailed from sales as well. There's a bit of a balancing act going on there. It was a fairly regular way quarter from an impairment point of view.
Great. Thank you.
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