Welltower Inc. (WELL) Q3 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the Third Quarter 2015 Welltower Earnings Conference Call. My name is Holly, and I will be your conference operator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now, I’d like to turn the call over to Jeff Miller, Executive Vice President and Chief Operating Officer. Please go ahead, sir.

Thank you, Holly. Good morning, everyone, and thank you for joining us today for Welltower’s third quarter 2015 conference call. If you did not receive a copy of the news release distributed this morning, you may access it via the company’s website at welltower.com. We are holding a live webcast of today’s call, which may be accessed through the company’s website. Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements within 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 assurance that its projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in the news release and, from time to time, in the company’s filings with the SEC. I will now turn the call over to Tom DeRosa, the CEO of Welltower. Tom?

Thanks, Jeff and good morning. I am pleased to tell you that our financial results for the third quarter were the strongest we have reported this year, an 8% increase in FFO per share overall Q3 2014. The performance as well as our confidence in future earnings potential allows us to increase our 2015 guidance and announced a 4.2% increase in our dividend for 2016, the largest dividend increase in a number of years. I'm also pleased to be speaking to you for the first time as Welltower, a name that speaks to the promise of the extraordinary business model that we've built over decades, a model that will continue to lead the evolution of healthcare delivery infrastructure. Now I know that you are all trying to understand the impact of new supply on our Q3 same-store results. So let me hit that for you right upfront. First, our Q3 same-store results for our entire portfolio are in line with what we expected and our guidance for 2015 remains unchanged at 3% to 3.5%. In the US, we have seen new supply impact some but not all of our markets. Scott Brinker will give you more detail here. We are encouraged by the 60 basis point occupancy improvement in our same-store operating portfolio from Q2 to Q3, and we continue to benefit from pricing power as our best-in-class operators command premium rates over the competition. So going forward we feel that our portfolio is positioned to grow. As in the prior two quarters, our same-store operating growth continued to be negatively impacted by a historic flu season that crushed the occupancy rate of our UK portfolio. As you will see in our supplement, if you exclude the UK from our same-store operating results, the year-over-year Q3 increase would've been 3.4% versus 2.7%. I hope this helps put the growth of supply issue into perspective. If you want to know more about supply in the markets where Welltower operates, see our new disclosure in our supplement. It will give you greater insight into our major and sub markets. Hopefully you'll see why we are bullish about the performance of our senior housing portfolio going forward. Scott Estes will provide you more information on our financial performance. Our great operating results were generated from our best-in-class real estate portfolio enhanced by over $20 billion of accretive investments and approximately $4 billion in dispositions made in the last five years. Our operating results also greatly benefit from our strong balance sheet which gives us great financial flexibility as we prepare for a potential increase in interest rates. Remember we’ve raised $4 billion in equity in the last 18 months and our leverage has been reduced by over 5%, no easy feat for a $35 billion plus enterprise. Frankly given the schizophrenic rhetoric coming from Janet Yellen and company, I'm very glad delevering is behind us. As Scott Estes will tell you, now it’s our time to drive earnings growth. Let me say that transparency has always been a hallmark of Welltower and our financials should provide a good clear roadmap to understanding our third-quarter performance and where we are headed. Now I’d like to turn the call over to Scott Brinker, our Chief Investment Officer.

Thank you, Tom and good morning to everyone. I want to start with the themes that drive our investment strategy. They provide a framework to think about how our portfolio has performed to date and how it should perform going forward. One, align with best-in-class operators and buildings, because our building, our business is driven by real estate and operations. Two, concentrate in large metro markets that have superior demographics and higher entry barriers. Three, diversify by geography, operator and lease maturity and fourth, actively manage the portfolio. The payoff is visible in our results. The long-duration triple net portfolio contributes half of our earnings and is a steady strong performer. Same-store seniors housing NOI increased 3.3% while post-acute increased 3.4%. That's awfully attractive with inflation at or below 2%. Payment coverages were flat and remained at secure levels. The median duration outpatient medical portfolio is 15% of our earnings. We hit all time highs in occupancy and tenant retention. This led to a solid quarter with 2.5% same-store growth which is right in the range we expected. The final segment is a short duration operating portfolio. Same-store NOI grew 2.7% last quarter. That number requires some color and context. One, we own a modern portfolio that allows us to drive NOI growth with very modest capital expenditures. This is a really important point when comparing same-store results across companies. Less CapEx means more free cash flow to grow the dividend and acquire new properties. Two, and as expected, the UK dragged down results for the entire operating portfolio. This is a finite-12 month issue and we are now three quarters of the way through it. A record flu season wiped out more than 300 basis points of occupancy in the UK earlier this year. But we are turning things around. Occupancy is up 110 basis points sequentially and the momentum has continued in October. The UK was a same-store growth engine for us in 2013 and ‘14 and we think it will be again in 2016. Three, the US is strong. That represents 70% of the operating portfolio. Our core markets like Southern California, New York and Washington DC are thriving. The US portfolio is on target year-to-date with 4.7% same-store growth and a positive outlook in 4Q. Four, we were up against the tough comp. And finally new supply. This is the time to use a sharp pencil not a broad brush. We’ve added a huge amount of information in the reporting package. We included color commentary to give you context to all the numbers. The color is important because not all new supply is equally competitive due to services offered and price point. As you do a deep dive, the data will confirm that on a relative basis our markets have less new supply, better job growth and superior demographics. That doesn't mean we’re immune from new supply but we’re entering a period in which dispersion is going to widen. This is the time to align with the best real estate and operations and that’s exactly what we are. That takes me to our outlook for the overall operating portfolio. And as a reminder, we don’t update NOI guidance throughout the year for each segment only for the aggregate portfolio. But the question has come up quite a bit and we want to be responsive. So looking forward. Occupancy was up 60 basis points sequentially with solid growth in all three countries. Occupancy has continued to move higher in October. We have pricing power in the vast majority of our markets. So from where we sit today, despite one more week quarter coming from the UK, we’re optimistic that NOI growth for the overall operating portfolio will move higher sequentially in 4Q. We’re in the middle of the budgeting process with our partners and we’ll provide 2016 outlook in February. Turning to investments. Our model is privately negotiated high quality real estate with existing partners. It’s simple and perhaps a bit boring but it works. The initial cash yield on our third-quarter investments was a very strong 7.2% and we expanded our relationships with both Sunrise and Genesis, two industry leaders. That brings me to a critical point of differentiation: our deep relationships with best-in-class operators. We’re extending that advantage in a highly targeted way. So far this year we’ve formed new relationships with Aspen, Oakmont, EPIC and most recently Leisure Care, one of the 20 largest operators in the US. These relationships extend our leading market share in London, California and New England. And all four partners will be a source of future growth. We’re off to a strong start in 4Q. Alongside our partner Revera, we just completed the acquisition of Regal Communities. The assets are concentrated in our core Canadian markets, including Toronto, Montreal, Ottawa and Vancouver. We will receive a 6.1% preferred return that escalates over time, which is highly attractive in comparison to recent public auction M&A in Canada. The opportunity set is never a problem. We have active dialogue with 30 plus existing partners and a long list of operators who want to be part of the Welltower family. We expect this will remain a unique way to create incremental shareholder value. In summary, we’re looking to end the year with momentum heading into 2016. And Scott Estes will now discuss our financial results.

Thank you, Scott and good morning everyone. From a financial perspective, our message over the last several quarters had focused on strengthening the balance sheet. Importantly, as Tom discussed, we took the opportunity to consistently raise equity over the past 18 months that we are currently in a position of strength and flexibility. More specifically, our leverage and balance sheet metrics have continued to improve, give excellent liquidity with our entire line of credit available and approximately $100 million in cash, we are not reliant upon the equity markets over the near term and our multiple pension fund partners provide flexibility in financing new investments. So as a result, the key financial message today is that we've shifted our focus from improving our balance sheet and credit metrics to one where we are driving more meaningful earnings growth for the remainder of 2015 and 2016. I will begin my more detailed remarks with some perspective on our third-quarter financial performance and changes in our supplemental disclosure. Normalized FFO came in at a record $1.12 per share and normalized FAD was $0.99 for the third quarter, representing strong 8% and 9% increases year-over-year respectively. Our results were driven primarily by the solid same-store cash NOI increase and the $3.6 billion of net investment completed over the past 12 months. There was one notable expense item in our numbers this quarter that I'd like to take a moment to clarify. You'll note on our income statement that we recognized a tax benefit of about $3.3 million. You would typically see an expense on this line but we recognized approximately $5.4 million of tax repayments this quarter for amounts overpaid in previous periods. Importantly, we did not take this benefit to normalize earnings this quarter. I think this is another good example of the financial transparency Tom mentioned in his opening remarks. We arguably could have taken these repayments to normalize earnings this quarter since we did include the overpayments in previous periods but we are excluding them in an effort to show a more true operating result. And you can see where we exclude these repayments in our normalizing items on page 8 of our earnings release. In terms of dividends, we will pay our 178th consecutive quarterly cash dividend on November 20 of $0.825 per share representing an annual rate of $3.30 and a current dividend yield of 5%. I'd note that our FFO and FAD payout ratios for the third quarter declined to 74% and 83% respectively. And as we move into 2016 our confidence in our internal and external growth has allowed us to announce a 4.2% increase in our 2016 dividend payment rate today, representing our highest dividend growth rate in four years. In terms of our supplemental package, we continue to enhance our disclosure in response to investor and analyst feedback. A few items of note – first on Page 1, we added a footnote regarding our hospital portfolio. This is notable because you'll see that our London hospital portfolio derived 80% of its revenue from outpatient services and 93% of revenue from private pay sources. Next on Page 9, we added new disclosure comparing our Canadian seniors housing operating portfolio to benchmarks in the country. And on Pages 10 through 14 as Scott Brinker discussed, we've added significant new disclosure detailing new supply related to our seniors housing operating portfolio on a 3 and 5 mile radius, including detailed descriptions of the local market dynamics for a significant number of properties. Turning now to our liquidity picture and balance sheet. As the third quarter was relatively quiet from a capital raising perspective, we did issue 1.2 million common shares under our dividend reinvestment program, generating $78 million in proceeds which was the most we've ever raised in a quarter through the program. We also generated $171 million of proceeds through the sale of non-strategic assets and loan payoffs which included about $2 million of gains and represented a blended yield on total proceeds of 5.7%. The remaining $57 million of our 2029 convertible debt either converted or was redeemed during the quarter, which eliminated the final convertible debt instrument on our balance sheet. And finally we’ve repaid approximately $130 million of secured debt at a blended rate of 4.4% and assumed to refinance $108 million of secured debt at a blended 3.1% rate. Subsequent to quarter end, we did complete several additional capital transactions. In early October, we completed our first significant capital raise under the Welltower flag when we reopened our 4% senior unsecured debt through June 2025 through the sale of 500 million of notes priced to yield just under 4.3%. And also in early October, we utilize our ATM program for the first time since 2011 by issuing 696,000 shares at a gross price of $69.23 which generated $47 million in proceeds. So as a result, pro forma for both our October capital raising activities and financing the Regal transaction earlier this week, we are in an excellent liquidity position today with our entire $2.5 billion line of credit available and approximately $100 million in cash. Our balance sheet and financial metrics at quarter end continued to strengthen. As of September 30, net debt to un-depreciated book capitalization was 37% and net debt to enterprise value was 30%. Our net debt to adjusted EBITDA declined to 5.2 times while our adjusted interest and fixed charge coverage for the quarter improved nicely to 4.5 times and 3.5 times respectively. Our secured debt level also declined by 40 basis points to only 10.8% of total assets at quarter end. I will conclude my comments today with an update on guidance and our key assumptions. In terms of same-store cash NOI growth, as Tom and Scott discussed, we continue to forecast blended same-store growth of 3% to 3.5% for the total portfolio in 2015. We can't stress enough the consistency and lack of volatility in our same store NOI results over the longer term. Specifically if you look over the last 16 quarters, our total portfolio same store NOI growth has only varied between 3.0% and 4.4%, and I think this number becomes more impressive considering the low-inflation environment we've seen over the same period. In terms of our 2015 investment expectations, in addition to investments completed through the third quarter, our $4.1 billion guidance does include the Regal Lifestyle communities transaction that closed earlier this week, the Genesis acquisition and loan expected to close late in the year, approximately $50 million of investments through our Mainstreet partnership and $73 million of development funding. I would also note that we increased our disposition proceeds expectation for the full year to a total of $1.1 billion and an expected average yield on total proceeds of approximately 6%. Our CapEx forecast is now approximately $60 million for 2015 which is comprised of $40 million associated with the seniors housing operating portfolio with the remaining $20 million coming from our outpatient medical portfolio. These amounts continue to represent approximately 6% to 7% of anticipated NOI in both asset categories. Our G&A forecast is now approximately $145 million for 2015 which is about $2 million below our previous estimate. And finally in terms of earnings guidance, we’re in position to increase our normalized FFO forecast to a range of $4.32 to $4.37 per diluted share and tightening our FAD estimate to a range of $3.84 to $3.89 per diluted share which both represent a solid increase of 5% to 6%. In conclusion, we feel very positive about our overall results today. We are on pace on complete over $4 billion in investments this year. We've enhanced our leverage and credit metrics. Our total same-store NOI growth forecast is unchanged at 3% to 3.5%. We delivered quarterly FFO and FAD growth of 8% to 9%. We raised our FFO guidance for the year and our confidence in our future earnings growth potential allowed us to increase our dividend at the highest rate in four years. So with that, that concludes my comments. I will turn it back to you, Tom, for some closing remarks.

Thanks, Scott. Before we open the line for questions, I just want to speak for a moment about the compelling long-term investment and growth opportunity we see before us. This past Tuesday, the front page of the New York Times reported on a study that concluded that the money to treat a person suffering from dementia in their final five years of life is 80% greater than the cost of treating someone with heart disease or cancer. Dementia is a disease where there is no cure. Dementia patients need constant care for years but these costs are not covered by insurance, Medicare or Medicaid. This is a crisis for families impacted by this disease today and will become an enormous crisis for society at large in the future. Welltower offers a solution. We are focused on providing the capital necessary for our operating partners to build the infrastructure needed to deliver wellness and a healthy and safe quality of life to our cognitively impaired seniors. And we are focused on providing capital to the most prominent health systems as they exit their old outmoded acute-care hospital buildings in favor of more modern efficient outpatient focused settings that can work effectively with post-acute and senior housing to manage the challenges of healthcare delivery in the future. We, with our shareholders, are the catalysts of capital to make this all happen. Now Holly, please open the line for questions.

[Operator Instructions] And your first question will come from the line of Juan Sanabria with Bank of America Merrill Lynch.

My first question is for Scott Estes. I think you mentioned shifting of the balance sheet to more meaningfully driving growth as we look towards ’16. Does that mean any change in how you're looking to financings going forward, is the plan to lever up or to maintain sort of a leveraged mutual approach?

Hey Juan, the short answer is leverage neutral approach. We don't intend to increase leverage. I think it's more of a comment that we’re happy with the general levels we are in now, so you’d expect us to maintain our typical 50%-ish equity, 40% debt capital raising ratio from these levels but we don't intend to increase leverage.

And then just on RIDEA, I appreciate the comments to the new disclosure around supply but for the US specifically what’s the view on kinds of levers with occupancy, kind of rate and expenses as you look forward and how should we be thinking about sort of a steady-state growth from here for the US?

Juan, it’s Scott Brinker. The major drivers of NOI growth for the business are occupancy rate and staffing. So if you understand those three components you’d I think underwritten 90 plus percent of NOI growth and we can't see too far into the future but from what we do see the trend is very positive. So occupancy across our portfolio is moving higher since June and that’s continued into the fourth quarter. Rate growth continues to be 3 plus percent in most of our markets and that's generally in line with compensation. So things bounce around a bit from quarter to quarter, 90 days is just a very small amount of time and unusual items can have a big impact. So don't read too much in any particular quarter but over time we see rate growth generally in line with wages.

And then just one last quick one from me on the RIDEA business, can you give us any sense of what the typical turnover at the senior management level, executive director et cetera is and if that's changed at all with new supply?

We haven't seen a major change, Juan but you raised an interesting question because that position drives performance at these properties. And one of the things we've done with our executive forum is really dig into employee turnover at all levels, including the executive director, so that for the first time all of our operating partners can compare how they perform against their peers. And we talked about that report at our last meeting about a month ago and that was a real eye-opener for 12 of the leading operating companies in the country, because they had not seen to date how they compared on that very important metric. And that's the type of thing that we’re doing in our portfolio that's totally different than the typical capital partner and helps explain why we have such close relationships with the best operators in the country.

Juan, I will just add to that, at the NIC conference where we brought together a number of the operators in our forum that Scott was referring to. We brought in a senior executive from the Ritz Carlton Company to meet with these executives and talk to them about building a positive culture in an organization. So these types of efforts -- which these individual operators couldn’t do on their own, because of the scale we offer we can bring in someone like this executive from Ritz Carlton and expose them to best practices which they might not otherwise be able to take advantage of.

And just what is the actual average turnover you guys are seeing at the level?

Juan, it varies because buildings are at different ages. But if you were to take just a pool of typical buildings that have been opened for 10 to 20 years in our portfolio, it tends to be in the five-year range. So there is turnover at that position but the higher turnover is really at the line staff level, like the direct care giver level, that tends to be more in the 30% to 40% range, so a bit higher for the lower wage employees.

And your next question will come from the line of Joshua Raskin with Barclays Capital.

This is actually Nihal Shah filling in for Josh Raskin. Thank you for taking the question. I wanted to kind of go into the 2.7 growth that you guys had. I appreciate the comments on the UK portfolio. But I was wondering if there was any particular operators that might be driving this, to the positive or the negative?

The only operator that I would think about in the U.S. and it's not by name, but just by region is New England because like the UK they had a devastating flu season in the first quarter. So occupancy is quite depressed and as I mentioned in the UK comments, it takes a full year to get out of that, because it's in the current year's numbers for 12 entire months and until you do a lap a year later it's a drag. So even though our New England portfolio is building back occupancy, it's starting – or you’re comparing against a big hole and that is an issue. And the other one is just a couple of outliers drive huge variance. So in the US we had five properties that if you were to take them out of the pool, the same-store growth rate would've been more than 100 basis points higher than we reported. So remember, we have 250 plus properties in the US. So a very small number of properties can drive a huge variance from any one quarter and that's why it’s just tough to look at only 90 days. Focus on a longer period of time.

Yes, I think that’s important that we don’t take facilities in and out of the portfolio. We will give you that -- that information we can and a lot of times it does get to you.

So please we ask you to look at the consistency of what's in our same-store portfolio because it would be very easy to manipulate the number by -- when you see a problem taking it out of the portfolio but we don't do that. We maintain a very transparent approach to this calculation.

And one more question if I may. We’ve been seeing a lot of activity in the hospital space both on the REIT side as well as the operating side. Are you seeing any increased opportunities in that space given all the action?

Well the opportunities we’re seeing are to help the major systems build out much-needed modern outpatient infrastructures. You’ve heard me say many times we stop at the front door of the hospital. In fact, I think we’re about to see the last of our US hospitals out of our portfolio this year. So we do not believe that investing in acute care in the US makes sense for our shareholders. Now we do like the private hospital market in the UK. You saw us make a significant investment there that continues – we’re very bullish on that business. But we don't care for the reimbursement paradigm of acute care in the United States and we’ve been watching the results of the public hospital companies recently and I think our thesis is being supported by some of the results that were reported this past quarter.

And your next question will come from the line of Daniel Bernstein with Stifel.

I just also want to go back into the same-store seniors housing NOI growth. Is that on a constant currency and how did the currency impact that number? Just trying to think about how it compared to peers?

Yes, it’s on a constant currency basis, Dan.

Did currency impact that number at all or –

No.

And then also I was just thinking about the development opportunities that are out there, are you getting any opportunities to do something more of like what you’ve done at 4Qs where you had the Surgery Center, MOB and hospital coordinate with the skilled nursing, coordinate with the assisted-living, are you getting any kind of more opportunities where you’re able to do that thinking about where the future of healthcare is going. It seems like that you might have that opportunity. I just want to think about – a little bit more in depth about what kind of construction development you are doing out there?

Yes, Dan, we are very focused on that. And I will tell you that the dialogues with health systems about the very subject you bring up have increased dramatically. So we are very focused on creating connectivity between acute-care, postacute and seniors housing and I would -- and we are -- as we think about the future we’re thinking that's an area that we will commit scale capital to. It’s early days, I am not saying that -- and again these are development opportunities, these are not acquisition opportunities. This is where we will be doing new development. But we are very excited about that. We think that’s the future of an important part of the growth profile of Welltower in the future.

If you look back at the last couple of weeks, maybe more than couple of weeks ago, you had an expansion of the bundled payment into 75 MSAs. Are you getting any – do you have any thoughts on whether and how the construction might head in the postacute sector, are we going to see more – the silos are going to go away – are we going to see more construction that’s simply rehab and have you had any inquiries or thoughts about what kind of construction or development properties you need to invest in going forward in the post acute space?

Dan, it's early days in that but our view is that it supports our thesis which is to back to support the best in class scale operators like Genesis. We think that they are best positioned to live in that kind of a world where they're negotiating with huge health systems, huge managed-care payers. There is massive infrastructure needed to do that effectively, technology and these small companies in our view cannot live in that world effectively. So our view is that in the skilled nursing business people are very focused on reimbursement rates and whether that means that the outlook is good, bad or benign and we think that is a small piece of the story, because underneath all of that is a massive change to how that business is going to work going forward. And I don't think people fully understand that. So we’re not focused on next quarter or two quarters from now. It’s what is that business going to look like in five years and in 10 years and it's a lot different than what it looks like today.

And the other piece of this, Dan, is the aging of the population which has really got to drive a profound change in healthcare delivery. I was struck this morning watching Squawk Box where you had the CEOs of the Mayo Clinic, the Cleveland Clinic and NYU Langone and they really didn't touch on that. And I sat there in amazement because that is one of the biggest looming problems for the healthcare delivery sector is how you’re going to manage this aging population and it has to be reinvented and it's not going to happen in the traditional brick-and-mortar that exists today. You will get a lot of hospitals in America, they were built in the 1930s and those are hospitals of many brand-name -- that are belonged to many brand-name health systems. That’s going to be a challenge in the future and that's one of the reasons why we get up every morning here and work so hard to tell our story and attract new sources of capital to invest in making it all happen.

We want to take that conversation offline because it sounds like it could be a very long conversation but we tend to agree that there's going to be a pretty big upheaval. I want to understand more how the operators are trying to deal with it. The last question I have is going back to the wage pressures, it sounds like you think your wages are about in line with revenues. But when we think about -- what we hear on the wage pressures are some minimum-wage, there’s poaching of executive directors maybe in seniors housing and then maybe on the operator side, it seems like there's -- if you listen to most of the post-acute and hospital calls, there’s some increased contract labor maybe in therapy and skilled nursing. So if you could talk a little bit about more in detail about where you are seeing wage pressure and how concerned you are about that, even if your rates are keeping up with that, how concerned are you about wage pressure going forward here?

Dan, it’s Scott. I will take that. It’s something that we’re very focused on. As I mentioned it's one of the three primary drivers of performance but my comments reflect our view that rate growth is generally in line with compensation. So there are some markets where there's a shortage and that may drive labor costs higher, it may require a bit more contract labor which is more expensive. But there are an equal number of markets offsetting that so that the average is in the 3% range. And we haven't seen any material change in turnover in any of the positions. But this report or study that we have underway I think will start to chip away that. So we’re optimistic that turnover can actually go down rather than go up.

And we just need to attract more people to this industry, to work in this industry. I think that's an issue. We are not at the top of everyone's list as the most glamorous businesses to build a career in. But that has to change because there's huge opportunities for people to come into this either the seniors housing or the post-acute sectors, and that's something we work very closely with our operators on as how they can work towards in recruiting and attracting people who are looking to change careers or people that are looking for encore careers. We’re going to live a lot longer, so the idea that you’re going to retire at 60 and then start collecting government benefits and live a happy life is probably a bit a thing of the past. I think there are lot of 55 to 60-year-olds that are going to need jobs because they are living to a 100 and you know what I hope they come calling us and work in the senior housing industry.

And your next question will come from the line of Smedes Rose with Citi Research.

Hi thanks. I wanted to ask you just as you look at the acquisition opportunities going forward, would you expect to sort of go with maybe more joint ventures and bringing in pension funds or other institutional investors? I think you said in the past they were looking more seriously at this asset class and I'm just thinking that in the context of you’ve said you want to remain leverage neutral and just kind of presumably a higher cost of equity here. Is that – would that be a way to continue the pace of acquisition activity in line with what you would like to be?

Definitely Smedes. Scott and I will both comment on that but that's not an area that we’re spending a lot of time in and CCP becoming one of our joint venture partners was very noticed by the large sovereign funds around the world and we’ve been in significant discussions with many of them as they try and understand an investment class that they've had no exposure to in the past. And as we told people and I think they recognized the Canadian pension plan spent more time underwriting Welltower than they spent underwriting the investment in the Beverly Hills portfolio. And I think that has not gone unnoticed. Scott?

Yes, I would add that we were ahead of the game on this. So we established a partnership with PSP almost 3 years ago and have significantly grown that partnership in the interim. And if you look at the recent track record of investments, including the big one we closed this week in Canada where Revera is a 25% owner, remember Revera is owned by PSP, and think about the Beverly Hills portfolio and stay tuned for other things that we’re working on. A large percentage of them have a joint venture partner and we think that's really important because as a public company our stock price is a little bit volatile and yet we see fantastic opportunities that strategically will be really important for us to own, whether their assets or operators as we look into the future and to be able to tie up those opportunities without spending 100% of the capital, sometimes can be really helpful. And it's nice to have friends to call on when you're in one of those periods of time.

I just wanted to ask you too, in the UK, I mean adjusting for the flu issue that you’ve talked about, it seems like it’s obviously a market with compelling demographics, are you seeing a lot of or more elevated supply coming into that market or if not, what kind of the governor that’s stopping new capital coming in to build more senior housing?

Yes, the UK is a fascinating market. I wish we could spend the whole day on it because it's so intriguing to us. But the bed supply in the UK for the most part is declining and if you do site visits in two or 95% of the homes there you would not want to stay there. They are obsolete and they need to be replaced. And what we own in the UK is literally the top 1% of the estate. So these are modern properties, private pay not government pay and there is virtually no new supply other than what we’re building with our partners. So we picked Sunrise, Signature and Avery, the three leading private pay operators in that entire country and we’re building out there development pipeline. And with a concentration in London which is the hardest market we have exposure to, to build in. It’s remarkably difficult.

So London, it's so important to know that our UK business is concentrated in London and it would be -- as Scott said we are bringing the new supply to the market, it will be very difficult for anyone else to come into that market and bring new supply in any scale. And I think London serves as a good example of the type of market that we want to be in over the long term. And again it’s like any sector of real estate, if you're in places where it’s easy to bring new supply and financing is available, new supply will come. But when you're in the very densely populated centers of urban markets where there is job growth, there is population growth, it's very difficult to bring supply into those markets. So that's why the bump that you see in our same-store results in this quarter is really not an indicator of the future performance. I think you have to go look more deeply at our portfolio and see that London is not an outlier, that London is basically characteristic of where we have placed our shareholders’ capital. And because we’ve sold so much over the years, we've been able to redeploy that capital in those -- in the most attractive markets in the US, Canada and the UK.

And your next question will come from the line of Jordan Sadler with KeyBanc Capital Markets.

I guess my first question is a little bit of a follow-up in terms of new supply in sort of protected markets vis-à-vis your commentary with London, Tom. I really appreciate the new disclosure. Can you guys maybe give us a sense as to why the 3 mile or five-mile rings are appropriate and versus maybe a seven or 10 mile ring around some of these properties, in these MSAs? And then separately I know on the five-mile ring at least you’ve identified this 4% of NOI, of your potential NOI being impacted. I'm just -- maybe you could hone in on that and maybe we could expand on that as it relates to sort of widening the ring a little bit.

Yes, it’s Scott Brinker. I will take that. And we chose 3 miles because we've done a lot of work about historical referral patterns in drawing networks for our portfolio in terms of where did the residents actually come from. And we characterize the entire portfolio into really three categories: urban, suburban and rural. The vast majority of what we own fell into the urban category. We had virtually nothing in the rural category and in general the median drawing area for these urban markets is about three miles and for suburban assets it's more like five. So for our portfolio 3 miles make sense. When I think about a 7 mile radius that's 150 square miles in London or Boston or Los Angeles. And frankly as developers are using the 7 mile radius there's going to be a lot more new development but that is not an appropriate drawing radius. When you get some people from 7 miles, sure but the vast majority in these densely populated markets are coming from a much smaller radius.

And then as sort of a follow-up on capital allocation, I noticed the dividend increase, larger dividend increase this coming ‘16 and I guess when I look at ’15 versus ‘14 it's going to be more than an 8% increase. But at the same time I see that you guys were issuing on the ATM post quarter end and using the DRIP during the quarter. Can you guys talk a little bit about dividend policy and sort of capital allocation vis-à-vis sort of equity versus the dividend?

Scott Estes, how are you doing, Jordan? We review the policy once a year. Over the last three or four years we’d increased the dividend at a rate of about 3.5% and we agree in what we actually do, we wanted to both acknowledge our confidence in our growth potential looking to next year but also acknowledging retained earnings as one of the best sources of capital. So we didn’t go with a more significant pace of increase. So we’re trying to balance the two, I think and thinking about what our shareholders would want, whether they be income oriented funds or more focused on the earnings growth.

So it would be something less than your AFFO growth, some portion of that, is that sort of how you are thinking about it?

You can’t hold me to any numbers, we don’t have guidance out there but we've been driving down our payout ratios pretty consistently and I still think there's an opportunity to do that from current levels.

And your next question will come from the line of Paul Morgan with Canaccord.

Just to get back to the -- you cited that there were just five properties that if you excluded them from the same store pool, it would have been 100 basis points higher. That's a pretty big – that’s just a pretty big double-digit decline in those. Do you have any more color about those – those five specifics and I mean is that kind of typical that you’d have that or when you talk about maybe seeing higher same-store numbers in the fourth quarter, could that be one of the drivers?

We think so, because there are specific issues at each of those five buildings that can be fixed. And the exact number was 130 basis points. So that takes our growth rate all the way down to 3.6, would have been 4.9 if you take out those just five properties, and it's a combination of flu, it’s a combination of new supply in certain markets and there was some turnover at the ED level at one. So it's a mix of things but in each case I think an identifiable issue that can be fixed. The one subject to new supply maybe it takes a bit more time for those but it shows you that with a portfolio of 250 plus properties in the US, 245 plus did very well growing right at the 5% mark and we had five that we needed to fix.

And if I could add to, I think it's important because everyone is so focused on the rate of growth and the actual percentage change and to me from a financial perspective to put the supply issue in some context, a 1% variance in our overall same store operating portfolio NOI in a quarter is actually less than $2 million or half a penny per share, it’s less than half a percent really to our total earnings. So we obviously acknowledge we’re all focused on it but financially I still think it’s important for everyone to remember it’s not a big impact.

I mean I think I heard you right where you said that it looked like the same-store could move higher in the fourth quarter. I mean is some of that also just the comps getting marginally easier in some of the subsectors or some of these specific issues, could you just give me color sort of kind of what would be the driver of moving higher?

Yes, the comps really get easier next year, 4Q is still a pretty difficult comp for us. So we’re not giving specific guidance for 4Q but from what we see today we feel like the US in particular will continue to be strong. It’s grown in the high 4% range year-to-date and it looks like it could be in that range in 4Q as well.

And then I mean you commented on your focus on kind of the structural changes in the post-acute reimbursement setting and there has been kind of a lot of angst in the industry I guess over the past few months about the Medicare’s joint replacement program and the implementation next year and the potential profitability for SNFs in the postacute space. How do you think of that as a risk factor sort of in the near-term and everything you do about in terms of your appetite for development or investment in that segment?

It’s just a reason to be even more discipline about which properties we acquire or develop, which markets, which operator. It's definitely a business that’s going to have some challenges. I think there are a lot of obsolete buildings that will be taken out of service.

And it’s why we don't own a lot of SNFs. Our capital is being invested in state-of-the-art postacute, we’re not going after portfolios of SNFs. We've been selling portfolios of SNFs. So we do think that's an area – that while cap rates might look attractive for acquisitions, it’s not an asset class that we would feel comfortable owning long term.

And also underwriting really high payment coverages, so the development that we’re doing generally can be comfortably underwritten to a 2 plus times payment coverage before a management fee. And leaves a lot of cushion for any deterioration in margin and that makes us a lot more comfortable to invest into that sector.

Your next question will come from the line of Vikram Malhotra with Morgan Stanley.

Just on the UK, there is -- at least in the budget, there's a plan to increase minimum wages by 10% next year. Just wondering how much of an issue or specific issue is that for the staff [ph] portfolio there, and if it is, kind of what percent of the employee base do you think could get impacted?

I will take that, Vik. It’s one of many reasons that we chose to focus on the private pay side of the business in the UK because if you are in the government reimbursement business the rates there are increasing at 1% to 2% at best and if your wages are going up 5%, 10% that's a really challenging situation. And in the private pay business we have a much better shot of increasing rates and pointing to the minimum wage is a reason why. And that is definitely part of the plan and a lot of businesses are proactively raising their wages and increasing their prices because of it. So that’s happening in the UK and again ahead of time, so we’re already seeing some of that because Sunrise and others have been proactive about what they need to do to continue to attract staff but also continue to drive profitability.

And remember there's still very limited supply of high-end private senior housing in and around London, which is again where we are focused. So as Scott said, obviously it's always a concern when you’re seeing the government edict for wage increases but I think our operators are very on top of it and prepared.

And so if they do go up say 10% and I'm assuming wage or staffing costs are what 40%, 50% of the operating expenses, then if you have sort of 4%, 5% increase, I am assuming that, that minimum wage doesn’t impact all the staff you have, is there like a proportion that's more and probably they are more kind of not at the ED level but just like what proportion of the staff could get impacted or where we could see price increases?

One of the things – Vik, in the UK what’s different about the model there is that they don't have -- for instance much of the staff are what we would call registered nurse, so they don't have for instance the LPN category which is what you largely would find in the US. So the staffing model is a bit different in the UK.

So it would be a broad-based increases is what you are saying?

Not necessarily, Vik. I mean very few of the actual employees are being paid at the minimum wage but you do have people like housekeepers, dietary, some of the direct caregivers, maybe they are not at a huge premium to the minimum wage. So if you increase the minimum wage they probably will have some pressure on those positions, just to maintain that parity. But it's not all of the staff.

It’s a small percentage actually. We are thinking it somewhere around 10%.

And then just on the pricing model in the UK, there is a sort of a tiered pricing. At least when I was visiting some of your assets, it seemed like there was this tiered pricing where some of the additional services are rolled into one price, and it's maybe four or five tiers. Do you think there's some -- in the US there could be some changes to the pricing model that may impact when we look at the average RevPAR, that may impact that number going forward?

No, Vik, I wouldn’t say that, each operator does its pricing a little bit differently, whether it's tiers, some closer to an all in rate, and some are very specific about amount of care use to drive their pricing. But each operator has their preference and seems to work for them in their local market. I don't see that changing or driving RevPAR in any material way.

And then just last one, you talked about the potential pricing power, given the markets and the quality of assets that you guys have. But given sort of the broader -- just the challenges we've seen more widespread, have you seen any peers or competitors cutting prices to get occupancy up?

Not any meaningful trend or change, Vik. There are specific markets that are bit more challenged but where we’ve seen the price discounting tends to be more at the unit level, so particular rooms in a particular building that have been more challenging to lease and people being I think a lot more intelligent and specific about, hey, this is a difficult unit to lease for whatever reason and maybe we do need to make a price adjustment. That’s I’d say more of what we've seen rather than across the board rental concessions. The occupancy drop that we saw was really impacted by the weather not so much supply and demand. So there was really no reason to cut rate to drive back the occupancy.

And just one last quick clarification: The Chartwell options to buy some of the assets, when does that expire?

It lasts through the life of the joint venture, Vik, where we have certain non-compete rings that you draw around each of our 40 or so joint venture properties and if there's an opportunity inside any of those rings, we work together on it, or at least have the option to work together on it.

And your next question will come from the line of Mike Mueller with JPMorgan.

I guess in terms of postacute, I mean this wasn't a big deal, but it looks like during the quarter, you bought something, Genesis, at a 9 cap. You also put some capital to work with the Mainstreet properties at about 7.5 yields going in. Can you talk a little bit about the differences, why one was 7 -- 7.5 like held for 7.5, why it was held at Genesis printed 9, and then just a little bit bigger picture about where you see skilled nursing cap rates?

Yes, Michael, it’s Scott. A lot of that differential is because when we negotiated the 2011 sale-leaseback with Genesis we secured future rights to do all their new acquisitions and developments in it, included a pricing grid for acquisitions at specific rates of return and increases that are driving I think the higher yield on that acquisition, whereas our arrangement with Mainstreet is again contractual but it’s at a lower cap. So it’s 7.5 for some of them, 7.7% for others and there is a difference in the building itself as well. The Genesis assets are in core markets in New Jersey that we like but they are not brand-new whereas the Mainstreet property I think you’ve seen them a brand-new, 30% of the building is private pay senior housing. And so that drives some of the difference too.

And then if you're just thinking about, generically, postacute cap rates, I mean where do you put the band today for the different parts of it?

Postacute is still in the 7.5 range plus or minus and skilled nursing seems to be in the 8.5 plus range. We’re not very active in the second category though. So and probably not the best source of information on that business but that's – I read the same press release as you do and that seems to be the general market.

And then going back to Page 10 in the sup, looking at the three-mile ring that you talked about, looks like about 10% of the portfolio has some impact, some new direct supply impact. And can you -- I know you touched on this a little bit before, but just talk about what you are seeing there specifically in terms of occupancy and pricing trends in those markets, if there's any difference from the other markets, where there is not impact, just what you're seeing at this point?

Michael, it’s Scott again. I will try to respond and we did look at historical results when a new building opened over the past couple of years just to try to see what happened in the past, not that that's necessarily an indication of what will happen going forward. But there were 21 of our same-store properties that over the past few years have had a new competitor open inside the competitive ring and we looked at NOI 12 months before the competitor opened and then 12 months after to see how NOI changed. And in the aggregate occupancy was flat on average and NOI was up more than 4% on average. So were some buildings down? Yes but on average the buildings were remarkably resilient in the face of new competition. So it's another more context that new supply is not necessarily a doomsday scenario, especially if you're in markets that have a lot of affluence density and you have differentiated operations which in a lot of cases we do, I think about Silverado. So in the supplemental we give you some color commentary behind each of the properties that is impacted by new supply. And Silverado shows up on a number of this range, because they have buildings that are impacted by new supply. But the reality is that their operating model is vastly different than what anyone else does and more often than not, a competitor is more like a referral source. So it's more than numbers on a page and it's hard to get that across, we try to provide some color in the supplement to help do that. I guess the takeaway is we do have some new supply, it's less than others, it’s less than the industry and we have a very differentiated platform in terms of which operators we’re doing business with and markets that have a lot of people, lot of job growth, a lot of affluence and they are just -- I think better equipped to deal with new supply.

Not so different than other sectors of real estate Mike.

And your next question will come from the line of Michael Mont [ph] with Peachtree Advisors.

It's Kevin Tyler here. I just wanted to check with you in terms of flu season. What are you hearing currently from operators about the outlook for flu in the US and the UK for next year? I guess we are into it already or at the start of it, but how does it look to be shaping up?

Kevin, I don't have any indication on that yet unfortunately.

I can tell you everybody here in Toledo has had it. And I am the one who hasn’t had it, and I'm trying to stay away from all of them.

And then, we spent a lot of time on new supply, appreciate the disclosure, guys. One question to make sure I'm understanding correctly. The analysis excludes properties that have been recently opened, correct? It's only new construction?

Right, these are projects that are currently under construction, Kevin.

And it sounds like you did some of the historical analysis, that was my second question, in terms of seeing how sensitive it would be in the past. But as we look forward, if construction levels head higher, it sounds like, from what you're saying, you don't forecast this changing all that much.

Well, we will see, I mean we hope like others that new supply slows down a bit. It’s at a level right now that is a concerning which was lower. I like the markets that we’re in, I like the operators that we've chosen but all things being equal more new supply would not be helpful.

And then last question on capital allocation, you've been able to capture some pretty healthy pricing on the sales front. Just wondering if that will continue to be a focus for ‘16, and what's really the right balance for dispositions versus acquisitions as we look forward into next year?

I think it’s maybe a more balanced expectation for both. We had a big year for investments this year and a big year for dispositions. My estimation is we’d probably see a similar ratio, we will make more acquisitions and dispositions but I think the pace on both, it obviously depends on both. So I guess maybe to put more granularity around your disposition amount question, we talked a bit about our Genesis alone, those would be included in the disposition number next year. So excluding those, you probably assume another $300 million to $400 million of dispositions in addition to those and you all know we have a great deal of success on the investment front just focusing on our existing partners that’s averaged $600 million or $700 million per quarter. So those are probably the way I would think about those numbers.

Your next question will come from the line of Rich Anderson with Mizuho Securities.

So, Scott or whomever, you said just a few properties had the effect of driving down same-store by 100 basis points. I don't know that that registers as a risk to me, not a good thing, if it only takes a handful to disrupt the entire group. How would you respond to that?

That is just as likely to go the other way.

That’s true, high data type stuff right?

Yes, which is why we built an overall diversified portfolio. RIDEA is 35% of what we do, so despite the volatility that you're referencing our same-store results for the whole portfolio have been remarkably consistent quarter to quarter.

And long term, we understand this is a great organization. But in the here and now, to Scott Estes' point, the impact of supply is minimal when you look at the broader story. But I guess it isn't what's happening now, it's where is it going, right? I think the uncertainty is having a lack of visibility of what the bottom is in terms of same-store growth out of your senior housing operating portfolio. We know in 2000-ish or whenever that was, it really nosedived before RIDEA even was a glimmer in NAREIT's eyes. But what do you think about the downside of all this? If we are at 2.7% this quarter, is there a risk it can go negative? Do you have any color at all that you could share on that topic?

If we went into a deflationary environment maybe it could go negative and if wages continue to increase in a deflationary environment, that doesn’t make any sense but that’s kind of what I hear from the Fed. So anybody’s guess what might happen, I think as Scott said we have a diversified portfolio. We’re located in the best markets and we have the best operators, that's how you protect yourself from these types of phenomenon and I think that -- so I think we’re well-positioned there Rich.

Rich, the other thing I’d add is we did share with the rating agencies a couple of years ago. It wasn’t too long ago, six or seven years ago that the world was coming to an end financially. I mean the decline in late ’08 and ‘09 was pretty devastating and our senior housing portfolio at the property level NOI was remarkably resilient, basically flat and I think about the other real estate sectors that had drastic declines in NOI, occupancy, rental rates, in a lot of ways they are restoring what they lost over the past years rather than actually growing whereas our base stayed absolutely flat during what was really a remarkable downturn in the financial markets. And it just I think underscores that this is not just a real estate business.

The other thing, Rich, you have to keep in mind this is an industry sector, the senior housing industry sector is still largely unknown. It is still a early stage industry. It is just starting to be recognized as a solution to an enormous problem that's coming down the road. So when I look at the past it's hard to say what happened 5, 7 years ago is a good indication of what’s happening in the future, because five or seven years ago was a much smaller industry than it is today and in a way I think you see some new supply coming into the markets, I think that's a good thing because every year more and more people are going to embrace that keeping your 88-year-old mother in her apartment with your wife or a niece as a part-time caregiver is not a solution to keeping her safe and healthy. And that is -- that's why I raised that article that was on the cover of the Times this week because people have to wake up, hospitals need to wake up, everybody needs to wake up that we have a crisis occurring and we offer the best near and long-term solution to manage this problem. So I guess that's why we're less troubled by our same-store sales number this quarter because we’re looking to the future and we believe there is going to be -- there may be ways of absorption that we can anticipate today because there's still such a small level of penetration in our population of this asset class. So I think you got to stay tuned and I think what we're doing as a company is making sure we have – we’re in the strongest position, that we have the best access to capital, diversified access to capital, a clean balance sheet to perhaps weather any short-term dislocations and allow us to keep our eye on the big prize of the future.

Yes, no one is debating the quality of your organization. There's just times for the stock and times not for it. And so that's really the debate. Someone brought up the issue of bundling. Do you have any concerns about how that could impact Genesis's business platform in the next couple of years, should that pivot from being pilot programs to real law?

Rich, our general view is that there probably will be a few years of challenges with margins declining but taking a longer-term view I think it's going to really shake up the industry and result in the exit of a lot of companies and a lot of buildings. So longer term I think Genesis, companies like it, capture market share and are able to be successful just in a different way, probably at a lower margin in reality but again very successful because they play such an important role in managing the post hospital discharge in these elderly residents.

And Rich, I want to leave you with one thing. Given what's happened in our stock since last Friday, I think there's never been a better time to buy our stock, Welltower.

Last question, and it's really more a statement, but you can respond to it. I think you got halfway there. You have this fortress balance sheet. Kudos to you for the deleveraging that you've done. Now we are faced with potential higher interest rates. Now there are some question marks in the industry, whether it's senior housing supply or bundling in postacute or the risks going on in the hospital sector. Maybe the second part of the strategy should be, you know what? We're going to stop right here, and we're going to protect our portfolio and our balance sheet, and we're not going to continue to push forward with an investment platform in the billions per year. What do you think about that in terms of just acknowledging what's out there?

Well I think you’ve seen, if you just look at this quarter, our investment activity was lower than you’ve seen in prior quarters. We have passed on lots of things because we saw cap rates going to levels that just made no sense to us and it’s the whole argument now that everyone's talking about that public market valuations are below the private market valuations. Well we were seeing that, we’re seeing a lot of crazy prices and we’ve stood on the sidelines but I can think of one large opportunity that was taken down and at a very high price and from what we're hearing that transaction unravelled. So because and maybe that's a sign that the bubble might have burst. But I think that look, we are the major player in the sector and I've actually told our operators don’t bring us low cap rate deals because you want us to have a high stock price, you want us to have growth because if we can't raise capital you can't grow your business, so simple as that. So I am going to tell you, Rich, we have been very judicious and we will continue to be.

[Operator Instructions] And your next question will come from the line of Tayo Okusanya with Jefferies.

First of all, thank you for all the additional disclosure around the senior housing operating platform. As we try to figure all this stuff out, I think information like that, you guys being so responsive, is definitely a move in the right direction. My question is specifically on skilled nursing. Just following up on some of what Rich said, a few weeks ago, saw Genesis stock and some of the other skilled nursing stocks go crazy on this Office of the Inspector General news about them looking very closely at overbilling issues on the therapy side. Just kind of wondering what Genesis at this point thinks about that and how you guys think that could potentially impact the outlook of the company?

Are you talking about the billing issues, maybe you could provide a little more on that –

Yes, this was the news that came out just around NIC, when the Office of the Inspector General was actively calling for CMS to reduce reimbursement rates to skilled nursing, because they felt or they were concerned there were overbilling issues, especially as it pertained to therapy, over the past few years.

Tayo, I didn’t see this specific article, that’s certainly a conversation that has been ongoing for years. I don’t think anyone believes that the current reimbursement system across the board is a good one, whether it’s skilled nursing, hospitals, LTACs or inpatient rehab and you're going to see a significantly different payment system as you look forward that's based on value, not services provided. And we think that's a great thing and that includes companies like Genesis in particular that are low-cost option and help save the system money. So they live within the current reimbursement rules today and I think you’ve seen a very good track record of performance within the rules for Genesis.

And other than that, we can’t say anything because they haven’t reported.

But do you see any risk around us given we're still working within the confines of the current system that we go through what we went through in 2011, where CMS has a big knee-jerk reaction and just makes a big cut to reimbursement?

Tayo, I tried to refer to it but maybe to indirectly in the prior response. We’re less focused on the reimbursement rate risk. I don't see that happening but there is a lot of risk in that the system is changing in a very significant way. And we do think that a lot of buildings and operators are going to have a real challenge as we look out 5 to 10 years in that business. So our overall view is that the marketplace is underestimating the risk profile in that business but also not giving enough credit to the higher-quality scale providers like Genesis because I think over time they will survive and they will capture market share.

Okay, that's fair. You've made some very pointed comments about the UK. Could you talk a little bit about Canada and what you're seeing out there at this point?

Yes, be happy to. So Canada is 15% of our operating portfolio, it's a different portfolio in that it's very much independent living and senior housing, so very little healthcare provided. But what's consistent common theme is that we’re focused on the big markets. So a huge percentage of the NOI comes from Toronto, Montreal, Vancouver, markets that you want to be in long term because of population density, affluence, job growth but it's a lower – I’d say lower risk, lower growth portfolio. So residents tend to stay for much longer than you would find in the senior housing business in the US or UK just because they're moving it at a young age and they have a lot fewer health issues. So much lower turnover, therefore higher occupancy and much higher operating margins because a lot of these buildings look more like an apartment building for seniors than they do a high acuity assisted-living facility. Now the challenge we’ve had in Canada is that inflation is really low the past few years. So the GDP, CPI are hovering around zero to 1% to 2% and as a result our business has been in that 2% to 3% range for the past few years, now it bounces around a little bit quarter to quarter but we’ve generally been a bit slower in Canada just because that marketplace overall has had very low growth and low-inflation. End of Q&A

And at this time there are no further questions. I will turn the conference call over to Tom DeRosa for closing remarks.

Thanks very much, Holly and we will sign off now.