Welltower Inc. (WELL) Q2 2016 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to the Sector Quarter 2016 Welltower Earnings Conference Call. My name is Kaila, and I will be your operator today. At this time, all participants are in a listen-only mode. I will be facilitating a question-and-answer session towards the end of this call. [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, Kaila. Good morning everyone and thank you for joining us today for Welltower's second quarter 2016 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, our CEO. Tom.

Thanks Jeff. Our strong results this quarter were driven by excellent operating results across all of our business segments. From an earnings perspective, funds from operations per share was up 6% and funds available for distribution was up 9%. The Scotts will take you through a deeper dive on what is driving our performance. But first, let me give you the high points. Overall same-store NOI for all of Welltower was up 3.3% versus last year, this is largely being driven by the performance of our senior housing business. The senior housing operating portfolio registered 4% same-store NOI growth versus a year. Despites the industry confirms about new supply and vague expense growth the Welltower family of operators were able to pass along on average, 4% rate increase, while increasing occupancy by 100 basis points. These results can only be realized by from owning A quality real-estate in A quality markets, that is the Welltower story. A key differentiator for Welltower is that 90% of our revenue is from private pay sources. You should expect to see our private pay percentage increase through this year. However, we also had a strong history of managing the credit exposure to government reimbursement for our shareholders, so regarding our Genesis assets, we believe Genesis is continuing to strengthen its business platform and financial position. I can only speak to our Genesis portfolio and I can tell you that the operating performance of our portfolio improved during the quarter. We are pleased to see a strong final Medicare rate increase, the DOJ settlement that was announced by Genesis yesterday and both Welltower and Genesis shareholders should be pleased to have some clarity around there capital structure. This goes a long way towards adding some ballets to the Genesis story and we believe position for Genesis management team to focus their time and energy on the future of their business. Speaking of the future, we are pleased to announce the $1.15 billion Vintage acquisition this morning. This is an ideal strategic acquisition for us. It allows us to go deeper into two important core markets, significantly solidifying our number one market share in Los Angelis, gaining the number one position in San Francisco and which by the way adds to our already number one market position in New York, Boston and Seattle, fives of the Section-56 corner markets in the United States. The Vintage portfolio will be mange by Sunrise, Silverado and SRG. Three of our operators with a strong position in these markets. The Vintage scene has built a great business with some irreplaceable assets. We expect rebranding and connecting these assets to the brooder Welltower senior care network will enhance their value and capture significant upside our shareholders. I do hope you reviewed the Vintage portfolio side presentation available on our website. Our strategy of building scale in A quality real estate in the leading core markets in the U.S., UK and Canada is driving the excellent results, we are reporting today. Our ability to bolt-on a large acquisition like Vintage underscores the dominance of the Welltower franchise and enhances our ability to continue to drive best in class operating results and growth for our shareholders. Now Scott Brinker will give you a closer look at our operating performance.

Thank you Tom. Welltower is known for discipline around high quality real estate and operating partners. That discipline delivered another solid quarter with 3.3% same-store NOI growth. Just above the high-end of annual guidance, the operating portfolio led the way. Same-store NOI grew 4%, rental rates were up 3.8% and occupancy increased 100 basis points all were above expectations. To-date, we are proving resilient to new supply and higher labor costs. Our diversification by operator service type and geography is a key attribute. An example is that same-store NOI in Canada last quarter increased 7.1% outstanding work by our partners at Hartwell and Riviera. Their performance offset more modest growth in the UK. Two years ago, the roles were reversed showing the benefit of diversification. By design, more than half of our Canadian NOI comes from Toronto, Montreal, Vancouver and Ottawa, the four largest markets in Canada. Over the past few years our properties in these four core markets have produced five plus percent annual NOI growth far above any comparative benchmark. We have number one market share in several of these markets and intend to go deeper overtime. Same-store NOI in the U.S. grew 3.5% last quarter. We continue to see wide variance by market with clear outperformance from our core markets. Those being Southern and Northern California, Seattle, Boston, New York, New Jersey and D.C., Northern Virginia. Including the Vintage acquisition, our six core markets will account for nearly 60% of the NOI in our U.S. operating portfolio. We have always liked the supply and demand fundamentals in these markets and they have rewarded us with consistently higher rate growth, better margins and same-store NOI growth in the mid to high single-digits. We very deliberately formed partnerships with the leading operators in these markets, including Sunrise, Silverado, Belmont Village, SRG, Benchmark, Epic, Merrill Gardens and Brandywine. Their operating expertise helps our real estate avoid commodity status. They make our market position even more defensible. Including the Vintage acquisition we'll have number one market share in five of these six core markets and number two share in the sixth and yet our market share is only in the mid-teens living plenty of room for growth. The UK operating portfolio produced 2.7% same-store NOI growth last quarter. As expected, labor costs are headwind, to-date thanks to our premium locations we've had pricing power to offset most of those costs. Half of our NOI in the UK comes from the RIDEA structure and the other half is triple-net with 2% to 3% annual rent escalators. This 50/50 mix in the UK gives us a nice balance of upside and stability. Outpatient medical results continue to be boring but in a good way with another quarter of same-store growth in the mid 2% range. There is excellent visibility into this income stream driven by low lease rollover and a high retention rate. Also, the vast majority of the leases are triple-net, which gives us reliable earnings growth because expenses are passed through to the tenants. Moving to triple-net seniors housing. Same-store NOI grew 2.8% in line with history and our expectations. Payment coverage move higher and we see potential for a slow upward trend overtime. Skilled nursing and post-acute. Same-store NOI increased 3.6%, payment coverage declined to few basis points, primarily due to certain assets being looked help for sale and therefore out of the calculation. More important our Genesis properties continue to perform well given the environment. Our master lease saw a nice improvement in 2Q, versus the previous few quarter as Genesis adapts to the new environment. Yesterday Genesis made several positive announcement, including covenant release and a term loan refinancing through Welltower and Omega on a 60/40 basis. For Welltower shareholders this could be viewed as an important first step in a much larger process. As of yesterday, we are better positioned to reduce our Genesis concentration. We own their core assets in their core markets, so getting buyers comfortable with our real estate has never done our concern. Three things changed yesterday, one the hospital lender is gone, two the buyers can under write the corporate credit with more clarity and three Genesis can now focus on running their business rather than on inherited DOJ investigations, covenants and debt maturities. We had already been seen inbound interest in acquiring Genesis real estate from us and we expect the interest level to a increase over the past 24 hours. We raised $227 million of capital last quarter through this positions and loan payoffs including $61 million of Genesis mortgage loan repayments. The largest assets there was in Canada, where senior housing cap rates are now right at the top of the U.S. When we entered Canada nearly five-years ago the spread to the U.S. was at least 100% basis points. Since then institution of capital is poured into that sector, driving down cap rates. We took advantage last quarter by selling a non-core triple-net portfolio in Alberta for $125 million, which is mid 5% cap rate. The price was particularly attractive to us and in light of the weak economy in that province. We closed $356 million of new investments last quarter at a 7.3% initial cash yield. A healthy spread to our cost of capital. Our operating partners continue to be a unique source of high quality investments at reasonable prices. And that takes us to our pending acquisition of the Vintage portfolio in California for $1.15 billion. This portfolio is middle of the fairway for us. First 100% of the NOI is in our core markets. We are going deeper into markets where we have any credible footprint and a track record of success. Second, Welltower is uniquely positioned to unlock value here. We chose SRG, Sunrise and Silverado to take over management of the properties. Seniors housing is not a one size fits all business and we have the unique luxury of hand picking among our operating partners for the task at hand. SRG is an expert in large communities, Sunrise excels at mid size properties and Silverado is the memory care specialist and that’s exactly how we allocated the 19 properties. The cap rate is expected to improve from about 5% in year one to the mid to high 6s at stabilization. That improvement is driven by occupancy rate and expense assumptions that are based on our partners’ deep experience in these markets. Vintage is a very unique opportunity due to its scale and high barrier markets. It includes irreplaceable properties in San Francisco including one of few blocks from Nob Hill and one of few blocks from Golden Gate Park. Also the timing for a big core acquisition is perfect for us given our pending dispositions. And that’s a good segway to Scott Estes.

All right, thanks Scott and good morning everyone. We were pleased to generate another solid quarter of earnings results and operating performance that of our portfolio. I would like to focus my comments this morning on how we are thinking about our business from a financial perspective as we enter the second half of the year. As Tom and Scott mentioned we will not be shy about looking for incremental disposition opportunity throughout the remainder of 2016. As a result, you should expect us to remain focused around our capital allocation theme this year, which emphasizes the following three components. First, we will look to maximize our financial flexibility through enhance liquidity as evidenced by the recent increase in our line of credit from $2.5 billion to $3 billion. Second, we intent to further strengthen our balance sheet by using incremental disposition proceeds to fund announced investments and continue to reduce leverage and strengthen our credit metrics. And third, we intend to further enhance the quality of our portfolio through targeted asset sales which we will remain focused on reducing our skill nursing exposure and in increasing our private pay mix. So again, begin my detailed remarks with some perspective on our second quarter financial performance and several of the more significant changes made through our supplemental package this quarter. In terms of second quarter earnings, we generated normalized FFO of a $0.15 per share up about 6% versus last year and normalized that of a $1.4 per share, which increased 9% versus last year. Results were driven primarily by our same-store cash NOI growth and the $1.9 billion of net investments completed over the last four quarters. Overall I think this is a fairly straight forward quarterly report, as our net investment volume of $129 million was relatively light, a G&A of $39.9 million was in line with expectations, and tax expenses only quite less than expected. The only somewhat unusual item was on other income line which included an additional $11.8 million related to the receipt of insurance proceeds and the release of an escrow the benefit of both of which were backed out of our normalized earnings results. Moving onto dividends, we will pay our 181st consecutive quarterly cash dividend on August 22nd of $0.86 per share, a rate of $3.44 annually. This represents a 4.2% increase over the dividends paid last year and represents a current dividend yield of 4.3%. I'd also like to point out three fairly significant enhancements we made to our supplemental package this quarter. First, you can see at the bottom of page five that we enhanced our CapEx disclosure to include both recurring CapEx that impacts our normalized FAD, but also the other CapEx amounts that are generally the value enhancing larger renovation projects throughout portfolio. Second on page eight, we had a detailed trip-net payment coverage data that highlights both EBITDA coverage and duration of the individual leases in our portfolio. And third on page 29, we added disclosure related to our same-store NOI calculation methodology which details the specific adjustments to arrive at our same property count at the top of the page and the adjustments to arrive at the same-store NOI by property type at the bottom of the page. I think our intent here is to be as transparent as possible in showing you how we calculate our same-store result. Turning next to our liquidity picture and balance sheet, the second quarter was fairly quite from a capital markets activity prospective, I think the highlight of the quarter occurred in May, when we further enhanced our financial growth stability by increasing our line of credit from $2.5 billion to $3 billion, while extending the units of that improvement at 2020. Our new line is priced that LIBOR plus 90 basis points, represents saving of 2.5 basis points from our previous line and carry the one-year extension option and in accordion fees for additional $1 billion. This brings our total unsecured credit facilities at 3.7 billion, when including our U.S. dollar and Canadian dollar term loan which were also extended for another five years. In terms of equity, we raised $64 million by issuing 914,000 shares through to our [drip] (Ph) program this quarter and we also generated 227 million of proceeds for dispositions and loan payoff, which importantly included $61 million in Genesis mortgage loan repaid during the quarter. and lastly, repaid approximately $151 million of secured debt at a blended rate of 5.2% while issuing $87 million of secured debt at a blended rate at 3%. So as a result, we continue to have significant liquidity with over $2.7 billion available at quarter end, with only $745 million of line borrowing and $467 million in cash on balance sheet. Our balance sheet and financial metrics at the end of the second quarter remains strong, as of June 30, our net debts-to-undepreciated book cap of 39.2% improved 40 basis from last quarter, while net debt to enterprise value improved 230 basis points to 30%. Out net debt-to-adjusted EBITDA improved to 5.5 times, while our adjusted interest and fixed charge coverage for the quarter remains solid at 4.2 times and 3.2 times respectively. Our secured debt level remained at only 11.9% of total assets at quarter end. In addition, we are pleased to receive an upgrade in our senior debt rating from Moody’s to BAA1 in June. In light of the recent Brexit vote, I would like to take just a moment to remind you that we have fairly little financial exposure to the recent weakness in the pound sterling as a result of our hedging program. More specifically as of June 30, our UK exposure from a balance sheet prospective is over 80% hedge, through a combination of sterling denominates unsecured debt and other currencies hedges in place, while our earnings that at the UK are approximately 90% hedged, their interest expense on debt, G&A CapEx and cash flow hedge. Since the UK does represent only 8% of our total NOI, each 10% move in the pound against the dollar currently has an annualized earnings impact of less than $0.01 per year. I will conclude my comments today with an update on the key assumptions driving our 2016 guidance. Regarding investments, our acquisition guidance includes those completed during the first half of the year, the $1.1.5 billion Vintage portfolio, and an additional $48 million of investments expected to remain through partnership. Moving to depositions, we have increased our dispositions forecast for the full -ear to $1.3 billion in proceeds from the previous $1 billion. Our new forecast is comprised of the $343 million in proceeds received during the first half of the year. $769 million of proceeds from properties currently held-for-sale, with the reminder representing loan payoff and other potential property sales over the rest for the year. Most of the $300 million of incremental disposition proceed and they were added to our guidance this quarter of skilled nursing asset and do to include $68 million from our Genesis portfolio. As Tom and Scott mentioned, we continue to evaluate opportunities to sell additional Genesis assets above and beyond those included in our current guidance. And just to be clear, our exposure to Genesis has declined by $57 million for the three Genesis related items that have been disclosed over the past two days, which includes the $61 million in mortgage loans repaid during the quarter to $68 million in pending dispositions partially offset by the $72 million new term loan. In terms of our same-store NOI growth forecast, there is no change to our blended full-year estimate of 2.75% to 3.25% though I would state that we are attracting toward a higher end of the range at this point driven largely by the strength of our senior housing operating portfolio. Our FAD CapEx forecast is currently $82 million for 2016 comprised of approximately $55 million associated with the senior housing operating portfolio with the remaining $27 million coming from our outpatient medical portfolio. We do expect CapEx spending to ramp up a bit during the latter half of the year due to the timing of projected expenditures. Our G&A forecast continues to track towards the low end of our initial guidance at approximately $160 million for the full-year at this point. Our tax line item is projected to return to an expense of about $3 million to $4 million per quarter during the each of the last two quarters of this year based on slightly higher taxable income forecast. And a result of all of these assumptions we are maintaining our normalized FFO guidance of $4.50 to 44.60 per diluted share and FAD guidance of $3.95 to $4.05 per diluted share, both of which represents 3% to 5% growth over normalized 2015 results. I think our decision to maintain guidance was largely based on the fact that the incremental dispositions added to our guidance this quarter should be roughly offset by the Vintage portfolio acquisitions and continued solid operating portfolio performance through the second quarter. So in conclusion, we remain focused on our capital allocation efforts this year that we will continue to prioritize, maximizing financial flexibility through increased liquidity, strengthening our balance sheet by lowering leverage and enhancing the quality of our portfolio and private pay mix. So that concludes my remarks and I think at this point, Tom I will turn it to you for some closing comments.

Thanks Scott. Before we take your questions, I wanted to highlight a few promotions that were approved by our Board and announced last week. Many of you know Mercedes Kerr as she is an important leader in the senior housing industry. I’m delighted to tell you that Mercedes was named an Executive Vice President and a member of the Well Power Management Committee. Mercedes oversees business development and relationship management activities and has relocated to the Mothership here in Toledo. Additionally, Matt McQueen, Senior Vice President of Legal was named General Counsel and Corporate Secretary. I am grateful for their contribution to our success and they have further strength to an already deep senior management bench here. Now, Kaila open up the line for questions please.

[Operator Instructions] Our question comes from the line of Michael Carroll from RBC Capital Markets.

Thanks. Good morning. Guys can you give us an update on the sales process of the Genesis assets I know you touched on that in your prepared remarks and may be you can touch on the depth of the buyer pool that you are currently tracking?

Yes Michael I will be happy to. The held-for-sale bucket include $68 million in Genesis properties that are already under contract and that should closed in the next 60 days or so. Those are unique and that Genesis is actually existing the operations as well, so we are selling the real estate they exit in operations. And I would say that unusual or unique, because for the most part, we own core Genesis assets that they want to stay in as the operator. So would be selling our real estate and Genesis would remain as the operating partners. So I think that’s less complex transaction and trying to sell the real estate and the operations together. In terms of interest level it’s strong and it’s from number of different sources, private equity for sure, overseas capital for sure. And we are actually starting to see that private and public REITS show interest again, which we were not have been the case in the past three to six month as the stock prices have come back and the capital rates has improved. So there is actually a pretty deep buyer pool and the lenders continued to be interested in the space as well provided the payment coverage’s reasonable. But I would highlight something that Scott said earlier Mike is that based on the Genesis announcement yesterday I think there is even greater interest in owning these assets. Because there were a number of issues that were providing a little bit of a smoke screen in terms of really understanding the true value of the real estate and the future of the Genesis operating platform. I think the lot of that has been taken care of by the measures that we have already talked about.

Okay then can you touch on the get how much of the portfolio, you would like to sell and would this be done multiple transaction with JV or one single transaction?

Mike, we have always been both buyers and sellers of real estate and we are opportunistic and strategic in both those regards and we again are evaluating opportunities to sell across our portfolio as they come in. I think we are comfortable with what we own today, and felling better about it today then we might have felt a few days ago. So again, just we ask you to stand by and assume that we are seeing a lot of interest and we’ll make the best decision with respect to our shareholders.

Okay great and last question, can you give us some color on that California portfolio you agreed to buy. I think the release said a stabilized yield in the mid to high 6% range. Why is this a stabilize yield, does that assume some type of redevelopment opportunities or does that see many types of operational improvements for the transitioning your existing operators into those assets?

Michael it’s more the latter, there are couple of properties that would benefit from some CapEx and redevelopment but that’s not the reason for the gap between the first year yield and the stabilized yield. That’s more of that we are going to pretty dramatically change the service profile at the communities. I think the service level of the price point is going to change pretty dramatically and you chosen three operating partners to do that with who have extremely deep experience in these markets. So we have underwritten occupancy rates and expense assumptions, they are very much based on their historical experience in these markets. And any time you do an operator transition you have to assume that there is going to be a decline in your line, especially if you are increasing the service mix. It's just the way it works is the expenses go up first and it takes time to be able to increase occupancy and rate to match the service level that you implement day one. And no doubt you have staffing changes as well as turnover within the resident population. So the year one is always a bit depressed.

So what's the in place or initial yield on these assets?

It's around 5% Michael in year one.

Okay. Great, thank you.

Sure.

Our next question comes from the line of Kevin Tyler from Green Street Advisors.

Good morning. Thanks. Just following up on that point on the Vintage deal, can you give some color on how it ultimately came together I know the portfolio had been roomer to be kind of on and off the market. What brought them to the table ultimately?

Kevin the only much we can say about something like that, I would say that patience is a virtue sometimes and the timing here was particularly well for us given cost of our capital today and may be versus in the past and our disposition proceeds that are pending. So we felt like this is always been a portfolio that we had our eye on. We always had operating partners that we thought could do a great job creating value and at time it came together perfectly.

And Kevin we don't know of another opportunity to be able to create the level of scale in the Los Angeles and San Francisco markets that this acquisition will give to us. So we think it's very a highly strategic move for us to be able to acquire Vintage, we are very excited about it. The Vintage Group, Vintage Senior Living really assembled at excellent portfolio of assets in some extremely high barrier to entry locations that's what we are all about. So this as Scott said down in the middle of the fairway this is exactly the type of growth opportunity that we seek out.

Okay. Thanks yes I agree definitely some high barrier locations there right in our backyard here in Southern California. In the slides that you put out the occupancy in the Southern California piece of the portfolio I think it was around 83%. I was just curious given the nature of these assets and where they are why that might be a little bit lower kind of the industry average any color there?

We think there is opportunity to bring it up to the industry average. Our occupancy in these markets is in their low 90s SRG, Sunrise, Silverado consistently run at that level and it will take a little time to get there. But we are confident that overtime these properties will be at that 90-ish percent level and that's why we one of the reasons why we see the yield in this investment improving overtime.

Okay, thanks. Just switching gears onto the Genesis and sniff side for a second. As we think about the overall exposure to these new bundling initiatives we are trying to quantify what that means for any particular operator. We try and pencil down what percent of NOI might be exposed to joints broadly and then may be go from there into [Technical Difficulty] 67 geographies that are laid out under the CJR program. I am just curious from you and we've been also talking exact numbers, but directionally Genesis exposure to CJR and in those 67 markets, how do you think about that that and if we are talking about our terms, would you think if that represents in terms of their NOI?

I guess Kevin, the world of healthcare reimbursement is moving towards underlying and it’s hard to answer, you question incrementally, because there is so many unknowns. Genesis is very much preparing for world that looks different than today in terms of reimbursement and I would say as the lowest cost setting with that can deliver the best outcome will be the winner.

Okay, thanks for the thoughts guys.

Our next question comes from Juan Sanabria from Bank of America.

I was just hoping you could comment on the changes that Genesis announced yesterday with regards to its covenant to get a 20% to 25% better. If you could just comment on what we should expect that imply, does that imply a more pressure, like we had and if you could comment on what the governance want, were they are now relative to the governance and what the change was?

One that answer what I can, Genesis who have their call on Friday, I think they are disclosing particular governance but the point is when these covenants were set three and four years ago, it was a different business environment and they were set in a level that give it cushion to the projected performance and that’s the same thing that we've done here. The idea behind covenants is to give you self to see at the table, when things are turning in the wrong direction so that and you can sit down and have a rational discussion by how to proceed and that’s what happened here among Genesis and it’s various capital partners. So we agreed to reset the convenient to levels that certainly have all of us being paid and as they disclosed the caution in the 20% to 25% range against the EBITDA projection that they recently provided that’s based on today’s operating environment.

And so, is the convenient were for regards to 6 charge or what is the new convenient level, and if you can comment what did you guys get in return for the change for that governance?

So I don’t think it’s appropriate to talk about specific numbers Juan, but there is the fixed charge coverage, there is an interest coverage, there is a leverage convenient, liquidity, networks, I mean there are number of covenants that hit all the key factors on our corporate credit. And for us there is a master lease payment coverage as well.

Okay and then on Genesis you talked about the lenders being supportive of potential buyers of any assets that you are looking to sell. What you are seeing in terms of lenders and what kind of coverage levels do they want and may be you can comment on, how that is relative to your expectations? Or how your Genesis portfolio will look as the year progresses, given I think you said that the second quarter were strong, I don’t know if that’s a one quarter trailing or kind of a as of today.

Yes Juan One on the payment coverage, we are talking about, because we always report on a trailing 12 month basis but also on a one quarter lag, so the number that you see in our reports is, it can be a bit miss leading. So when I talked about the second quarter being strong I’m talking literally about the three months from April 1 to June 30 and that the performance in those 90 days was a nice improvement over the prior two quarters which is encouraging to us. In terms of the payment coverage the lenders are looking for and the same is true of the buyer pool and it tends to be in the 1.3 times coverage range. So, our coverage today is close to 1.25 so we are slightly below but not in any material way, which gives us additional comfort that these are very saleable assets particularly now that the Genesis corporate profile is a lot less uncertain than it was a week ago.

And just last quick one from me, you guys have obviously substantially exposure to Genesis and if you were to do call it a $1 billion of dispositions over the next 12 months or whatever the timeframe may be. Are you still ruling out a potential spin of whatever may remain after kind of an initial larger transaction?

Yes, we are.

Okay. Thank you.

Our next question comes from Nick Yulico from UBS.

Thanks. Just another Genesis question, I mean you’ve said that one of the motivations here to do the term loan to become a term loan there was to remove other lender parties from discussion table make it easier when trying to sell a chunk of the Genesis real estate in deals where Genesis would stay the tenant. So I guess some of that motivation, but it is skeptic to say it looks like no other lenders were willing to step on new term loan besides you and Omega. And then looking at the LIBOR plus 13% rate doesn’t that signal a very weak credit profile and that you were forced into becoming a lender of last reserve here?

Hey Nick its Scott. It’s interesting that where we thought about the term loan is that it’s not a core business, so 98% plus or minus of what we do is high quality real estate. So you are not going to see us do things like this so often on occasion to accomplish a longer-term bigger goal we will extend a loan and we have a good history of having those loans repaid. And in this situation we can’t speak for Omega, but for Welltower we told George and his team to go out and talk to the marketplace see what a third party was willing to lend and we would be going to match it and that’s what we did. Because this is an important security and the Genesis capital structure and we prefer to control it rather than have a hostile third-party be in that position holding the parts even though they have 1% or less of the capital at risk. So the situation existed a week ago to us was untenable and was not allowing us to accomplish important goals and was distracting Genesis, but we did not do a below market loan, we didn’t do an above market loan this is a market rate clearly it’s not a AAA credit. So we are being paid for the risk that we are taking.

And then, what is the incentive for Genesis at this point to go out and try to refinance the term loans right and it sounds like you guys want to be the term loan near term because it helps with some asset sales helps short Genesis. But, why if the rate is market what is the incentive for Genesis to go out and refinance this with new term lenders?

So regards with who the lender as one looks at one capital sac, you want to payoff to the highest cost that you can. So I would say that given that Scott said this is market terms of this kind of paper, it’s always going to be the type of paper that management what is to get rid of as soon as possible so.

And our maturity at December of 2017 to another consideration exactly.

Exactly.

Okay thanks and just going to be the Vintage deal, could you just talk a little bit more about the time, you think it’s going to take to get, from the going yield the 30% NOI outside to get to mid six yield and I forget you said what the occupancy today that portfolio is ?

Yes Nick the occupancy today is in the 84% to 85% range to bit lower in Southern California, then it is in Northern California and it’s going to take a couple of years. This isn’t unlike redevelopment opportunity and we think given the locations in this scale the 6.5% to 7% stabilized yield is more than adequate return for this type of opportunity and then in longer-term. We think it’s fits right into the profile of inflation plus outperformance. So this is not a [indiscernible] investment for us, this is continuing to built on a really important footprint in great market.

I think that’s what is exciting about this acquisition is that while Genesis has been doing a good job. We think that the scale being that we already have in those markets and the operational efficiencies that being part of the Welltower, Umbrella bring to any asset in our portfolio, was the very reason why you see our performance leading the industry. It’s not magic, it’s hard work and believe, we bring tremendous synergies with the other pieces of our portfolio to the with this portfolio and we think that will benefit our shareholders over time.

Thanks everyone.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley.

Thank you and you guys have pretty solid central growth in the operating portfolio again this quarter ahead of some of our peers. So you continue to show sort of a result there, I’m just wondering on the expenses side, was anything one-time in that comp expense, I think it was up 6% and what should we assume sort of a good run rate over the next few quarters on expenses?

Yes Vik, there is always a usual, it’s one reason that we try not to focus too much on 90 days increments of time, well that’s a plus or a minus with this many properties, there is always something that usually going on but. We don’t really move those in or out, the pool is the pool, if there are any adjustments that are particularly unusual, we tell you exactly what we did in the supplemental. So the numbers are always going be a little bit was also, let’s say triple that lease. The compensation for sure is escalated this year, particularly in the UK, in the US, we talked about that at length. It’s in our projections for the year and those expectations are being meet. I don’t know it’s good or bad, but we actually predicted the cost would be up quite a bit with respect to labor. The fact is we are in core markets that are at the leading edge of the change and the minimum wage like San Francisco and New York and Los Angeles. And the benefit is we have the pricing power to offset that. So we can’t view these things in isolation and our performance to-date is showing that the revenue growth has been enough to offset the cost growth and still deliver really good performance.

Yes, I think just look at the occupancy the fact that our occupancy increased across the portfolio a 100 basis points as we are pushing rate growth that is not what you see across the industry. It is what we are able to do because of what we own, how our operators manage and the benefits that the Welltower platform gives to the portfolio. That’s why we get those results.

Fair point. And just more broadly on the shop portfolio you are now at what 37%, 38% can you may be just give us some color on the opportunity set just going forward for similar types of large transactions that you just announced. And where do you want to see this segment of the business going in terms of business mix?

Vik there aren’t many opportunities of this scale sort of most of what you’ll see from Welltower in terms of investments in everyday portfolio will be select acquisitions that are in core markets and new development and virtually every one of our 10 U.S. RIDEA partners is actively doing new development between two and five properties a year. sometimes they do it alongside of us sometimes we have an option to buy when it opens or when it stabilizes. So you are much more likely to see us to one at a time, two at a time acquisition and development to grow that portfolio going forward. But there always a handful of portfolios that are interesting to us or that may be aggregated overtime. But there is nothing else out there like this Vintage portfolio in terms of its scale in core markets.

Okay. And then just last one thanks for the Triple-net coverage you have mapped of, realty useful. I am just wondering how what our operators think today when they look at when they look to enter into deals or they look at their own coverages which fits some cases may be 1.1 or below 1.1 on an EBITDAR basis. What are they saying about the level of coverage doing new deals or do you seeing some operator say, hey we need to rethink about structuring the deal?

I think so Vik. When I started doing this 14-years ago the typical coverage for seniors housing was in the 1.25 or higher range and to us that was a structure that made sense for the landlord and the tenant and this has become more competitive the coverage ratio have declined and declined and 1.1 today is sort of the market. And for years operators are going to enter into leases at those coverages. Frankly we were not doing many if any acquisitions at those coverages. We have been saying for years now that to us the distinction of risk in focusing on triple-net versus RIDEA was really not the way we think about risk. And we would always prefer to own a Class A asset in class A market and deal with the quarter-to-quarter variation in results and that’s exactly why you’ve seen us concentrate our investments were you have for the past six years. We have various yield triple-net investments, when we do it tends to be a new development, were there is an opportunity and enough profit, in the development for there to be strong opinion coverage or a turn on opportunity. We are just, we don’t like the thought of doing big acquisitions to near one coverage. It looks straight on the press release because you got great structural protection here so got structural protection, but we seen already that there is don’t always out as plan and, if the deal doesn’t work for both parties, it eventually doesn’t work for either party. And I think you have seen that and to us to market coverage’s ratio is today are not appropriate and there is not enough for the balance between risk and rewards for the tenants.

You have seen often the operators is getting frustrated, when once at the profitability is going into the ramp and we find that it’s much more constructive to have the RIDEA structure where you are both incentivize to try the NOI share in the CapEx and you want to drive the performance as supposed to try and find some means that starching out profitability when it’s right around one, one to one.

Yes now that the great point and I think the other thing that is, just understand that we have built and infrastructure here over the last five-year that really allows us to maximize the performance along with the operator of the RIDEA assets. So I think that’s a key point that you have to consider, going forward. There will be a rare occasion that we will, you will see as acquire seniors housing assets in a triple-net lease structure. You might expect to see some of the triple-net lease assets we own moved to our idea structure, if that’s the possibility in the future I think , we think it’s better for us, we think it’s better for the operator, we think it’s better for our shareholders.

Okay. Thank you guys and congrats on a strong quarter.

Our next question comes from Tayo Okusanya from Jefferies.

Just wanted the follow-up on Juan’s question about, some of the changes to the covenants and if HCN actually received anything in consideration for that?

Tayo, it’s Scott speaking. There are a long list of projects that we are working on. With Genesis some of them disclosed, some haven’t, and it’s fair to say that the term loan is well as to covenant really were part of a much broader discussion. So we are not prepared to talk about this specific pluses and minuses. I would just ask, you to have patients, give us time, we are clearly focused on the situation and there is a much bigger picture that we are focused on than covenant release and a term loan.

Okay, fair enough. And then did you do anything similar to what Sabra did in regards to changing the least maturities as well to kind of help Genesis have a staggered maturity schedule?

Well I can’t speak for the details of what Genesis and Sabra agreed to. I can tell you that all 180 plus reminders of our properties are in one mass release that matures in 2032. So the maturity date is not something we are not worried about.

Okay helpful. And then last one for me. I know you guys have always kind of be in and out of life sciences for while, we've kind of went off through this [Waxford] (Ph) transaction. I guess that was a little bit surprised to see them do it and probably now you guys have given you already got experience with life sciences and you’ve always kind of expressed an interest in it. But, had expressed frustration you couldn’t grow in the past. So just some thoughts around that transaction, did you look at it and why didn’t you do it if you did indeed look at it?

Well we will only invest in real estate that’s in core markets, that’s part of our strategy and I don’t think you’ve heard us say that we want to invest in life science related buildings. We told you when we did the deal with Four City in Cambridge that was an opportunistic investments and it was an opportunistic sales. I don’t think you’ve heard us say that we had any interest in getting into the life sciences real estate business.

Okay. Thank you.

Our next question comes from the line of Chad Vanacore from Stifel.

Hey good morning. Just a couple of quick questions. On that Vintage acquisition what is the mix of stabilized versus reset opportunities? And then what kind of occupancy increases are you assuming to go from that 5% in place GAAP rate for the mix expectation?

Hey Chad it’s Scott. Occupancy today is in the low to mid 80s and our portfolio in this market - pardon me.

Did that get to up above 90s to get your in place stabilized assumptions?

Yes, that’s right Chad in the low 90s which is where we are today in these markets with our operating partners.

All right and then what kind of a break assumptions are we making there?

Yes in terms of the percentage stabilized versus unsterilized, I would probably think about it a little bit differently. There are properties that we think have the opportunity to grow senses pretty materially. And almost across the board we feel like there are opportunities to change the service mix, the service level, and change the value proposition pretty dramatically for the residence. So that’s in addition to the occupancy upside it’s really on the rate and service level that we see the portfolio changing the most over the years, but that will take some time. And it is a drag in the earlier years because you’ve got to put the new service platform in place before you can charge for it. All right, people need to see it before they will pay for it and it takes time turn over the population. So this is a long-term investment for us, the 5% cap rate is accretive day one, but the fact is where cost of capital is today it’s probably is accretive 5% this is very much a long-term play for us.

You said differently the way I think about it Chad you really do have the opportunity for four to five years for mid to high-single-digit NOI growth for the year after spending those additional dollars.

All right, thanks. And then just one more. So, Scott you made a comment that increasing private sale reduced exposure with the priority I think a quarter or two ago you guys may have made a comment that that Sniff actually look like the best value at the time to you. Can you reconcile where we are today?

I don’t recall anybody saying that Sniffs were an area that we wanted to invest in. We said that we are comfortable managing our Sniff portfolio that’s operated by Genesis, but I don’t think you have heard us…

Probably kind of the general pricing environment on…

I would just say Chad that the skilled nursing environment is still one that is attracting in investments dollar, it’s just as we think about the direction of our company, it’s probably does not in Welltowers portfolio. So that is the population that uses those properties, it’s going to double in size over 20-years and the supply of properties is declining. So when you think about the longer-term rather than the next three quarters or the three months. I think the supply demand dynamics are still quite favorable for that business despite the headwinds that exist. And in a world with yield that are pushing zero percent in most developed economies. You can still price skilled nursing in the high-single-digits unlevered, and get attractive financing. And it generates an awfully attractive return on equity immediately and the payment coverage is unlike seniors housing, were they are awfully low with 1.3 times coverage, it’s a pretty stable yield, particularly if you own good real-estate with two good operator. So look it is actually still is a good investment. It’s just not for us.

I would even remind everybody, I think it’s important, where everyone is still focused on Genesis, we actually and even today we just announced an incremental progress on disposing a skilled nursing assets. So within our 1.3 billion of projected disposition proceeds about 60% or so of that is skilled nursing and pro forma for what we have announced through today, we are already at 90% private pay. So Genesis is just a little bit of part of those numbers currently, but we are actually seeing those reasonable prices, we have 760 some million of potential proceeds, some asset held-for-sale in that low 9s kind of cap rate. And that’s kind of, I think a good example of how we are continuing to improve the quality of the portfolio.

All right guys. Thanks a lot.

Our next question comes from the line of Smedes Rose from Citi.

Hi thanks. I just wanted to ask you about how you are thinking, if any change is about your investment in the UK, if you want you may be bring that down, given their pending exit from the EU or does it change the way you think about in investing there going forward or is it too soon to tell?

Yes, I think that you just answered the part of the question. Yes I think it is too soon to tell, I think we have seen a very different view of the impact of the Brexit over the couple weeks. The thing you have to understand as 99% of the population in our building are UK residence. So they are not leaving the UK, because of Brexit. The UK is not going to be building new assisted leaving assets for its population. More and more of the UK residence will have to turn to a private pay alternatives to local authority funded elder care. And the bulk of our assets are in the London Metro Politian area, which I don’t think you bet against London long-term. I think London has had a 30-year head start on building an irreplaceable infrastructure, an economic machine that will prevail regards what of what happens here. So I don’t think we are losing sleep over it. I think there are some challenges, you have heard us talk about on the wage side in the UK, but we continue to manage through that again for the same reasons why we are managing through that in the U.S. I said we have the best located real estate with the best operators and people want to live in this portfolio. So at the same time, we are watching what is happening in the UK and Europe very closely. But at the end I would tell you that we have assembled a really great portfolio of assets there.

All right that makes sense. I think you guys did the rest of them so thank you. I appreciate it.

Thanks.

Thanks.

Our next question comes from the line of Paul Morgan from Canaccord.

Hi good morning. Just a couple of quick things. So on your, you mentioned that you are trending towards high-end of your full-year same-store NOI guidance and I think that still implies may be around 50 basis points of deceleration, if I have that right. Would you think that’s accurate and if so are there any factors of markets that might be driving that in your outlook?

First quarter I think it 3.8% blended to 3.3%, averages to about 3.5% and I think in short we like to keep a little bit of conservatism in there and are attracting toward the higher end of the range. So really the only variable is again around the operating portfolio, but we feel like it’s doing pretty well. So we are hopeful we would again be able to come in toward the high end of that range at this point or may be in a little better.

Okay. Great and then on Genesis I think you mentioned that one of the reasons for coverage decline was based on held-for-sale assets and so I might have thought that the sale assets would have lover coverage is that just specific to the deals or is there anything - kind of is there any color there you can offer?

Yes, it’s more because among the assets that are being sold are in-patient rehab hospitals that have particularly high values in extremely high payment coverages. So that’s what is driving it and it’s not a huge portfolio at the end of the day. So if you sell a $60 million, $70 million property that has three times payment coverage unfortunately impacts the portfolio about two or three basis points and that’s what happens.

Okay. That’s helpful. And then just lastly going back to bench, sorry if you mentioned this and I missed it. But is there anything in terms of a contribution to the ramping yield to stick to the stabilized level that’s coming from the cost side as you roll those assets into your platform in those markets or is it all really occupancy in REIT?

Yes, it’s more driven by revenue in this case one property 13 taxes have a impact immediately, the minimum wage is an issue in a lot of these markets so we have budgeted for that and our operating partners expect to increase of the service level and not decrease it. So it’s not like we are assuming big expense cuts, it’s really just the opposite here.

Yes. Okay. Great thanks.

Our next question comes from the line of Michael Muller from JP Morgan.

Spent a little bit of time, Tom I think at the beginning of the call talking about performance in the core markets and hitting at and talking about how after Vintage I think core markets are going to be 60% at the end of NOI for senior housing or for the operating portfolio. And I guess just given the disconnect in terms of performance that you are seeing between the six core markets and everything else. Should we expect ramp up asset sales in those non-core markets over time?

Well Mike, we like what we own across the portfolio, but that’s how it’s changing. What today is the good market may not be a great market in the future, so expect that we are always looking for opportunities to recycle capital and constantly improve the quality of the portfolio. I would say that we are laser focused on building scale in the top markets in the country. You know Scott mentioned that the six of the sexy six is DC where we are number two, but expect that we are very focused on building scale in DC. And a number of our operators have development properties being the constructed in the greater DC market that’s an important market for us. But you have heard us say this before, we are looking to go deep in the top core market in the three country, in which we operate and get as close to the centre of the core as possible, which is not typically where you found senior housing assets. So that speaks to what we are doing in New York city, which we talked about on our last call. And it speaks to some of the things; we are doing in market quite Toronto very much in the centre of the urban market there. You will see on assets, we are either own today or developing in Los Angelis. So it’s very much our strategy, expect you are going to continue to us to follow that strategy and the other piece of this, which you will be hearing more about in the future is, how we are connecting what we do to the major health systems in those core markets.

The one thing I would add - Mike its Scott Estes. I think it’s important that, because what Tom just said, we have here at visits, investing methodology and I think we see less variability between the portfolio, I think we start talking about the six core markets that’s used is generally in industry. But, I remember when Scott Brinker had some color during the first quarter think about our same-store RIDEA NOI growth was 5%, 5.5%. The best markets were 7%, 8%, the low were 2% or 3% all positive. And around the 4% this quarter, we don’t see why variability and no big negatives or anything, we don’t dislike any market. I think it’s important that we feel a pretty about the market we are in.

Yes when we talk about performance, we talk about the entire portfolio, we are not bifurcating our portfolio. We generally like the markets we are in, we are skewed to the core markets. It’s not a 100% of what we own, but we have edited the portfolio, over many year and that’s why our performance is better. Because we don’t have a lot of weak links in our portfolio, that is one of the key differentiators of the Welltower business mode. Again, it’s not magic, that our same-store numbers are what they are, it’s because we have better assets and much fewer lower quality assets

Got it and just one quick follow-up on the Vintage, the $1.5 billion investment does that capture everything as you go through this, you know $5 billion yield ramp up to $6.5 million or is there is an incremental spend above and beyond that to get there?

Yes Mike it starts at $1.15 billion and there is some capital that needs to be put into a couple of buildings in particular, but that’s accounted for when we talk about a stabilized yield in the 6.5% to 7% range.

That number is fully loaded. Okay.

Yes, correct.

Okay, great. Thank you.

Our next question comes from the line of [Andrew Rosawitz] (Ph) from Goldman Sachs.

Hey thanks. It’s late so I will talk really fast. On Genesis, I wanted to ask about the [facility] (Ph) EBITDA coverage. Because it’s interesting if you look at 1.57 it’s actually being constant for over a year and does that imply that basically the operator property level EBITDA on a same store basis has been flat over the last year which would appear to be a lot better than the overall commentary for the skill nursing industry and also Genesis’ portfolio overall?

Yes Andrew this is Scott speaking. We have commented in the past and we’ll do it again. Our properties have performed quite well over the past four years there is a 3.5% lease escalator in our master lease that’s a high bar for Genesis to climb over every year now next year that goes to 3% so a bit of relief from their standpoint. But our coverage is other than in 2011 when Medicare cut reimbursement substantially have been very consistent over the past four years. And we think…

I guess a follow up is how are they able to do that and one thing I thought about it there is a difference between because you are not in the ex-Sun asset right, you are not in the ex-skilled assets is that kind of legacy Genesis doing better?

Yes.

Just curious, is there a reason why?

They have huge geographic scale in these markets so we are concentrated in New England in the Mid Atlantic they have been there for decades they have their referral networks the brand, the staffing and it’s good real estate. So I don’t know as much about the Sun portfolio or the skilled health portfolio we don’t own those assets. We do own their core legacy assets and they have held in quite well, which is why keep saying we are confident that there will be interest for our real estate. And the issue was clearing up the corporate credit situation, because they have done three or four big acquisitions in the past three years that on hindsight may be not all the assets were perfect and they did use a lot of debt to finance them. So the corporate credit isn’t as strong as it could be despite strong performance in our real estate.

But Andrew thanks for noticing.

Any time. Thanks for taking the question guys.

Thanks.

Our next question comes from the line of Todd Stender from Wells Fargo.

Did you talk about what types of leases you will enter into sort of Vintage deal just across the three operators and maybe it is a mix of RIDEA or a triple-net?

Hey Todd its Scott. These are all RIDEA structures, so no leases.

Okay. Thanks. And about the rent coverage, can you tell us what the rent coverage was in a trailing basis and that what you underwrote it at?

For the Vintage portfolio Todd?

Yes and may be bifurcated between independent living and assisted living if you can?

So There may be some confusion, we are using the RIDEA structure, so this is just management contracts there is no lease or payment coverage in place.

Okay, can you tell what it was covering at?

It was owned by a different operator and a different owner. Sorry I’m not sure even how they deal with structure...

We are just looking at from how we underwrite it and we are happy to help walk you through that offline if you would like.

Got it okay, and how the funding sources, I know disposition proceeds are going to be factored in having any assumed debt?

There is real small amount of that we have seen that like $35 million in the low force, with a eight year maturity, so there was its cash.

And we are in a good place from a cash position Todd, with almost a billion of pending dispositions and $467 million of cash on balance sheet currently.

Great. Thank you.

[Operator Instructions] Our next question come from the line of John Kim from BMO Capital Markets.

Thanks good morning. I was wondering if you could provide some on color on the asset held-for-sale as were as composition, skilled nursing, senior housing and MOB?

I have that, John now are you doing? Its Scott Estes. I would say it is about half skilled nursing and then the other 25% is about evenly split between 11 medical office buildings are in that pool and some triple-net seniors housing. Probably it will happen more heavily into the third quarter as well. I didn’t comment too much on that, but again our guidance was flat. You have $300 million of incremental disposition largely in the third quarter, about evenly offset by the benefits of the vintage acquisition that’s probably more towards the later part of the year, end of the fourth quarter, plus some better operating performance kind of netted each other.

Great and then a couple of follow ups on the Vintage acquisition, can you discuss a number of units in this portfolio, average age and also if there any development expansion opportunity?

There are 19 properties, 2600 units, there is excess land at particular properties, but we will focus for on selling the buildings that we have and was there another question John?

Average age and development expansion?

Most of the buildings are in the 10 to 15-year range, there are couple of other buildings that have been completely redeveloped and renovated including one in San Francisco that technically is 100 years old, but if you walked in it [indiscernible] so. It’s sort of material those off the average, but most of them were built in sort of the late 1990s early 2000s.

And development?

Oh sorry, I thought I covered that. There is excess land at particular campuses, but that’s not part of our expectation right now, we want to focus on maximizing the value of the existing buildings.

Great. Thank you.

Our next question comes from the line of Rich Anderson -from MUFG Securities

No Mizuho, but anyway. What doers Vintage get you to from a RIDEA prospective, as you are 38% now where do you get to?

Well I guess it depends how many dispositions we have, but it could easily be in the low 40’s Rich.

Okay and. And what would you comment be just in terms of the elevated profile risk profile that that would suggest in an uncertain economic environment and so on. How would you respond to that?

We don’t think it elevates the risk profile, because we have very seasoned operators and an infrastructure to manage RIDEA assets that’s unparallel and we feel much more comfortable in our ability to manage our RIDEA assets than we might with certain triple-net just by the nature of how the ownership is structured. We think that not that we would say that triple-net is necessarily riskier, but we think we know how to manage risk and enhance value through a RIDEA structure better than anybody.

Okay. I would be quicker. I would like to talk about rack audits. so but I do want to talk about Genesis and is it first of all true that whatever else you may sell after the $68 million that kind of have on under contract will be just real estate, it will be areas where Genesis plans to stay and continue to operate those buildings, is that correct?

That’s mostly correct Rich, there may be handful of properties 10 plus or minus they would prefer not to be in. So there are some states like Ohio and Kentucky where they have got a very small footprint and prefer to exit. We are the landlord on those and we would be happy to participate in a complete exit from those properties otherwise, yes, they will remain the operator.

Okay. So if that’s true and by the way did you give a cap rate that you are expecting on the $68 million is it in the nines or tens?

No, it’s lower than that, but what Scott gave is the blended yield for the entire held-for-sale bucket is in the low nines.

Okay. So my question is if Genesis plans to stay in the majority of the stuff that you may sell in the future. That would indicate that these are pretty good assets and I think you probably are going to agree that without any question. So like if you were a private investors as oppose to a publicly traded REIT, could you see yourself sort of taking a shot and committing more to Genesis and working with them through this. Particularly since these assets that may be sold or assets they are big welcomed to maintain operations in. I’m just curious like is the publicly traded element of your story at all driving your decision to be a seller and what can be argued a pretty inopportune time right now at this point in the cycle?

That was also an opportune.

Well, it’s not a great time for skill nursing, we can all agree with that.

I haven’t seen it that much from when we bought it. I mean I guess the point is the cap rates and the payment coverages haven’t really changed over the years. So we can talk about it when we actually announce something Rich, but I think it’s fair to say that when you compare the cap rates hit the property level when we entered portfolio six years ago to what we think we can exit at, they are awfully similar. So I’m not sure what is happening elsewhere whether it’s in the [indiscernible] or inside Genesis, but our properties I think are quite valuable and we are seeing a lot of interest from buyers.

Then why sell them?

Well, today we announced another fantastic quarter and we spent 90% of the call talking about Genesis.

Sorry.

Let’s now talk about rack audits.

Okay. That’s all I have. I won’t keep it going. Thanks very much.

Thanks Rich.

We have now reached the end of today’s call. Thank you for your participation. You may now disconnect your line and have a great day.