Good morning, ladies and gentlemen, and welcome to the Third Quarter 2017 Welltower Earnings Conference Call. My name is Dorothy, and I will be your operator today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. Now, I would like to turn the call over to Tim McHugh, Vice President, Finance and Investments. Please go ahead, sir.

Thank you, Dorothy. Good morning, everyone, and thank you for joining us today to discuss Welltower’s third quarter 2017 results. Following my brief introduction, you will hear prepared remarks from Tom DeRosa, CEO; Mercedes Kerr, EVP, Business and Relationship Management; Shankh Mitra, SVP, Finance and Investments; and John Goodey, CFO. Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements 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 those projected results will be attained. Factors and risks that could cause actual results to differ materially from those in the forward-looking statements are detailed in this morning’s press release, and from time to time in the company’s filings with the SEC. If you did not receive a copy of the press release this morning, you may access it via the company’s website at welltower.com. Before handing the call over to Tom DeRosa, I wanted to point out four highlights regarding our third quarter 2017 results. First, we reported 4.1% year-over-year same-store growth in our senior housing operating portfolio, supported by greater than 3.5% growth across all three of our global geographies; second, driven by senior housing operating performance, we reported total portfolio same-store growth of 3.4% in the quarter, allowing us to raise full year total portfolio same-store guidance for the second time this year to 2.5% to 3%; third, as a result of the continued strong property performance, we are increasing normalized FFO guidance to a range of $4.19 to $4.25 per share from our prior guidance range of $4.15 to $4.25 per share; and fourth, we finished the quarter at 5.19x net debt to EBITDA, representing a half-turn reduction in year-over-year leverage. And with that, I will turn the call over to Tom for further remarks on our quarter.

Thanks, Tim. As Tim just highlighted, we are pleased to report a strong quarter characterized by industry-leading results from Welltower’s premier seniors housing portfolio, which is concentrated in major metro markets. The REIT sector appreciates the resilience of A-quality real estate in most industry categories, and our performance supports the fact that health care real estate is no different.While the overall environment remains challenging, our same-store seniors housing operating portfolio registered 4.1% growth, with the U.S. posting 3.7%.Keep in mind that we have 423 properties in our same-store operating pool, which is by far the largest same-store operating portfolio in the industry. So our numbers are statistically significant, consistent from quarter-to-quarter and financially reliable. The unique hands-on operations and data and analytics-focused approach we employ in the senior housing space is validated by our continued outperformance, and we continue to attract top-quality operators to the Welltower family. Together, Welltower and our premier operating partners deliver premier results. I’m proud to announce that Sagora Senior Living, a resident-first centered operator based in Fort Worth, joins our bench of RIDEA operators. Donny Edwards, Bryan McCaleb and Robert Bullock have built an outstanding business with some of the highest quality next-generation assets I’ve seen in this industry. For Sagora, we used the security of a triple net lease to incubate this exceptional team and their business plan. Now as Sagora has achieved critical mass, we employ the RIDEA structure to share the future upside in the value of Sagora and the real estate. This new joint venture better aligns Welltower and Sagora to grow and enhance investment returns. We also welcomed Encore, a U.K.-based operator of assisted living and independent living, this quarter. Many of you know, Welltower dominates the high-end private pay senior housing business in the U.K., and Encore further solidifies…

Well, thank you, Tom. I would like to start today by describing the organization’s resolve, which we witnessed from our operating partners and Welltower’s own property management team last quarter. Hurricanes, floods and forest fires put many people at risk, and it put about 100 Welltower outpatient medical properties and senior housing communities in the path of these natural disasters. We saw first-hand what great team preparedness and good property maintenance can do to minimize losses and protect our residents, tenants and buildings. Our property management team ran around the clock surveillance during the worst of the storm, and without hesitation, our seniors housing operators took in dozens of residents who had to be evacuated from other area communities. There was an impact to our quarter earnings resulting from these storms. However, we viewed this as a cost of doing business and the numbers are included in our financial statements as an ordinary expense. We are grateful to Welltower’s and our operators’ staff for keeping our tenants and residents safe and our properties in good order. Turning to Welltower’s investment activities in the third quarter. We continue to expand our existing partnerships and also added a new one, which I will describe in a moment. 95% of the $381 million of new investments that we reported involved existing relationships. We acquired $304 million at a blended yield of 6.5% and funded $70 million of construction, with an expected stabilized yield of 7.9%. We also funded $7 million in loans with a combined yield of 7.8%. Dispositions of $84 million included $51 million of loan payoffs at an average yield of 8.3% and $33 million of property sales, with a blended yield of 8%. Welltower’s relationships continually produce desirable off-market opportunities with above average returns and a reduced risk. It makes…

Thank you, Mercedes, and good morning, everyone. I will now review our quarterly operating results for different segments of the business, and provide you with an update on our continuing portfolio repositioning efforts. We’re very pleased with our results and are increasing our same-store NOI guidance for the overall portfolio to 2.5% to 3% on the back of significant outperformance on our SHO portfolio, which grew 4.1% year-over-year. I will remind you that we do not update our outlook for the segment level NOI growth throughout the year, but we are tracking towards the top end of our original 1.5% to 3% guidance for the SHO portfolio. Same-store NOI increased 3.4% year-over-year for the entire portfolio. The triple net portfolio continued its reliable performance as our senior housing triple net segment grew 3%. The payments stream remained secure despite a 2 basis points of optical decline in coverage. This decline was primarily driven by the removal of Sagora portfolio, part of which was converted to a RIDEA joint venture as Sagora had higher coverage than the overall triple net portfolio. While industry debate is often focused on RIDEA versus triple net, we have combined the best of both worlds in structuring this relationship. Newer assets in the best of markets are now structured as RIDEA joint venture, while more middle-market assets where we can earn reliable and consistent returns are part of a triple net portfolio. Alignment of interests and downside protections were two of the most important pillars of restructuring. We’re extremely confident in Donny and Bryan’s ability to drive significant value here. The outpatient medical portfolio reported 2.4% NOI growth in Q3. Growth rebounded from Q2, as we expected, due to strong leasing and high tenant retention. Our steady performance and continued growth demonstrates why institutional investors are…

Thank you, Shankh, and good morning, everyone. It’s my pleasure to provide you with the financial highlights of our third quarter, and I’ll take you on our guidance for the remainder of the year. Our strong Q3 2017 financial performance once again shows the superior quality of our real estate and operator relationships as well as the strength of the Welltower platform to allocate capital and deliver results. We continue to produce resilient same-store growth, maintain a strong balance sheet and liquidity position and improve our own corporate operational efficiency. The highlight of our quarter was the performance of our senior housing operating portfolio, which saw same-store NOI growth of 4.1%, driven by REVPOR growth of 3.9%, aligned with good operational expense control. Growth was delivered across the three countries of our operations, with the U.S. recording same-store operating NOI growth of 3.7% against a challenged overall market backdrop. This growth, combined with good results from our senior housing triple net and outpatient medical businesses, augmented with in-quarter growth investments of $381 million, have enabled us to report a solid normalized FFO result of $1.08 per share. In addition to this quarter’s acquisitions, we completed three seniors housing developments at $48 million of total costs, bringing year-to-date deliveries to $506 million. We expect an additional $76 million in conversions through the remainder of the year at a stabilized yield of approximately 9.3%. Although Q3 was a slower period for dispositions with only $84 million realized, we continue to see strong investor interest in our sectors, and we will continue to derisk our portfolio through targeted dispositions. In alignment with this, today we announced an increase in our disposition guidance for 2017 to $2.4 billion, an increase of $400 million. This represents an expectation of a further $1 billion of dispositions…

Thank you, John. Before we take your questions, I’m proud to tell you that the Welltower Foundation and our community relations fund donated approximately $100,000 to a number of our operators to help support their employees whose lives were profoundly impacted by the hurricanes in Texas and Florida, and the fires in California. We hope that life there gets back to normal soon as well as in Puerto Rico. Now Dorothy, please open up the line for questions.

[Operator Instructions] Your first question comes from the line of Chad Vanacore with Stifel.

Just picking up the Sagora conversion from triple net to RIDEA. You converted 11 properties. What was the coverage on those properties? And then, was this always in the plan or is this opportunistic? And then should we expect them to convert more of these remaining leases to RIDEA over time?

Yes. It’s Mercedes. Let me talk to you a little bit more about Sagora. So we started this relationship in 2010, and as Tom mentioned, this triple net structure rather was somewhat of an incubator process, if you will, but there were a group of properties, these 11 properties that we converted to RIDEA, which stood out from what is otherwise a very solid portfolio, a very consistent performing portfolio, as a group of properties that had outsized growth. And so those were the ones that we decided fit very well in this RIDEA model. As you probably know, we are very selective about what we want to own in that kind of a joint venture structure. We try to, I suppose, manage volatility by really picking properties that we think have the opportunity for outsized growth and performance. So in any event -- the rest of the portfolio, which we thought was very suitable for the triple net lease structure because they are, by all accounts, cash cows for Sagora but don’t have the same growth prospect. It’s kind of the decision that we made with them. You saw, what we’re calling kind of our version 2.0 of RIDEA joint venture, structuring tools, and by that I mean with respect to alignment, with respect to management contracts. So Sagora was very instrumental in us sort of designing some of these new found tools that we think are going to be very useful for us going forward.

Mercedes, the outsized growth expectation, is that because these were in process of stabilization? Or they’re outperforming in some other way?

No, these properties, Chad, are in the best of markets in the footprint, and so we expect this portfolio that we have in, in RIDEA outperform because they’re in the best submarkets as well as the best demographics.

Yes, Chad. It’s Tom. Let me just make a comment regarding your broader question you asked. We built our business model around owning RIDEA assets. For Welltower, we see that as a lower risk structure because we’ve built the full complement of skills, tools, technology to maximize the value of real estate in a RIDEA structure. So you will continue to see us look for operators that we may incubate in a triple net lease format to transition eventually to a RIDEA structure. And you’ll see us likely move away from operators where we don’t see the opportunity to transition the operator or the real estate into a RIDEA structure in the future. That is -- this is -- Sagora is a great example, and I’m sitting here looking at my friend, Joe Weisenburger, who is very much responsible for this relationship and helping this business grow to where we could affect this transition. That’s -- this is such an example of what this company does, and you’ll -- you should expect to see more of that.

And then, just thinking about your SHO fundamentals. They’ve pretty much outperformed the industry. Do you think fundamentals have bottomed here coming into the fourth quarter of ‘17? Or should we expect more pressures in 2018?

It’s too early to comment about 2018. As you know, we don’t know what exactly the flu seasons will look like. We are receiving the operator budgets now and, obviously, we have a huge process that we go through with every one of our operators. So it’s really too early to comment on 2018. But what I can tell you is, we remain very optimistic that we’ll continue to outperform the industry as well as our peers because of where we are and also the asset management and systems and processes that Tom mentioned. Because if you think about the supply impact, you will see, obviously, 2017 was a deliveries peak. But you also -- if you think about what that means for next 12 months, right. So this will impact operation, but we absolutely believe that we will -- our property, our property and our -- properties in our portfolio will hold up better than the industry and better than peers.

So if we can’t take about 2018 yet, fourth quarter 2017, what occupancy and rate assumptions are baked in your guidance?

We do not give quarterly guidance on rates and occupancies, but we are pretty optimistic about rest of the year as far as our SHO portfolio is concerned.

So one more for me. On the disposition guidance, you raised it from $2 billion to $2.4 billion. What asset classes are you expecting in that increase?

That in the senior housing, triple net portfolio.

Your next question comes from the line of Mike Mueller with JP Morgan.

I guess, looking at the Sagora acquisition cap rate of 7.3%. Can you just use that as a starting off point to talk about where you see cap rates for SHO assets at this point? And kind of how that fits into the mix?

So this is Justin Skiver, SVP of Underwriting. Just to give a little color on cap rates. And obviously, there is many factors involved, but generally speaking, we see Class A seniors housing trading at a 6% cap, plus or minus 50 basis points. And Class B seniors housing is trading at a slight discount to Class A, probably by about 25 basis points. But we view that delta as being too small, and there should be a larger spread between A and B class properties.

And I want to add to that. That’s the beauty of this Sagora transaction, is the fact that we were able to have this relationship and build the trust and build the structure together that I described before, allowed us to take what we consider to be terrific assets with a lot of upside potential at a great price compared to market.

Got it. And how new are they? And how occupied are they? The ones that were acquired for the 7.3%?

Yes, the -- three are about three years old, on average, with occupancy in the low 60s. And I think, an important point to make here is that, we are acquiring these at below replacement cost. So we see a tremendous value upside in making this acquisition with Sagora.

And Justin is specifically talking about the three new assets that we bought in Texas.

Yes, okay. And then just last question for me. Just any sort of update on the Manhattan development?

Yes. I can tell you that we continue to make progress. I think our assumptions continue to be validated, both on the cost side as well as with what we see happening in terms of a lack of supply and demand. So we feel very good about the progress. The construction, I think I already reported this last quarter, is underway with a demolition and so on underway. So just things continue to progress, and like I said, our assumption is validated.

Okay. So demolition is occurring. And when do you see it coming out of the ground?

We’re still on the same timeline, that -- late 2019, early 2020 or so is the timeline that we have been indicating.

Your next question comes from the line of John Kim with BMO Capital Markets.

I think, Shankh, you referenced the disposition program that went through Genesis assets. Can you maybe comment on the magnitude of the sale as far as what percentage of your Genesis exposure you’re looking to sell?

Yes, John, as I said, you can appreciate this is a live situation, right? I mean it’s very hard to comment on the quantum as well as sort of what will be our retained interest right now. I can tell you that we’re pretty much set on who we think that we’ll go with. We’re set on the economics and the structure and retained interest. But because it’s a very live situation, I just don’t want to comment on it anymore. So -- but we hope that we’ll be able to talk to you about this particular situation in a lot more details soon.

But this is separate from the $1 billion of dispositions for this year?

Yes.

Right, okay. And then you also referenced the $25 million rent credit. Is that an annual figure? And when does that start taking place?

That will take place at the close of the deal. So when the deals close, that’s when we get the rent credit.

Is it a onetime or an annual figure?

It’s a onetime.

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

On the expense side, you’ve now had two quarters of pretty strong expense controls. Can you give us a bit more details on sort of the moving parts? And I know, Shankh, you’ve mentioned the comp control there. Just some more details, and just how sustainable are -- is this control? Is there more to go from here? Or is this sort of a good run rate?

So I would not consider 0.8% as a good run rate. I just wanted to mention that, obviously. Look, we have heightened labor cost growth for last few quarters. As you know, we have talked about -- like we know, sort of the -- all the deliveries are lining up. There’s been also the law of large numbers [indiscernible], right? So when you -- what happened in 2000 -- late 2015 and ‘16, labor cost went up but also the year-over-year comparison was very low. So year-over-year numbers growth was extraordinary. Now we’re getting to more of a stabilized numbers, where you will see the labor cost will remain elevated but not to the extent that we have seen before. The other expense line item, as you can see, utilities, we’re doing a lot. I mean there’s a lot of very focused retrofit program here that’s driving that lawsuit. You know we have a GPO. We’re focusing a lot on our property taxes. Our asset management group is highly, highly focused on that. And then, it’s the other expense bucket, the all other buckets, where we have seen, this quarter, a significant decrease. As I told you, last quarter, there’s a huge focus on bringing down the professional management fees -- professional fees, lawyers and accountants and consultants, et cetera. There’s significant decrease there. We have seen a significant decrease in the workers comp area as well in the workers comp insurance area, so it’s across the board. We’re looking at everything and trying to retool the business. Not much different from what you’re hearing about our corporate. We’re trying to say, "Okay, where the business is? What is the sustainable cost model going forward?" I cannot guarantee you that everything will continue to come down, but we think a lot of these savings are not onetime in nature.

Okay. That’s helpful. And just on the dispositions, I wanted to clarify, I think to an earlier question, that the $1 billion that you are expected to close by year-end, that includes any Genesis sales as well? Or is Genesis over and above that?

Genesis is over and above that.

Okay. And then just maybe last one for me. Any update on some of the legal proceedings that you outlined last quarter? Any update on sort of where we are today? And anything on economics?

Vik, you know what I’m going to do? Let me have our General Counsel, Matt McQueen, answer that question for you.

Sure. Vik, as you know, it was disclosed that Welltower filed a lawsuit against Scott Brinker, alleging that he had breached his separation agreement with us in connection with the announcement that Mr. Brinker would start at HCP on January 4, 2018, which was the end of his non-compete period. So we’re pleased to report that we’ve recently reached the settlement of this lawsuit. Some of the terms are confidential, but I can say that under the terms of the settlement, Mr. Brinker is not permitted to begin work as the Chief Investment Officer of HCP before the date that we issue our Form 10-K for our fiscal year ending in December 31, 2017, which will be on or around March 1 of 2018.

I don’t want to say anything further about this matter beyond what Matt said, but let me add that the first principle of how we approach everything at Welltower, including litigation, is that we do everything we can to protect our shareholder. That’s what we will always do as a company, and you should not accept anything less than that.

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

Shankh, did you give the -- if you said it, I apologize. Did you give the Genesis’ rent coverage -- EBITDAR rent coverage today?

No, we didn’t. You will find that it’s disclosed in our supplemental.

Okay. I was searching for it and I didn’t -- but can you give a sense of how that’ll change post sales or is that too much information at this point?

No, it’s not. I think I said this before as well that the market is about 1.3 times coverage going forward. So it will be reset to 1.3 times coverage going forward.

Okay. Bigger picture, maybe for Tom. You guys have an interest in staying invested in Genesis for the couple of reasons you cited earlier in the call. Can you make that same comment about Brookdale?

Well, let me talk to you a little bit about Brookdale. Obviously, they’ve put out their numbers as well. And so we’re always concerned about any one of our operators that’s having any trouble. And I think it behooves everyone, and it would be good for the industry for them to do well. So we’re hopeful that they will do well. But having said that, we’re not actually worried about our own portfolio with them. Their triple net EBITDAR coverage is actually above the Welltower average at 1.15 times. We have some possible type of protections in our portfolio, and we’re always in discussions with Brookdale about performance and also around strategic alternatives. We have a good collaborative relationship with them. But like Tom just said, we’re always looking to protect our shareholders’ interests. So we’re looking always at our alternatives, and we take, actually, comfort in knowing that two thirds of our portfolio with Brookdale is either in California or in Washington or a CON state, and we have excellent operators in every one of those regions who could step in and take over the building, so if we need ever -- if it were ever to arise.

So Rich, just from my perspective, and you’ve always heard us say this, Brookdale is not one of our operating partners. We’ve never looked at Brookdale as an operating partner. That has always been more of a financial transaction. Our Brookdale exposure largely arose from the fact that Brookdale acquired some of our smaller operators. Look, we are cheering for Brookdale. We hope they can turn their business around, because the fact is, their issues affect the view of the entire industry. Never say never. But, they are not one of the operators I was referring to beforehand. So ones that we will come in and grow with, grow out of that triple net lease structure into a RIDEA structure longer term. They’re very different situation for us, they always have been. So again, never say never. But, likely, we’re not looking for growth opportunities there.

So if I’m using how you describe wanting to move most -- anybody into RIDEA or maybe exit the relationship, is this ultimately as you see it today? It could change, but as you see it today, Brookdale is somebody or an operator you would ultimately part ways if everything stayed the same today. Is that a fair statement?

Well, we will continue to do what we can to optimize the value of the real estate. And we have lots of ways to manage this. If Brookdale’s performance turned around, we might be happy to keep Brookdale in a triple net lease structure for the time being. The fact is, we have good real estate, as Mercedes said, in good markets. I think anyone who has looked closely at Brookdale knows that the Welltower leases are the best leases, because they are structured around a good portfolio of real estate, which gives us lots of optionality. So we’re continuing to be in discussions with Brookdale -- we have been in discussions with Brookdale for years, and we will maximize whatever value option is in the best interest of our shareholders. That’s the best thing I can say, Rich.

Through the press release today, several items related to UK investing, is that just coincidental timing? Or do you, as a firm, looking to expand there?

It’s John. I’ll take that one in my prior hat on, if I may. And I think the answer is, yes, we continue to expand in the UK We have a number of ongoing construction projects with...

John, let me just interrupt. Expand disproportionately more than where you’re at today?

Well, I think law of numbers, that’s quite hard to do, because we’re sort of 8% of our portfolio relative to the overall portfolio is there. So obviously, we’ve got a leverage -- a multiplication equation to overcome. But I think we’re -- we’ve had great performance in UK As you know, we’ve got some great operating partners there that we continue to grow with. Mathematically, to grow it as a proportion is relatively difficult compared to the growth of the U.S. right now. But I think overall, are we looking to put more dollars to work in the UK? The answer is, absolutely yes, and we are doing that, as you can see, both through a conversion of construction projects into operational assets. We’re bringing Encore as a new development partner, who we hope to grow very significantly with going forward, but also to back our existing partners like Avery, Sunrise and Signature.

And then last one for me, the $95 million of noncapitalizable transaction costs, what is that?

Well, essentially, I’ll take that one on as well with my new hat on, I guess. And because we already owned the real estate, so we didn’t buy any new buildings from them, U.S. GAAP, if you’re very interested in such things, under ASC 805-10-51-21, allows us or means that we cannot capitalize those extra proceeds to Sagora for the transaction onto our balance sheet. We’re not allowed to. The one statement I can make, which is the truism. If we had bought those assets, clean and clear as a first off transaction, that number would’ve just been on our balance sheet. We’d have had a capitalized rate on those RIDEA assets. That’d been very attractive to Welltower, and there would have been -- literally would have been a nonevent. It’s only because of the GAAP accounting.

Before the next question, I just want to clarify. This is Tim. I was intending to clarify something from a question earlier. In our current disposition guidance, we have a $1 billion in dispositions for the fourth quarter. We’ve kept $400 million in there, as most of you know, from a Genesis purchase option, that was an option going into the year. And we kept it in there to communicate to the market the intention to sell Genesis after that option expired. That $400 million is still in our guidance from a nominal dollar amount, and Shankh, I think, was intending just to stay that the scope of what he described in his opening comments goes beyond that. So there are Genesis dispositions in our guidance for right now.

Your next question comes from the line of Daniel Bernstein with Capital One.

I just wanted to go ahead, and given Tom’s earlier comments about the business platform being built around senior housing operating, and then with Sagora, the increase in NOI from seniors housing operating, should I read anything into that in terms of how you think that the seniors housing industry will recover from the down we are in now? Without specifics, obviously, on 2018, that you don’t want to give out, but how should I be thinking about where you think fundamentals will be in a couple of years? And how much RIDEA you want in your portfolio going forward?

Well, I’ll start off the answer to that by saying, we’re very optimistic about the senior housing industry and we’ve been taking this opportunity to lighten up in markets and around operators that we do not see strategic to our business model in the future, and we invest behind operators and markets that are strategic. We have a core Metro market strategy in the U.S., Canada and the U.K. And it is no secret that it is our intention to dominate those core markets. We believe the demographics, starting in about two years, are all in our favor and they’re not going to reverse.

And Dan, I want to add. If you look at the numbers even today and you look at the population growth -- nowhere in the demographics as a law, if you will -- the population grows 75-plus-years old. In that category for the last seven years, you’ll see map 31 and map 99 is about 1.5%. If you look at the absorption of assisted living and memory care product, you’ll see its five plus percent. That tells you how the products, the absorption is significantly growing above the population growth. And then you add what Tom just talked about, the population growth itself, we’re extremely bullish about the industry.

Okay. And I should expect RIDEA to become a larger part of the portfolio generally from your 42% or so now it’s...

Yes.

Okay. Is there a top limit of that?

Hard to say.

Not to corner you.

We are opportunity driven, not necessarily equation-driven that we’re trying to sell for.

I mean, look, if there was some phenomenal triple net lease opportunity that had really strong coverage in the right markets or with the right operator, we wouldn’t turn that down. So as you keep hearing us say, we’re opportunistic and keeping all our options open. But clearly, Dan, for us, we have built a model around maximizing the returns that wanted to derive from this operating lease or RIDEA structure. That is, if you don’t have the infrastructure and the systems and the right people, that means it’s riskier than a triple net lease. But we’ve made those investments, and we’ve seen, as you’ve seen in our results quarter-over-quarter, particularly this quarter, we’re able to get a return on that investment because we have the system. But it’s not magic. We don’t make it up. It doesn’t come out of the air. It’s real. And it’s real because we roll up our sleeves and we work hard, alongside our operators, and that’s what drives our results. And if you’re not willing to do that, you should own this top category of real estate in a triple net restructure.

No. I can appreciate that. One more quick question regarding Brookdale. Could you talk about the trend in their lease coverages? And do they have any purchase options that can be exercised in, say, the next couple of years, two years?

With respect to trends, I think, sequentially, we’ve seen them sort of stabilize a bit. We’re seeing -- as you’re looking at their corporate performance, which is probably emblematic of a lot of what’s going on in their portfolio, which is some pressures on occupancy and the like. In our portfolio specifically, I think that they’ve been very capable of maintaining cost. So that’s been a very helpful tool for them. And so sequentially, I think they feel relatively stable to us. And with respect to purchase options, they’re out in the future. At the end of some leases there might be 1 or two purchase options that are still left from old structures that remain.

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

With regard to Sagora, did you disclose how much compensation you provided to the tenants who moved those 11 assets into the operating structure?

No. We haven’t disclosed that.

Can you discuss it?

I think it’s part of the contractual negotiations. I believe that’s not disclosable. But as I said, I think the -- if you take a step back and look at the overall income from the triple net lease revised and the additional net operating income from the excess coverage of the triple net lease, the rate there is probably 50 to 100 basis points better than the present in [ph] the market if you were to buy this quality of assets with this quality of operator. I mean that’s the sort of guidance I can give you. It was a -- overall a good transaction.

And the other thing that I could add is, we reinvested -- they’re saying in the structure of the -- on the -- both on the lease side and the RIDEA side. They’re staying in as joint venture partners with us. And so they have basically reinvested a book of whatever it is that they’ve received in proceeds.

Okay. And then how much I guess of an ownership stake do they have in the JV? And is there any desire from them or you guys to transition the remaining assets into that structure too?

We have -- as we continue to add assets to this portfolio, and I think Justin talked earlier about some new assets that we just added to the portfolio. So yes, indeed over time, there might be properties that transform into RIDEA.

Yes. To give clarity, Sagora has a 10% ownership in the operating entity, and a 45% owner in the OpCo entity, and they’re reinvesting $33.5 million into the transaction. So we’ve had a strong alignment of incentives. We think this trend -- this transaction was transformative, because it fit the portfolio of RIDEA assets, which has an average age of 5% as well as 90% occupancy and has a strong growth profile. And the triple net portfolio, while it has a strong occupancy in the 90% range, it’s an older portfolio, older than 15 years. So we think it was the best of both worlds to provide a great transaction for us and for Sagora.

And that was Joe Weisenburger who manages the Sagora relationship.

I think -- Michael, it’s John. The one thing I would say is, you’ve seen us systematically segment the market of those assets that will grow with the market and those that’ll grow faster than market. If it grows faster than market, generally we would love it to be in a RIDEA format of partnership. If it’s going to grow with market, then a triple net lease. And you see that actually in the structuring of Sagora. We’ve had to do it with one partner to stay actually within the portfolio profile. They have a different profile of assets, and we put those together in the different categories of triple net lease and RIDEA to be, I guess, mirroring the way we see the market more generally.

Okay, great. Just one last question. I guess a bigger question, maybe for Tom. I mean how is your conversations going with the major health systems right now? And are those organizations any closer to partnering with REITs to grow their real estate footprint?

Yes, thanks for asking that. Yes, they are. And stay tuned, we may be discussing something between now and the end of the year.

Yes, but you know you asked if they’re closer to partnering with REITs, and I just want to be very clear, they’re closer to partnering with Welltower, which is very different. Building relationships here has been a very, very specific focus of ours, as you know. And the kind of progress that we have made is really very specific to what Welltower can deliver in terms of a value proposition.

And I would tell you that we are likely planning an Investor Day in the first quarter of next year, and expect you’ll have the opportunity to hear a lot about this strategy and how it’s being put into practice.

Your next question comes from the line of Nick Yulico from UBS.

Just going back to Genesis. You mentioned the $35 million rent credit. So is the way for us to think about this that, versus the current rent you receive, it looks like it’s about a 25% rent cut. So what you’re doing here is, you’re trying to create market level rent coverage for the assets in order to sell those assets outright or in a JV?

Yes. I’m not agreeing to your exact numbers, but that’s the idea that if you have coverage below 1.3 times and the market is 1.3 times, then you have to give Genesis the rent credit. And so that going forward, whether it’s a joint venture or the owner will have a sustainable rent coverage. This would only happen upon sale, right? At transaction.

Right. And then in the senior housing operating segment, you gave the breakdown of your same-store expenses. You talked about this a little bit, but you have this line item for all other expenses. That number is down year-to-date. It’s causing, it looks like the bulk of the reason why your expenses are low. Is any of that year-to-date decline due to a lower management fee that you’re paying operators?

So I think I answered that question earlier. But if you look at before all other, you will see utilities is down. You’ll see raw food is down. So you’ll see our NIM is down. You’ll see property tax is down. So I’m not 100% sure where you’re seeing that the -- all the expenses are coming in the all other bucket. But as I mentioned, the all other bucket, it’s a catch-all, right? It has what is comp, insurance, marketing, professional fees, bad debt as well as incentive management fees. This particular quarter, we have seen a significant decrease in the workers comp area as well as professional fees, which is sort of the lawyers and the accountants and consultants, that bucket.

Okay. But that number is down almost 5 million year-over-year. Is there any lower management fee that you’re paying operators?

So I think I answered that question earlier. But if you look at before all other, you will see utilities is down. You’ll see raw food is down. So you’ll see our NIM is down. You’ll see property tax is down. So I’m not 100% sure where you’re seeing that the -- all the expenses are coming in the all other bucket. But as I mentioned, the all other bucket has -- it’s a catch-all, right? It has what is comp, insurance, marketing, professional fees, bad debt as well as incentive management fees. This particular quarter, we have seen a significant decrease in the workers comp area as well as professional fees, which is sort of the lawyers and the accountants and consultants, that bucket.

And so but the -- but, so that number -- I mean again, that number is down almost $5 million year-over-year. Is any of that -- is there any lower management fee that you’re paying to operators there? I’m just trying to understand if that -- because if that’s the case, whether that’s a onetime issue this year, does that benefit reverse next year?

There’s lower incentive management fees there, because of an underperformance of a particular portfolio. If that portfolio bounces back, we’ll be more than happy to pay a higher incentive management fee.

And what’s the dollar amount of the lower incentive fee?

This is a -- Nick, as you can imagine, this is -- obviously, I don’t want to talk about any specific operator or any specific relationship, but it is not significant relative to rest of the expenses.

Yes, I’m not asking about any operator. I’m just trying to figure out if it’s a onetime benefit this year to your same-store expenses. It’d be helpful to know what the level is.

Yes, I totally understand the question. The way to think about it, it could be onetime event, if the topline from -- how the operator is performing comes back. If it doesn’t come back, it will be a recurring event. We’ll much rather have this specific operator perform, so that we don’t have to lower that number.

So in other words, if it comes out, it’s a good outcome. And if it stays in, you can see that it’s -- will be relatively consistent in, in there again. But we’re not talking about a big number.

Your next question comes from the line of Juan Sanabria with Bank of America.

Maybe this first question is for John Goodey. You’ve commented previously about Canadian senior housing supply kind of trailing the U.S. I was just hoping you could help us frame that as a percentage of inventory. What is the supply? When do you expect that to peak? And does that make ‘18 growth maybe more challenging?

Yes. So I think it’s fair to say that there is new building going on in Canada. We’re responsible for some of it with our partners. This is a good thing. And what you do see, though, is a very much market-by-market segment outcome for new-build versus existing supply. Unfortunately in Canada, we do not have the equivalent of a NIC, so we don’t have a very reliable -- near enough real-time basic gathering points where we can show all the trends and talk about it the way we do in our supplement for the U.S. What I can tell you is, it feels imbalanced. So when you look at the historical data of gross demand and gross new supply, it looks to be roughly imbalanced. So you end up a little bit with aligning with our strategy that the core urban market seems to be undersupplied and new builds there seems to be slow relative to demand growth, which is again where we’re focusing our capacities in places like Toronto and Vancouver and others. And in the easier to build, suburban markets or country markets, you’re seeing people a bit like with the U.S., building more supply. Again, we are more concentrated in the urban and suburban market, so we’re a little bit less exposed, we believe, than the average of the industry. But again, unfortunately, we don’t have the equivalent of NIC in Canada to give you the deep data analysis that we do here in the U.S.

And Juan, if you think about overall year-to-date performance, I mean U.S. and Canada is actually not that much different. On a NOI perspective, Canada is slightly better NOI, but U.S. is better in terms of revenues. So if your question is, when will supply impact Canadian numbers? I will say it is impacting, as we speak. So I don’t assume there will be sort of disproportionate impact next year or the year after. There is some supply in Canada, like you have seen in everywhere else, and that’s sort of flowing through our numbers.

Yes, and it is market-by-market. Calgary is quite tough right now, as an example, because of new supply. But Vancouver, Québec, British Columbia, Ontario, these are mostly in pretty good shape. So it is a market-by-market. Again, it comes back to -- we strongly believe the demand -- there is great demand in the core urban markets. That’s where we’re concentrating our new-build activities, like we are with Chartwell in The Sumach in Regent Park in Canada, and so that’s, again, going to be core to our strategy, where we deploy new capital for new builds, it’ll be in these core urban markets.

That’s helpful. And then, I was just hoping you could speak to, again, on the seniors housing on the RIDEA side for the U.S. What you guys are seeing from a leasing perspective on the increases to in-place versus the new leases? And how we should be thinking about that? Brookdale talked about declines year-over-year on new lease rates. If you can give us a sense of how did you -- your U.S. portfolio, that difference is between new and renewals?

I think as we mentioned to you last quarter as well, we actually don’t see a huge difference between sort of the new lease as well as the renewals. Remember, like half of our portfolio tons of news on January 1, and rest of the portfolio sort of goes through the year as you have the anniversary. We don’t see a huge difference. It depends on, obviously, market, but on average, we don’t see a huge difference.

The rent bumps to your existing is equal to what the increase you get on new versus the old?

Relatively the same. It’s a very large portfolio in different markets. Some markets, you see -- the markets that you have weakness, I mean you see the reverse, right? I mean you see weakness in the U.S. and then as well as in New England, you see that. In markets where you have strong demand, such as Southern California, you see just the opposite. But when you blend that -- all that in, in your huge portfolio of 423 properties that Tom talked about, you see relatively the same.

When you think about the math of this, the average length of stay means that residents only on average see a couple of increases in their stay. So it’s not that you have a very long cycle of resident increases with in-place, and then a different rate -- a significantly different rate in the new leases because of the dynamic of the numbers -- the number of resident occupancy turnover dynamics. It’s not a, as Shankh said, often the market’s maybe a small fraction difference, but it’s very hard to see them be dramatically different.

Great. And just one last quick one for me. Vintage will be added, I think, in the same-store numbers next year. Do you see that additive to the growth of the overall pool? Or not necessarily?

Vintage will be added to the pool in fourth quarter actually. And that will take -- that will not be additive to the growth, at least in the fourth quarter. Actually, it’ll be 10 basis points hit to the overall growth for all the new assets we’re adding to the pool, not specifically talking about Vintage. We’re yet to give you -- we’re yet to do the budget on next year, so I’m not going to talk about ‘18, but I just wanted to give you a sense of what’s going on.

Can you give us a sense of where that occupancy for the portfolio is?

I don’t have it with me right now. I can follow it up with you.

Juan, keep in mind that the -- I think we made this remark when we first made the investment. This is about a lot of opportunity. We saw an opportunity by way of switching the operator, and we brought in three operators that we feel very good about, in particularly in the markets where we put them in. And then we also talk value added opportunities from the repositioning of the assets which require some CapEx work and so on. So what we’re doing right now is actually undertaking that kind of execution and everything is working as we had planned. CapEx is on the way, and so on. There was an element of restaffing that needed to happen and things of that nature. But we always knew that this was going to be a portfolio that we saw tremendous value in but we needed to actually create that.

Your next question comes from the line of Tayo Okusanya with Jefferies.

My question is really is around the SHO portfolio. Again, in the past 12 to 18 months, you’ve really seen some very strong rent growth, not just in your portfolio but for some of your peers. Just trying to understand when you take a look at your residents -- again, many of them are well retired. A lot of them are on fixed income. How is it that you still kind of have this ability to push rent as hard as you have without really impacting occupancy that much?

So Tayo, I would characterize it, of course, a little bit differently. We are seeing the impact on occupancy, right? Occupancy is down 170 basis point. So it is a question of optimizing rates versus occupancy. It is a need-driven business. As you know, that there’s a huge part of our senior housing operating portfolio is the living memory care. It’s a need-driven business. We’re eyeing markets where we are usually the best provider of care with the highest reputation, and people are willing to pay for what they consider the best quality care for their parents or their grandparents. And does that mean that everybody is willing to pay? No. That’s why you’re seeing the occupancy decline. So we’re confident that, you know, the -- it’s a game of optimizing rate as well as occupancy. We’re trying to maximize revenue, and if we come to a point where we feel we get more traction by getting more occupancy and attractive terms rate, we’ll do that. But this is a -- as we know, we run a SHO which is fundamentally driven by data analytics and numbers, and we’re trying to optimize and maximize our revenue, not one part of the revenue. So we’ll see what market gives us next year.

And Tayo, this is Justin Skiver. I’d just like to add to that, that you have to remember that the average length of stay in these building is 18 to 24 months. So it’s not as though these people are getting increases upon increases for 5 to 10 years. It’s a set amount of time. Then new residents are turning over.

Tayo, and also -- let me just add to that. A point that I started the call out with. We have 423 properties in that portfolio. You should line up other portfolios to have -- to better understand the numbers that are being reported. We have a large sample that’s very consistent. And I think that is important when you want to understand what’s happening in the industry.

Okay. Are you finding when you’re qualifying residents to live in your facilities that their children or other dependents are having to kind of contribute more towards the payments now?

I don’t think that has changed. I mean when you think about -- I think you said that they live mostly on fixed income. The fact of the matter is, our communities are in extremely well, sort of, wealth locations, if you will. Obviously, they have fixed income, but they also have significant wealth in terms of asset. So we haven’t really seen or heard about much changes.

Tayo, I don’t know if you’ve seen the report that we commissioned not long ago about aging in cities. It corroborates a lot of our strategy, the reason why we focus on these urban centers is that what is attracting, engaging population at double-digit rates into this core centers. That alone, the demand and the desirability, for all the reasons that we found out in our survey, are the reasons why our pricing is more consistent. That’s why people really feel like there’s a value proposition that they’re willing to pay for, and so we don’t have that sort of slippage that maybe you hear others talking about on rate or having to lock rates for life or whatever other people might have to do.

I think, Tayo, the only thing I would say is, if you look at Page number 8 of our supplement, where we talk about quality indicators, we tried to give you -- obviously, we have a much larger demographic scorecard than this, that we run our analytics off of as we invest our capital. As you can see there, generally we’re trying to go for areas where there is significantly more wealth than average for the country, and that means wealth of income, because if you do need support from the children, then the wealth is there. Or capital wealth that someone will have accumulated primarily through their primary residence, that they’ll invariably be monetizing as they come into this environment of senior care. So it’s again, generally, for the most part, we’re sighting our capital into high wealth, high-income locations.

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

First, I just wanted to clarify, the rent abatement that Genesis will receive at close will be 25 million or 30 million? I’m sorry.

$35 million.

35 million, okay. Plus there’ll be a reduction in the existing escalators, correct?

Yes. Just like you have seen in the $1.7 billion total transaction we have done, it went down from 2.9% to 2%, and we’ll just replicate that structure.

That’s perfect. And then on transaction activity, so you’ve laid out the dispositions here plus, obviously, there is some incremental potential dispositions if they’re to close from Genesis. I’m trying to think about, as we look forward, how we should be thinking about your leverage, which remains very low, and whether or not these dispositions will be offset by incremental investment or if we should just expect leverage to head further south?

Yes, thanks. This is John. I’ll take that one. So you’re right, we have very significantly strengthened our balance sheet, nearly 0.5 turn deleveraged over last year or so. Look, we continually look at our capital structure to refine that, to provide shareholder value and to remain well capitalized to take advantage of, I say in my script, of acquisitions or new developments. And you’re right, I mean we will look to redeploy capital, clearly, to drive our earnings growth as we dispose off of assets and realize that capital. I think we’re very comfortable in the sort of ZIP Code where we are right now, and we’ll navigate around that sort of area going forward. So no significant sort of major changes, but we would say that we’ll look to redeploy the majority of the funds that we do see coming in through the dispositions that we have ongoing.

And is it safe to say at this point that new investments will continue to be pretty focused around seniors housing and senior housing operating, in particular? Or are there -- or you’re seeing opportunities that are of greater interest in the other segments?

What we’re seeing opportunities in both the senior housing space as well as in the outpatient medical space. So we’re -- right now, we seem to have a fairly robust pipeline of opportunities to evaluate in both sectors.

And what is your appetite for the outpatient medical business in the 5% or mid-5% cap rate range?

We are interested in assets if they are strategic, which means either that they are assets that are associated with health systems that are in markets that are strategic for us or there’s ability for us to bring our very experienced outpatient medical management processes to these assets to create upside. So that’s how we look. We’re not just looking to grow that outpatient medical portfolio by acquiring low cap rate assets where there’s no upside or strategic value for us. That’s why you’ve not seen us participate in a number of the auctions to date.

Your next question comes from the line of Eric Fleming with SunTrust.

I wanted to follow-up actually on that medical office comment you just made. So in terms of talking about your strategic markets there, is that -- you’re going to -- kind of what you’ve hinted at with the Johns Hopkins relationship, where -- is there -- is it more looking to add medical office into areas where you already have senior housing and post-acute facilities that you can leverage across those operating sites?

That is -- you get our strategy. Our strategy is built around major metro markets where we have senior housing assets, and that is where we will likely see -- you’ll likely see us try and accumulate outpatient medical assets.

Your final question comes from the line of Michael Knott with Green Street Advisors.

Is the eventual migration that was talked about earlier from triple net senior housing to RIDEA, is that going to be more of an opportunistic endeavor that will still take quite a long time? Or is there something a little bit more systemic or something that happens more quickly on that front?

It is going to be opportunistic, and it will be dependent on one asset at a time. So I don’t want you guys to take away from this call that we are looking to convert our triple net senior housing portfolio into RIDEA. It depends on, as we describe, at least in the Sagora transaction, we found a subpool of assets that we think have tremendous growth opportunity going forward because of the submarket they’re in. And as John said, if we think that the assets will grow with the market, they’re likely to be in triple net portfolio. If they are -- we’ll get market-plus growth, they’re likely to be in a RIDEA portfolio. But there is no effort inside our company to convert all the leases to RIDEA going forward. Asset by asset, operator by operator, market by market.

When it makes sense.

When it makes sense.

Right, okay. And then last one from me. Are you willing to give any guidance on where your skilled nursing, post-acute, NOI percentage of the portfolio will land after these planned dispositions?

Stay tuned. As I said, I hope that we’ll have a very robust conversation about this topic soon. But as you can appreciate, Michael, it’s hard to comment on live transactions.

Sure, okay. And then, maybe that same comment will apply to this one, but do you plan or expect that there’ll be further SNF dispositions later in ‘18 after this current round is finalized?

So we -- as Tom mentioned, we’re very focused on asset management and focused on optimizing our portfolios. A portfolio of this size will always have disposition, but we believe that if we can get to sort of the level that we are trying to get at with different asset class, different product types, different operators, we’ll probably hit more of a stabilized in our portfolio soon, and from there, it’s opportunistic going forward.

Thank you for dialing in to the Welltower earnings conference call. We appreciate your participation and ask that you disconnect.