Welltower Inc. (WELL) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the First Quarter 2015 Welltower's Earnings Conference Call. My name is Holly, and I will be your conference operator. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now, I would 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 fourth 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 our CEO, Tom DeRosa. Tom?

Thank you Jeff. Hello this morning I want to talk to about real estate. The power of real estate. What I mean by that, I mean Real estate then locations and markets it cannot be easily duplicated. Real estate that is nimble and adaptive to changing consumer Preferences. Real estate that defies conventional wisdom about supply and retains value across economic cycles. Overtime the lease that class a real estate has reproduced superior and resilient results compare to others that have not followed this strategy. Our quarter is yet another example of the phenomenon that began in 2010. This is my friends is why you own Welltower.The headline number is that our operating story grew by 5.5% in the first quarter. This numbers have not come as a surprise to us, in fact it's totally consistent with the operating same store in a wide growth portfolio over the last five years. Our total portfolio is now around 3.8% and FFO is 9%. All thanks to our business produce good results but we did have a phenomenal quarter in our senior housing for portfolio. While there have been real headwinds from increases in labor costs and other operating expenses our class A real estate was able to pass this along to the consumer in strong rate growth while at the same time increasing occupancy by 60 basis points to 90.7%. Now the last few earnings calls we told you that we remain bullish about the senior housing business and continue to believe that that's the spike pocket of oversupply in the industry. Our portfolio once valued entry markets from operators in the modern assets will continue to create tremendous value from shareholders by generating attractive growth with minimal CapEx. We see the market taking the data on new supply and applying it broadly across the entire senior market. We think that is a mistake and our performance supports that. We had a long conversation about our strategy around Post skewed and Genesis last quarter. Despite short-term challenges we continue to believe in looking beyond headlines and understand how the skilled nursing industry fits in the continuum of care. I am very pleased by the fact the CNF's recommended at 2.8% rate growth last week. You the biggest Medicare increase in seven years. And I think this supports our thesis. May I remind you that our Genesis portfolio is currently traded in high density east coast markets with significant form of profitability? Our last call we also discussed in length our capital allocation framework. Our sustained relative outperformance in the same store in a wide growth is a product of the strategy as well as smart and highly targeted investment discipline. Capital allocation is not about when to buy and what not to buy. You may have heard about the acquisition of the site on the corner of 56 Street and Lexington Avenue in New York City that together with Heinz we will build the Welltower, a State-of-the-art largely dementia Alzheimer care facility. The supply of residential care options for the growing elderly population in Manhattan is at best pathetic. For a population of over 1 million people there are only 70 marginal care facilities in Manhattan and I can tell you that they are marginal quality because we used to own them. So well tower will be an anchor for in affluent Challenge population has been forced to live in the shadows. The Welltower Will make them part of the larger community which includes billionaires row one block away. Now we are limited by nondisclosure agreement in what I can share with you today we hope to give you more color in the coming months. But what I can tell you is that we didn't sacrifice our return expectations and underwriting criteria to be In Manhattan. Frankly I cannot think for more class A Real estate opportunity. What that I'm going to turn the call over to Scott Brinker.

Okay. Thank you, Tom. A common question from investors the past few years was what would happen when the cycle turned. The answer today is very positive. Today's more challenging environment is highlighting that not all properties are the same, not all markets are the same and not all operators are the same. Our portfolio outperformed in the upcycle and today we have seen that continued. Each segment turned in a strong quarter with same stories above guidance. That being said, I wasn't to repeat something we said in the past. We don't over emphasize any one quarter good or bad. We think about results overtime, to reduce the noise that can occur over 90 day increments. I will start with the operating portfolio where top line fundamentals were incredibly strong. We increased rates 4.2% out sacrificing instances as occupancy increased 60 basis points. The result was 5.5% same store NY growth. CapEx remains modest levels, the age of our properties is a material advantage. It allows us to generate superior economic growth while retaining earnings to fund new investments. Here's some color on each country. Performance in the U.S was outstanding. Same story in the wide growth 5.1%. This is not a case of easy coms as we reported 5.2% growth in Q1 2015. Not to mention, an 8% in the first quarter of 2012, 2013 and 2014. An important takeaway is that our core markets extended their long track record of outperformance. It will continue to prioritize these markets with our capital allocation. Turning to Canada, our two partners Riviera and Hartwell delivered strong results despite a sluggish economy. Same-store NOI grew 7.2% last quarter, revenue increased nearly 5% while expense growth was in the mid 3%. It's reminded that seniors housing isn't perfectly correlated with the broader economy. The UK bounced back with 6.1%, same store NOI growth. We're seeing very strong demand for our properties. Revenue grew by more than 5% while expenses increased in the high 4%. By design we're a private pay high-end business in the UK. This gives us the ability to better offset cost pressures like the increased minimum wage. It's equally true in the U.S. Next, I want to share an observation on a broader topic. Seniors housing is a private-paid business, the laws of supply and demand apply. That's why we chose to concentrate markets with the ability and willingness to pay. This also happen in the markets which are more difficult to bring new supply. We know that location impacts performance because we've been tracking the data inside our portfolio for years. Our data is very powerful in a sector where the window in the industry level performance is limited to asking grants in occupancy. As result, seniors housing remained an inefficient market. Cap rates hardly vary at all based on location. We think that will change as operating data in the industry becomes more transparent. When that happens, our unmatched scale in premier markets will be highly valuable. Turning to outpatient medical. We extended our track record of consistent results with 2.6%, same store NOI growth. We have excellent long-term visibility into this earning stream driven by low rollover in our history of renewing the vast majority of maturing leases. Next up is the triple net portfolio. Quarter after quarter including Q1, the blended growth rate in this segment is in the 3% range. The lease structure gives us consistent and growing rental income not withstanding any volatility in the underlying operations. That's especially true of skilled nursing - a business that's long been subject to cycles. Public sentiment is even more volatile than the underlying business and right now, the pendulum has clearly swung toward the negative. I'll contrast to this volatility with skilled nursing valuations in the private market which have been remarkably consistent over time. If there's a prolong disconnect between public and private valuations, we may look to take advantage through selected asset sales. Moving to investments. Our activity in Q1 was intentionally low given the environment. We funded $350 million at a 7.7% initial cash yield. As usual, these were done in private negotiations - not auctions - which helps explain the healthy yield. We expanded relationships with leading health systems like Essentia and Adventist and we grew with core partners including Sunrise, Silverado and Signature. Each investment builds on what makes Welltower unique: premier markets, leading operators and modern buildings. Our stock has come back a bit since our last earnings call, but this still feels like a time to be highly, highly selective with new investments. Our strong balance sheet and unmatched relationships allows to be flexible if conditions change. As expected, we had $160 million of loan pay offs last quarter including $68 million of Genesis mortgage loans. We'll receive continued repayments from Genesis throughout the year. The bridge to HUD business plan is working as planned, we'll benefit Genesis cash flow and enhance the credit that stands behind our master lease. Now here's Scott Estes.

Thank you, Scott and good morning, everyone. We're off to a great start to the year with strong quarterly earnings growth and an increase in our same store NOI forecast reflecting our confidence in the continued strength of our portfolio. While significant stock market volatility occurred during the first quarter, we remain highly focused on capital allocations. Our current earnings guidance continues to assume that we remain net sellers of assets for the full year. We were also able to enhance our liquidity position during the quarter by opportunistically raising $700 million of 10-year unsecured debt. Importantly, we were able to raise this debt in an overall leverage neutral manner through offsetting debt payoffs and a small amount of equity rate through our DRIP and ATM programs. As a result, we had no senior debt maturing until September of 2017 and have only $398 million of secured debt maturing over the remainder of the year. With other $2 billion of current liquidity and a continued focus on capital allocations, our strong financial position allows us to remain both disciplined and opportunistic in regard to any incremental investments, dispositions and capital raises throughout the remainder of the year. I'll again begin my detailed remarks with perspective on our first quarter financial performance and a minor change we made to our supplement this quarter. We started off the year with strong quarter-over-quarter earnings comparisons generating normalized FFO of $1.13 per share of 9% versus last year and normalized that of $1.01 per share increasing 10% versus last year. Results were driven primarily by our same store cash NOI growth and the $1.8 billion of net investments completed over the last four quarters. I'll comment briefly on several of the more noteworthy income statement items this quarter. First our G&A came in at $46 million for the first quarter. This was in-line with our expectations as the first quarter is typically our highest of the year due to the timing of expensing stock compensation grants for certain employees and directors. After a detailed review of our cost this year, we now expect to come in toward the low end of our initial guidance range of $160-$165 million for the full year. We recognized impairments of slightly over $14 million in the first quarter. These impairments were a result of slight reductions in the carrying value to relatively small seniors housing portfolios currently held for sale which are now expected to be sold for roughly $167 million in the aggregate. And last we recognize the tax benefit of $1.7 million in the first quarter. Taxes came in slightly below our expectations for the quarter as a result of both tax planning initiatives and several revisions to our TRS taxable income forecast. Based on these revised expectations, we now anticipate incurring quarterly tax expense of approximately $1-$2 million per quarter for the remaining three quarters of the year. In terms of dividends, we'll pay our 180th consecutive quarterly cash dividend on May 28th of $0.86 per share, rate of $3.44 annually. This represents a 4.2% increase over the dividends paid last year and represents a current dividend yield of 4.9%. In terms of our supplement, we made only one relatively minor adjustment this quarter as we moved our UK-based private pay outpatient facilities from our hospital category to our outpatient medical category. This was done to reflect the fact that the vast majority of revenue comes from outpatient care and elective short-phase surgeries just like our outpatient surgical facilities in the U.S. I'll turn now to our liquidity picture and balance sheet. I think the highlight of our first quarter capital markets activity was the unsecured debt offering which closed on March 1. We completed the sale of $700 million of 10-year's senior unsecured notes, priced to yield just over 4.3%. We took advantage of strong investor demands to upsize the transaction from the originally announced size of $400 million. This offering helped extend our way to the average senior note maturity to 9.2 years and as a reminder, this debt offering was not included in our initial earnings guidance for 2016. In terms of equity, we issued over a million shares through our DRIP and ATM programs this quarter raising $93 million in proceeds. As Scott mentioned, we generated $116 million of proceeds through loan pay offs which included the $68 million in Genesis mortgage loans repaid during the quarter. In term of debt repayments, we repaid all $400 million of the five-year three and five-eight senior unsecured debt that matured on March 15, 2016. And last, we've repaid approximately $130 million of secured debt at a blended rate of 4.5% while refinancing $75 million of secured debt at a blended 3.1% rate. As a result, we continue to have significant liquidity with over $2.2 billion available at quarter end, with only $645 million of line borrowings and $356 million in cash on balance sheet. Our balance sheet of financial metrics at the end of the first quarter remains strong. As of March 31, our net debts-to-undepreciated book capitalization of 39.6% was consistent with last quarter, while our net debt to enterprise value improved 40 basis points to 32.3%. Out net debt-to-adjusted EBITDA sit at 5.7 times, while our adjusted interest and fixed charge coverage for the quarter remains solid at 4.1 times and 3.2 times respectively. Our secured debt level remained at only 12.1% of total assets at quarter end. We were pleased to receive an affirmation of our BBB+ ratings from Fitch last week, and as a reminder we sit at BAA2 BBB flat ratings with positive outlooks from both Moody's and S&P. I'll conclude my comments today with an update on the key assumptions driving our 2016 guidance. First, in terms of same store cash NOI growth. Based on our strong first quarter result across our entire portfolio, we're comfortable raising our same store cash NOI guidance for the full year by 25 basis points to 2.75% to 3.25%. Where same strength across virtually all of our respective portfolio components, and as Scott mentioned I think it's appropriate to remained focus on the blended forecast for our entire portfolio for the full year. In terms of our investment [ph] expectations, the only acquisitions in our forecast beyond those closed in the first quarter are an additional $98 million of investments expected through our Mainstreet partnership at an initial cash yield of 7.5%. In terms of development, we expect to fund an additional $363 million on projects currently under construction and expect $283 million of additional development conversions at a blended projected yield of 7.9%. Moving to dispositions. We continue to include a total of $1 billion in our forecast. This is comprised of the $116 million of loan payoff during the first quarter. Our current projection of $303 million in proceeds from properties currently held for sale at a blended yield bond sale of 6.5%, with the remainder representing loan payoffs and the other potential property sales over the rest of the year. Our capital expenditure forecast remains $83 million for 2016 which is comprised of approximately $55 million associated with the seniors housing operating portfolio with the remaining $28 million coming from our outpatients' medical portfolio. We typically see a lower CapEx spending during the first quarter, so we do expect the remaining CapEx will be higher during the last three quarters of the year. As previously mentioned, our G&A forecast is tracking around $160 million for the full year of this point, and as I also discussed earlier our tax expenses are likely to be about $1 million to $2 million per quarter for the remaining three quarters of the year. So finally as a result of these assumptions, we're maintaining our FFO guidance of $4.50 to $4.60 per diluted share and FAD guidance of $3.95 to $4.05 per diluted share, both of which represent 3% to 5% growth over normalized 2015 results. I think it's important to note that our decision to maintain both our FFO and FAD guidance ranges today was related to the fact that our $700 million bond offering was not in our original forecast, and that the results are still considerable variability around the timing of the approximate $900 million of dispositions that have yet to occur. Most importantly, we continue to focus on making prudent capital allocations decision to strengthen our balance sheet and maintain significant liquidity in the current environment. So in conclusion our continued focus on capital allocation this year will continue to prioritize enhancing the quality of our portfolio and private pay mix, maintaining a strong balance sheet and low leverage and retaining ample liquidity and greater stability in the broader capital markets environment. So at that point, I'll turn it back to Tom for some closing comments.

Thanks, Scott. So as you've heard we're quite pleased with Q1 results. It's all about the real estate and how we are driving better performance and value from our industry-leading healthcare real estate platform. Our optimism and our ability to sustain this performance is reflected in our decision to raise our 2016 guidance for same store NOI growth to 2.75% to 3.25%. And with that I'd like to ask Holly to open up the lines so we can take your questions about rack audits.

[Operator Instructions] And your first question will come from the line of Paul Morgan with Canaccord.

Hi, good morning.

Good morning.

Can you talk a little bit about kind of what came in above your expectations in the quarter and in terms of the idea portfolio and, I mean, you talked about kind of being able to pass through the kind of the labor cost you've been talking about in the past few quarters and, I mean, is there anything sort of at the market level that gave you the confidence kind of early in the year to boost the guidance or any color there?

Well we all have something to say about this, but I would say again, not to be the dead horse, it's about having the best located senior housing assets in their markets with the quality operators. So there is demand to be in these buildings and as the operators are sustaining real increases in expenses largely due to labor, they can pass it along because there is demand to be in those buildings. I think it's that one of the simple, probably the most simple answer I can give you. Scott, any other thing you want to say?

Yes, Paul on the out performance, really three drivers of the business, operating expenses and those were up in the low to mid force, sort of where we expected and the other two drivers are occupancy and rate, and we out performed them, so we were expecting occupancy to be roughly flat to up slightly for the year instead we're up 60 basis points and rate growth at 4.2% was quite a bit above where we were projecting.

I mean is there kind of color, you said it's not really kind of a regional thing or in terms of kind of maybe the parts of your portfolio that are exposed to supply kind of hang in there better or kind of more than just sort of a macro perspective?

The color is that the majority of our portfolio is located in, at least in the U.S. in six core markets, and those markets continue to outperform by a very meaningful factor. So from quarter to quarter it might be two times, it might be five times which was what we saw in the first quarter and those are the markets that we've prioritized for years and we'll continue to prioritize. So that doesn't mean you'll see SP 100% concentrated in six U.S. markets, we like some level of diversification. But frankly, we just see much better supply demand over long periods of time in these core markets, and we've established partnerships with the operators that essentially control the markets. So a company like Sunrise that has 30 plus buildings in Southern California, that's tough to replicate when it takes four to five years to see approvals to build a new project. So we're very selective going back years and who we chose to do business with and which markets they had a concentration. You're seeing the benefit of the discipline we have had just fell out of those marginal markets over time. I mean that is paying dividend today. You know for a rate that's a difficult thing to do. But our shareholders have been on that ride with us now for a number of years. We've sold a lot of assets, we've acquired a lot of assets, and it's all about having the data and the discipline to allocate capital into the best markets and de-emphasize the markets that just will not perform over time. That's what we do. To get one of the keys to this company's strategy and its success.

And one final point I think it's important to add to in your question was I guess largely based on seniors housing, but I think it's important to note that out performance this quarter was beyond just the seniors housing portfolio at least in relation to our initial guidance. And our MOB performance was above our initial guidance for the full year, as well as the post same-store NOI. So we saw it really across the board this quarter.

So you think that's sort of equal contributors to the boost in the guidance?

We're not quantifying it in particular, and we think about it as the whole portfolio for the whole year.

Okay, great. Thanks.

Thanks.

And your next question will come from the line of John Kim with BMO Capital Markets.

Good morning, thank you. I had a couple of questions on your same store numbers on Page 29 of your supplemental. Are the Canadian and U.K. figures on a constant currency basis?

Yes.

So when I look at the same store NOI per unit in Pounds in the U.K. it was 21,000 per unit this year, last year at this time it was about 27,000 per unit. So it's a bit decline on the per unit basis but you had a 6% increase in the same store NOI in the region. I know some of these is probably mixed, but I just wanted to know why that bit of discrepancy.

Yes, John, it's Scott Brinker. We did a big acquisition in August of 2014 called Critiswa [ph] and those are a very nice private-pay properties, but at a much lower price point than the Legacy-Sunrise portfolio that comprised the prior year's numbers. So that's what you're seeing.

Okay. Do you know what the same store per unit was if you're like at a comparable basis this year versus last year?

Can you repeat the question? I'm not sure what you're asking is, John.

Just the same store pool from last year to this year on a per unit basis. I could follow up later.

Yes. Are you asking about NOI unit?

Yes.

Yes, we might just follow up with you. I don't have that handy.

Yes and U.S. dollars is going to be impacted by the changing currency rates from then to now, too. So let us follow up with you later.

Sure, no problem. And Scott Estes, I just had a question on your balance sheet. There's a fairly large receivable balance this quarter of $693 million? What is this in relation to?

That number has actually been pretty consistent over time. It has, boy, there's lot of different items in there - value of derivatives, receivables, intangibles are all in there and it's actually been in that $600-$700 million area pretty consistently for the last couple of years.

Got it. Okay. Thank you.

Yes.

And your next question will come from the line of Chad Vanacore with Stifel.

Hey, good morning, all.

Hey, Chad.

Hello.

Okay. Just a thing about your shop portfolio, can you actually go into the buildup of that? I've seen you're 2% in a quarter to 3% in a quarter percent right now for the full year? That's going to be on rate to assuming not much occupancy changed? Are you assuming some occupancy decline as well?

Chad, it's Scott Brinker. We're not really changing the guidance that we gave for the data portfolio. We've increased the company's overall same store growth projection for the year and that's of course driven in part by the out-performance on the operating portfolio that we're trying to keep people away from being overly focused on every single segment quarter-to-quarter. This is a portfolio and it out-performed in the first quarter and that's why we raised the guidance. Your question is do we still get about the operating portfolio at the end of the day? The answer is yes, we have much better revenue growth driven by occupancy and rate and we were expecting the beginning of the year. We don't see that changing overnight, but we also don't see a need to continue to update every quarter what the guidance is going to be.

All right, Scott. I would have expected a leap year expenses to eat in the shop margins a bit. How should we think about that OpEx growth in second quarter compared to the first quarter?

Yes, it did increase operating expenses. Compensation in particular because a lot of the employees are hourly. So our rough guess is the compensation was up about 100 basis points more than it otherwise would have been because of the extra day. That being said, some of our operators charge by the day rather than by the month, so we do get some benefit on revenue.

All right. Then you had some commentary on the bridge loan genesis. Could you remind me how much was repaid and how much remains outstanding?

Sure. We have two only secured first mortgage loans with Genesis that they used to complete two mergers last year. In total, they had about $500 million of original principal balance and they've now repaid roughly $120 million. So the balance today is around $370 to $380 million.

All right. And then just staying with Genesis for a second. It looks like coverage just improved marginally, although if I recall, Genesis had a weak fourth quarter. What do you suppose is driving that sequential improvement?

Well, remember we report first of all in a trailing 12-month basis, but also one quarter in arrears.

That's what we're talking about, fourth quarter…

Yes, exactly. So they had a week, fourth quarter of 2014 as well and at least some of the issues that they referred to in their fourth quarter earnings release did not impact our portfolio like all the bad debt adjustments they booked for skilled health. That doesn't impact us and reality is we own the best assets and I think we're maybe at least bit less impacted by some of the head winds that they're feeling elsewhere, but there's no question that the operating environment is a bit challenging. So I wouldn't be surprised if coverage was under at least a bit of pressure over the next couple of quarters.

All right. That would be it for me for now. I'll hop back in the queue. Thanks.

And your next question will come from the line of Kevin Tyler with Green Street Advisors.

Good morning, guys.

Kev?

Scott, you've mentioned earlier that senior housing cap rates has been consistent or roughly the same for high and low barrier markets. But are you seeing them up more broadly and then is there maybe a little bit of a faster creep higher in the lower barrier versus the higher barrier markets?

Hey, Kevin. We haven't really seen senior housing cap rates move at all. It feels like it has been almost a year now where a lot of buyers including us have been trying to push for higher cap rates. But for the most part, especially in auctions without much success and at least the packages we see, the sellers and the brokers don't seem to reduce their expectations if they're trying to sell product that's outside of our core market. So you've not seen us prioritize or allocate our capital for those types of investments because we just don't feel like historically or even today you really get the yield premium that you should to make an investment in those markets.

Okay. That makes sense. And then maybe to follow on that point on the disposition side. It certainly seems like senior housing be a good place of cap rates of health firms to potentially take some chips off the table. But outside of that, I know there are some debt repayment that's coming through, but where do you see the best value today on the sale side?

It's probably in skilled nursing. I mentioned in the prepared remarks that despite sometimes wild volatility in the public market, private market valuations and skilled nursing have been remarkably consistent. I've been doing this for 15 years now and it feels like cap rates and the skilled nursing space have hardly moved at all. Maybe inside of a 50-basis point ban plus or minus year, after year, after year, notwithstanding what's happening with investment environment, or publicly traded stocks and today, skilled nursing is only 15% or so of that overall company, so it's hard to say how much it impacts our stock price, but based on the number of questions we get about it, I would say it's a very big and very large negative impact and yet, we see transactions in the private marketplace including very recently at prices that are quite attractive. Really no different than a year ago or two years ago when the public markets loved skilled nursing. I could see a stake in advantage of that if these conditions persist.

They're more inbound calls regarding our interest in selling skilled nursing today than in seniors housing. I think there are a lot of investors out there in the private markets as Scott has said that are seeing the headlines, seeing how some of the misinformation that has been put out there has created some tremendous volatility and they're looking to take advantage of that, or at least it has raised the idea of buying skilled nursing to a higher position in the queue for how they might deploy capitals. So it's an interesting time, a bit of a paradox about how the public market is viewing the sector and how the private market is viewing it.

Kevin, I agree on senior housing as well. Two of the assets that are in the health for sale bucket are in very much secondary, if not, rural markets and if the sales proceed as planned, we'll be selling those for less than a six cap on rent. We do still feel like this is maybe a good time to exit some non-core senior housing assets as well and the same applies to medical office where we've got about $100 million of assets held for sale on the balance sheet today. Again, at least in our mind very attractive cap rates, relative to markets and asset quality.

Okay. I appreciate the thorough color you got. It's helpful. And then last quick one for me - on the development side, definitely interesting project in New York and looking forward hearing more there, it sounds like there is not a whole lot you can share. But looking for a second at development at senior housing in the UK and I know it dates largely back to some prior arrangements, but as those properties get delivered, how are they performing? Are yields consistent with prior underwriting and for the newly purpose-built product there, is that performing well in today's market?

Yes, Kevin. There are really three buckets: we have Triple Net leases with Avery who's now one of our Top 10 operators and they've thought out-performed expectations on everything they've done whether it's the acquisitions or all the new development we funded. We've also got a large development pipeline in arrangement with Signature, which is Tom [ph], ex-President of Sunrise, and they have far outperformed all expectations. We have a mortgage loan program with them where we put roughly 60% of the capital into the development and they fund the bounce with equity and then we have a fixed price purchase option on the building after it opens and those have been remarkably successful and we have quite a few more under way. All of those in the greater London market. And then the third bucket is with Gracewell, which was essentially taken over by Sunrise and those have been a bit below the underwriting expectations. I think Sunrise, who's to my point earlier, to John's question, it's just a lower price point than Sunrise is accustomed to operate in the UK and I think they're still trying to figure out what the right cost structure is for that lower revenue building. It's still mostly private-paid, but it is a bit of a different building. So the NOI on those, Kevin, has been a bit lower than we had expected.

Okay, thanks.

Thanks, Kevin.

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

Thanks. Good morning.

Good morning.

First question, just more of like a clarification on page eight of the stuff, there is - in the quality indicators, the quality mixed days on a post-acute portfolio - is that just at typo, it says 37.4%? Because I think it was at 57.4% last quarter and a year before. Or is there something else going on there?

Yes, we changed it from being based on revenue to being based on days so that we could get a better industry comparable.

Okay. And then separately regarding New York City, is there anything that you guys can elaborate on in terms of the size of the investment or maybe future opportunities, structure at a JV or is that all?

Not at this time. No, we're not at the liberty to tell you really anything more than what I said, or what you've been able to get out of the press.

Okay. Can you maybe also just then give us a little bit of color on the acquisition market and the opportunities you're able to successfully source? The couple hundred million this year so far and just curious about what you're seeing in terms of the landscape opportunities on the senior housing side or otherwise?

We're seeing very good opportunities from our existing family of operators who still have assets that are very attractive in very attractive markets.

Yes, for the most part in the first quarter, those were not only privately-negotiated with the existing clients, but in most cases they were sort of purchased options, exercised on newly developed assets. For example, signature building in London, the Silverado building in Austin Texas, these are properties that we did not put all the development capital into the project - in some cases very little and then we alongside with our JV partner have the right to buy those either when they open or in this case when they stabilize. It's an example of how we build an attractive acquisition pipeline at favorable prices, but also great modern real estate and good markets rather than what you find on the next auction of assets in Houston.

Is it conceivable that that's repeatable at that pace?

Yes. It would be hard for us not to do from $200 million or so of acquisitions. We certainly could if the circumstances required us to because for the most part, these are purchase options, not purchase obligations. But at these types of yields, we thought these made sense given the quality of the markets and assets even we are stuck in the low 60s, now that we're back to the high 70s, they clearly are hugely profitable.

Okay. Thank you.

Sure.

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

Thanks. Good morning and good quarter for sure. Tom, you said misinformation. What would you say were the one, two or three top components of these misinformation you referred to? Because these things are happening. There are changes going on, there is bundling happening, there is some question marks about how post-acute will be utilized in the future. Where do you think people have gotten it wrong in your communications with both the sale side and the buy side?

I'd say in a couple of places. I'd say that you may have seen that there were some wholesale, something of our stock based on maybe misunderstandings about things like RAC audits and if you like us to go through a discussion about that, we're happy to do it. We could do it on here, we could do it off line, but I think there has been a lot - there was misinformation earlier in the year about Genesis that was out there. There was a research before that frankly was just plain out wrong, that caused a lot of activity in our shares. I think the supply issue in senior housing which has been a huge overhand on our stock, I think has been overplayed. I think there's wrong information out there, Rich. We disagree we have opportunities. People call us, we are happy to discuss anything, we show up at lots of conferences, we're there, we're telling our story, we're trying to be as clear as possible, we're a very transparent company, Rich, we don't play hide the ball and we're happy to address any questions people have about the skilled nursing industry, about RAC audits, about supply in seniors housing, about where we think healthcare is going - I don't know what else to say.

As far as the RAC audits go, isn't it true there is a treasure chest map or whatever by which they can work off of with some of the things that have happened at other firms not in your network? Isn't there at least some risk there that this revitalization of RAC audits might actually be a little bit more of a risk this time around than in past years?

Okay. Let's take a couple of points here. The concept has been around for 10 years. They were implemented under the Tax Relief and Healthcare Act of 2006 and there are some notion out there that the sniff sector has not been impacted by RAC audits. But if you look at CMS data, almost $86 million of overpayment was collected in 2014. The CMS is limited, the recovery auditor looked back for period of six months from the date of service for patient status reviews as of May 15, 2015 and I think most importantly is that our operator are prepared for this. They have rigorous compliance and documentation procedures. Medical necessity is established with a physician at admission, a care plan is established with a patient and therapy team, and therapy encounters are thoroughly documented.

Okay.

So this is not a random process on the part of our operators. It's one of the reasons why we're very concentrated with Genesis because Genesis has the scale and resources to invest in compliance procedures that help them operate in an environment where they are principally being paid by Medicare and Medicaid.

Okay, so - don't be mad at me, I'm not in order. So…

I'm always mad at you, Rich. This is nothing new. Rich, I just want some more additional context on the rack audits because it's, I don't know maybe it's the medicine name that has everybody all worked up. We're not trying to suggest that it's not an issue, it's just we're trying to put some context around it. Because today as Tom mentioned, roughly $100 million of overpayments were essentially given back to the Medicare program for skilled nursing. Right? That's on a $30 billion denominator. So it's 0.3%, even if that number increases by seven times, right? I mean seven times, it's still just the equivalent of the Medicare inflation update that CMS is proposing for next year. So I mean it's not like this is going to bankrupt the industry, and for operators that have great documentation it will have absolutely no impact other than an occasional headache, and it's at the facility level, Rich. This is not something that is levy, there is no, again we don't have a crystal ball but it's not our understanding that they will pick an operator and saying we're doing a rack audit, cut down the hatches we're coming through. I mean this is on a facility basis. It's hard for us to conceit. Our crystal ball is not as good as yours, but it's hard for us to conceit that the entire value of our net portfolio is subject to the dramatic decline in value because of rack audits.

No, I'm just saying if something, Genesis happens that pivots from preliminary situation to something more defined, that's a headline risk that people at least should be underwriting in their line of thinking. That's all I'm saying. Now can I just quickly switch…

No, we want to talk more about this. No, no, no, come on ask me something else about rack audits.

I want to ask you something about Genesis. Is it true that coverage this year, at least to some degree, is getting a boost from some of the events in their own recent history in terms of investment activity and that some of that will wing down over future years as the skilled gets merge in and everything else. Is that a fair statement about Genesis and the coverage this year?

They're definitely benefitting from some of the synergies on the acquisitions, they're benefitting from the refinancing of the bridge loans, are there roughly 10%, or is in the low fours, that's a big difference for them. But longer term we actually think the story is very positive. I mean our master lease is 187 properties and that matures in 16 years. They have a lot of individual leases or smaller leases that mature either next year or in the next five years that frankly have very low coverage and either they'll reject them or they will substantially renegotiate the rent downwards. So I think there's a lot of those types of opportunities they could certainly exit some of the lower quality buildings that they've acquired and we support them in that effort, their optimization opportunities in the assets that they acquired because they are premier operator. And if you think long term with bundling, I mean the challenge right now is that hospitals and managed care players are already starting to reduce admissions to skilled nursing, but I don't think they really started the process of targeting the best in class properties in each market. And when that happens I think there actually is an opportunity for Genesis to outperform and take market share, but we're just not in that phase of the funding roll out yet.

Okay, and let me just stay on, thanks for that Scott. And for the final question for me on hospitals. Are you seeing them smalling down their playing field with regards to their relationship with snips, are they cutting back and kind of isolating their relationships post to Q wise, do you have evidence of that and how do you avoid being involved in that side of the business that maybe some of the failed situations on the skilled side?

Rich, at least in our world we see no evidence of that, and let me give you an example of something that we recently saw. The Cleveland Clinic is building a new hospital in Avon, Ohio, about 40 miles West of Cleveland, and this hospital which, actually the project looks a lot like what we did in Voorhees, New Jersey. It's actually going to have a skilled nursing facility attached to the hospital, and Cleveland Clinic isn't running that facility. There's another operator who's going to be running that facility. I believe it's Select Medical. That to me is a good indication of where the future might be going and it validates the fact that the sector is not going away. When you have one of the finest hospital systems in the world now putting skilled nursing, not only on their campus but actually attached to the building. So I think that more and more from our conversations with the leading health systems. We don't spend a lot of time with the non-leading health systems. So all I can tell is you the view from talking to the major players who will survive in the hospital sector that they want to see a strong skilled nursing industry. They know it is part of the future and part of their ability to manage profitably under and ever changing reimbursement environment.

Okay, I'll yield the floor. Thanks very much for the color.

And your next question will come from the line of Karin Ford with MUFJ.

Hey, Karin.

Hi, good morning. Just going back to your comments on the quality of the real estate and the performance of the senior housing portfolio. Are you seeing any divergence in the performance between the shop portfolio and the underlying fundamentals you're seeing in the triple net portfolio?

I think we can say everything was pretty strong across the board.

Yes, Karin, we studied this data for - it feels like years before we made the decision to fill into the days structure six years ago because we do see differences in performance by operator, by market. And I think that's a big reason why you see certain operators in the day portfolio and certain operators in the Triple Net portfolio because our typical increase their in Triple Net is around 3%, and if anything you've seen payment coverage is unfortunately declined a bit or it stayed flat which suggest the underlying NOI of the properties only going 3% and clearly we've done a lot better than that in our [ph]. So there is a divergence. It gets to the point I was making earlier about there is variation and performance by market, by operator, and I don't think that market fully appreciates that yet. We're trying to tell the story, I think a longer time history will be helpful. But we have seen that in our data. The industry data just isn't there for people to see. There is an even reliable source of NOI in the industry. I mean, I hate to say it NIC is doing a great job of trying to change that. But as of today the best you can get is occupancy and asking rent at the national level. I mean, man you're talking about a lot of room to go and you compare that with 15 to 20 years of data in our portfolio. That is an excruciating detail for us to look at and help make investment decisions. We feel like it's a huge proprietary advantage that we have.

Thanks, and coverage in the Triple Net senior housing portfolio notch down just a couple of basis points here for the last few quarters. It's down to one. Any concern with the 3% escalators and the supply pressures that that could, a coverage could go materially lower from the one-one level?

Triple Net coverage is a bit lower than we like. It frankly is, for the most part driven by one operator. So it was one-one five two years ago, now it's one-one zero, all of that driven by a particular operator unfortunately. So the rest of the portfolio has helped that propel. But the reality is it's the main reason you haven't seen us do a lot of Triple Net lease acquisitions in recent years because I think there is a mindset by some, and this is going back a couple of years that if you could put something in the Triple Net lease it was a low-risk investment, right? So rental coverage, high escalators and, life is great, probably release looks fantastic and it only took sometimes a year for people to realize it. If the asset quality isn't very good notwithstanding that lease structure which on the surface seems to provide protection for the landlord at the end of the day it's a very risky investment. In our every view it always been that the higher risk investment is actually those Triple Net leases with low asset coverage and low asset quality in comparison to doing red [ph] which granted has some quarter-to-quarter volatility in NOI but overtime if you're in the great assets in the right markets, we think that's the lowest risk investment.

Thanks for the color. And then just last question for me. Did you guys push through 3.5% rent escalator on Genesis in April?

Yes, so this is the last of the 3.5% escalators. Next April it goes down to 3%.

Got it. Thank you very much.

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

Thanks for taking the questions and congrats guys on a strong quarter. Just on the red [ph] side, so one of your peers reported that in some of the markets they saw a decline, single-digit decline and their same store NOI while in markets like New York it nearly, it was quite positive, not surprisingly. Just wondering if you can give us some color as to what the range was within your U.S. portfolio.

Yes, I would be to Vik. I mean, we saw a particular strength in Southern California, New York, New Jersey, Washington D.C., these are core markets with NOI growth in the high single digits, and I'll contrast with markets like Chicago and Atlanta where unfortunately we don't have a bid presence but we do have some assets, and in large part because of either weak economies or a lot of new supply, the NOI growth was a bit negative.

Yes, we just always try to sell out of the market that where it's easy to bring new supply. I mean Scott said we do have some exposure, Vik, but in our portfolio it was because of the disposition program that is not exposing as much to those non-core markets. Yes, I mean the resupply is an interesting in this data point, Vik, almost half of the new supply in the U.S. is in six specific markets. I mean that's astounding right? Almost half of new supplies in six markets when you really think about, and only 8% of our NOI in the operating portfolio is in those six markets. So that means 92% of our NOI is in all of the other markets where frankly in a lot of them there is either no new supply or not much, so it really is a market specific issue. We keep saying it and now you're starting to see it in the results I think.

No, they make sense. In the U.K. or maybe even in the U.S. is there a timing difference between when sort of these minimum wages take effect or the increases take effect versus when you sort of get the rent bumps. I'm just trying to see if there's a difference in the U.K. where we see the minimum wages go up 10%.

Vik, it's hard to say with a lot of specificity, but for the most part you increase wages on January 1 so you have to recognize that higher expense on day one of the year and with rental rates, at least with existing residence you try to increase rates on January 1 but half of our portfolio, the operators increased rates on the anniversary dates, so they breathe in over the year. So when we, again this is in black or white, but in general you have to suffer due to higher wage growth immediately while the rate growth would blend more over the course of the year.

Okay, and then just last one on the nursing side, wondering if you looked at recent data, see a master list on readmission to hospitals. Sort of in talking to different stakeholders it seems like that's going to be an important metric in determining who maybe preferred vendors or who may see more volume. It's interesting when you look at the story, things which I know there are several components, Genesis being sort of average versus the U.S. but it actually screen very well on the readmission side. Just wondering if you dug into it or have any thoughts around that as to how that could be a future differentiator.

We do think that the quality operators in the skilled sector will again have the strategy and program built to minimize readmissions. I think that if you have a random portfolio of mom and pop operators who may be very good at what they do, it's just from our perspective it would be difficult to understand if they do have the structure in place to be a more viable partner to the acute care hospitals. So and we just think that again because of its scale, because of its program strategy, because of technology, we think Genesis is in a pretty good position.

Okay, thanks guys.

Okay.

And your next question will come from the line of Tayo Okusanya with Jefferies.

Yes, good morning everyone. Let me also add my congratulations on a really good quarter. Two quick ones for me. First one, Mr. Estes, when I take a look at guidance I understand that the debt raise wasn't in there. Could you just give me a sense of how much dilution that's causing to your guidance number so we can get a better sense of just how better operating results, a really kind of driving growth?

The shortest answer would probably be about $0.03. We had $400 million of the March debt being repaid in our forecast, so the $700 million we raised was $300 million in excess of that, and you think about that for the ten months of the year that it was out there is roughly $0.03. So I think that roughly matched some of the benefits we see from the strength of the same store NOI growth and the performance of the rest of the portfolio.

Okay, that's helpful. And then Tom or the other Scott, I think earlier on in the conversation there was a comment around Genesis that you thought comfortable where things were heading, there was probably some misunderstanding about the company's fourth quarter results but you also added the statement that you do expect some pressure on coverage going forward, could you just talk a little bit about that and where you kind of assume that's going to be coming from?

It's Scott, Tayo, I mean the skilled nursing business goes up and down. It's the most difficult business that we invest in, that's why we use the Triple Net lease structure. Genesis has been able to maintain payment coverage the last four years despite the 3.5% escalator which is a testament to their quality, but the environment probably is getting more difficult not easier at least for the foreseeable future. It's certainly nice to have the 2.1% Medicare increase, but there are well-document headwinds on the skilled side of the business as well as occupancy with length of stay. So it wouldn't surprise us if coverage ticked down, but keep in mind where we're starting from, right. The corporate coverage is around 1.3, the facility level coverage is around 1.6, before management fee are in the higher 1.2 after management fees. So and there's a lot of cushion there. We're not talking about will it pay the rent, we're talking about what coverage fee 1.24 or 1.28, and at the end of the day four basis points doesn't really impact well, tell her a whole lot other than a lot of question. They pay the rent, if it was substantially lower payment coverage then I'd be really worried about one or two basis points.

Okay, that's helpful. And if I just indulge with one more. Just seeing on the skilled nursing side of things, I mean do you know if any of these bundling programs have actually reached a conclusion yet and if there's anything that be gleaned from any of them in regards to where sniff reimbursement maybe heading?

I don't think we know a lot about that yet.

Okay.

It's an early base.

Just so I would ask in case something had come through. Thank you very much.

Thanks, Tayo.

And your next question will come from the line of Todd Stender with Wells Fargo.

Hi, thanks. Scott Estes, just to go back to the earnings impact this year. How are your loan payoffs impacting guidance and any loan payoffs coming in? Are they in general coming in as expected or they're being repaid, would you say a little early?

No, we had, Genesis is going through the process throughout the year so we had a pretty balanced repayment expectation and I think they would probably stay the same so I would characterize that, Todd, as in-line relatively balanced throughout the year where they should make pretty good head way on the - it's still remaining outstanding as Scott Brinker mentioned, I think it's $372 million currently still outstanding for us.

Any broader initiatives to call in loans? Just to clean up any of the credit issues that happen in your portfolio? Any expectations that the loan book will actually decline as the percentage of assets?

It definitely will, mostly because of the Genesis mortgage loans which is almost half the outstanding balance. We had at least $50 million of loan payments in the first quarter beyond Genesis and I can think of a couple of others that are in process in the balance of the year, but it's not because of credit issues, or because we're calling the loans. They're just being repaid as expected.

That's helpful. And just this take with you, Scott Brinker. You touched briefly on the Silverado asset you purchased in the quarter. Can you talk about what the least expectations were, what they actually were? Looks like the facility opened in 2014. Just wanted to see and get a sense of what the stabilization period was and any anecdotal evidence? You can talk about of how their strategy is performing in the taxes markets.

Yes. That's a property that they built with mostly third party capitals. So we didn't invest any money into that project, but Silverado had a purchase option that included what ultimately was a very large promoted interest as well that collectively, we purchased that property, the typical Sunrise communities around 70 units and it would typically take around two years to fill, but they were able to lease that building much quicker than the expectations, so we exercised our purchase option early and because of the promoted interest, the cap rate would have done even more attractive than what we reflected in the earnings release, which just sort of ignores the benefits of that.

Great, thank you.

Sure.

[Operator instructions] And our next question will come from the line of Juan Sanabria with Bank of America.

Hi. Thanks for the time. Just hoping to talk a little bit about the senior housing Triple Net portfolio. You talked about Atlanta and Chicago being at risk from supplier, just softer markets in general. Can you help us frame how Triple Net portfolio is exposed to new supply? Is there a certain percentage of the portfolio that maybe is generating that negative NOI that is a very small amount of portfolio?

Yes, Juan. We haven't done the level of analysis on the Triple Net portfolio that you see in the supplemental for the operating portfolio. As a general comment, the Triple Net assets tend to be in more secondary markets, so we don't have the same emphasis on really the prime, premier, metro markets and as a result, they probably are a bit more impacted by new supply. Now, we don't have a huge presence in the six markets I mentioned, even in the Triple Net portfolio. We just don't have a huge presence in Houston, or Dallas, or Chicago, or Atlanta. We have assets, it's just not a big concentration. But most of the performance decline that you've seen in that portfolio is really driven by one operator who unfortunately is a pretty big percentage of our pool who has gone through some integration issues and hopefully that situation is now right-sized and their coverages can start to pick up again.

And I noticed you have - it looks like three different master leases with EBITDAR coverage below 0.95 times. Pretty small, but I noticed they're not necessarily targeted for dispositions. Any reason why?

That really just means they're not actively for sale. Fair to say that anything on that page could be a candidate for disposition. These aren't big portfolios by any means. It looks like the biggest one is around $10 million plus or minus at annual rent. We only have about $25 million in the outreach of the year so these are very small portfolios. I don't think they'll move much one way or the other.

Okay. Just a last question for me. On the portfolio, how should we think about the year-over-year growth as you go throughout the year? I know you've wanted to get away from the quarterly discussion, but is the second quarter tough for a comp, or is it set up as well as the first quarter ended up to be?

Yes. One of our best guess is that the second quarter may be the weakest of the four quarters this year. In February we said as a general statement that we expected growth to pick up throughout the balance of the year. The first quarter surprised us in a positive way, but at least for now we'll maintain our expectation that the second half of the year should be a bit better, which means that Q2 may slow down a bit.

And it's also important to know that the first quarter was not an easy comp. I think there are some perception out there that because of a more severe flu and weather last year that that was an easy comp and that was not the case actually.

Thank you.

And your next question will come from the line of Michael Carroll with RBC Capital Market.

Yes, thanks. With regards to the potential asset sales, Scott, you mentioned in your comments, would this be over the billion-dollar guidance and with regard to those sales, I guess with the skilled nursing facilities, are there any focus on operators? Would it be with Genesis, or Mainstreet? Or do you have different operators you would look at selling?

On the last question, I'd say all options on the table and we're in a favorable position and that we don't have to sell anything. If again the private market describes you a value or something that's much higher than what we feel the public market is valuing it up, we'd be happy to sell it and because with our landlord position, we've got a ton of flexibility to do what we want with these assets. So we're looking at everything, but we haven't targeted one specific operator to say that they're first on the list. Let's see what the market bares, let's see how the staff performs. We want to be as flexible as possible here.

Okay. And would that sales be over the $1 million guidance that is provided?

It could be. Again, depends on what happens over the next couple of months. We're looking at a lot of things to hopefully create shareholder value.

Okay. And then Tom or Scott, with regard to the RAC audit, how cumbersome are those audits for the operators? Does it take a lot of their time and will it cost them to I guess focus on the audits versus operations?

Well, it's hard to answer that because we don't think there's a lot of evidence that our operators have sustained a lot of RAC audits and I think if you're thinking they're buses driving around the country with RAC auditors that are descending on skilled nursing facilities, well then it might be cumbersome. But that's not what we're aware of. Who knows?

Michael, they also have documentation that's off the charts. It's not like they need to increase the level of internal audit, or documentation that they do. They live in a regulated world and it's really no changing practice. So I don't think it's going to have any material impact on what they actually do day-to-day in terms of active property level. They may have to start providing information to these RAC auditors and maybe that's a bit more time-consuming than have some added cost, but the real issue is are you properly documenting the service? Do you have a physician order that supports the services being provided and are documentation on those important topics is at least in our estimation best in class?

Okay. There's not a lot of information on the RAC audits out there right now. Do we know when they actually started, or if they're ramping up, or if they're just preparing? Do we have any information on that?

The only information we have is what you have heard publicly and the information that we do have is that our operators provide these services within the guidelines established. So now we have no idea if on a property-specific level that if some - if one of our operators is doing something that would raise suspicions by a rack audit, but we'll have to wait and see. It is something again, we want to remind you, this has been around for a while. Whenever you're on a regulated business, there's always the additional oversight to make sure that there's no funny business. So again, we don't know specifically, but we don't expect that this is going to be a major problem. Anything can happen, but again, this is on the property specific basis. We have no knowledge that thousands of people have been retained to go out and audit nursing homes now. That would be very costly at a time when there isn't money for that. But please, if you hear something, I'd ask you to give us a call because we might be able to help you out to understand it better.

Okay, great. Thanks, guys. I appreciate it.

And at this time we have no further questions. I'd like to thank everyone for participating on today's first quarter 2016 Welltower earnings conference call. You may now disconnect.