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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2017 Welltower Earnings Conference Call. My name is Nicole, and I will be your conference operator today. At this time, all participants are in a listen only mode. We will be facilitating a question-and-answer-session towards the end of this conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.
Now, I would like to turn the call over to Tim McHugh, Vice President, Finance and Investments. Please go ahead, sir.
Thank you, Nicole. Good morning everyone and thank you for joining us today to discuss Welltower’s fourth quarter 2017 results and outlook for 2018. Following my brief introduction, you will hear prepared remarks from Tom DeRosa, CEO; Mercedes Kerr, EVP, Business and Relationship Management; Shankh Mitra, SVP, Investments; and John Goodey, EVP, 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, I want to highlight a few significant points regarding our 2017 results. One, we realized full year total portfolio average same-store growth of 2.7%, at the high end of our original guidance, driven again by the consistent outperformance of our senior housing operating portfolio. Two, we continue to opportunistically take advantage of favorable capital markets through disposing of 1.5 billion of non-core assets and raising over 600 million through our DRIP and ATN programs at an average stock price just above $71 per share. And three, we have redeployed that capital in a very disciplined manner, extinguishing 1.4 billion of high coupon debt in preferred securities and recycling 1.2 billion into high quality acquisitions and developments, finishing the year with a well capitalized balance sheet and a 94.2% private pay mix.
And with that, I will hand the call over to Tom for his remarks on the year and the quarter.
Thanks, Tim. In the most challenging environment we have seen for weeks in a number of years, I am pleased to report Q4 2017 financial results, our outlook for 2018 and some important strategic initiatives that all speak to our optimism about the power of the Welltower platform. We run this business to be the most effective global capital and operating partner to the broad healthcare delivery landscape including senior housing and have not been afraid to make bold decisions regarding people, capital deployment, asset mix and operator alignment to ensure our ability to drive our strategy and deliver shareholder value for years to come.
Here are some highlights. Despite headlines of oversupply and flu, our seniors housing operating portfolio continued to deliver solid growth throughout 2017 and the outlook for 2018 remains positive. We delivered on our strategy of tying major health systems to our business platform as is evidenced by our Mission Viejo JV with Providence St. Joseph's, the third largest health system in the U.S. and Simon Properties, the world's most prominent mall owner.
We announced 1.2 billion of gross investments for 2017 and by month end we will have closed on a 0.5 billion of accretive new investments in 2018. We negotiated a successful restructuring of Genesis Healthcare that has significantly enhanced the credit quality and sustainability of the Genesis business model. I am sure you are all waiting to hear more about that from our friend, Shankh.
Now, Mercedes Kerr will give you an overview of new operator relationships, new relationship investments in Q4, and her view on how we expect to grow in 2018. Mercedes?
Thank you, Tom. As detailed in our earnings release, we completed $334 million of growth investments in the fourth quarter of 2017 in the form of acquisitions, development funding, and loans at a combined average yield of 6.6%. For the whole year of 2017, our investments totaled $1.2 billion and had a combined average yield of 6.9%. Consistent with prior period more than two-thirds of our investments in the fourth quarter were completed on an off-market basis and 80% of the transactions completed in the fourth quarter of 2017 or repeat business. Our focus on off-market relationship based transactions is possible because we have purposefully assembled a roster of best-in-class partner with scalable business model.
Our unique operator alignment features incentivize us to grow together, so our partners often help us to find off-market opportunities themselves. This was true into fourth quarter when we expanded our relationships with new perspective, Sagora Senior Living, Florida Medical Clinic and Ascension. As well as our recently announced acquisitions with Sunrise Senior Living where we are buying four rental CCRC communities for $368 million at an above market yield of 7%. These project returns are especially noteworthy given the highly desirable markets where these properties are located such as Washington DC and Miami. I should add a note of congratulations to Chris Winkle and the rest of the team at Sunrise Senior Living which was recently ranked the highest in customer satisfaction among Senior Living communities in J.D. Power's first ever Senior Living satisfaction survey. It's great to see them recognized for their hard work.
Every year we selectively identify new operators and healthcare providers to bring into our fold. In the fourth quarter, we were proud to introduce Summit Medical Group to our portfolio. This is the oldest and largest physician-owned multispecialty medical practice in New Jersey. We also announced a new collaboration with Mission Hospital, part of the Providence St. Joseph health system, a formidable and progressive healthcare provider. Our project together at The Shops at Mission Viejo speaks to the evolution of delivery of care model and how Welltower and premier health systems can partner to bring state-of-the-art infrastructure solutions to the market.
Since the start of 2018, we also expanded our relationship with Cogir Management Corporation by bringing them into our partnership pool. We are extremely pleased to have created a joint venture vehicle with this important next generation Canadian operator and look forward to working with Mathieu Duguay and his team in this new construct. I want to take a moment to speak about the flu, which can impact senior housing revenues and expenses through a voluntary and mandatory additions spend, higher than average move outs due to illness or death and also with higher cost anytime that caregivers are temporarily replaced by agency labor when they are sick.
We monitor these trends closely and we know of individual cases where flu has impacted our communities. This year's flu season has been the subject of headlines due to its severity and wide spread nature and its mostly in report, the CDC is calculating a 130% increase thus far this season in outpatient visits related to influenza-related illnesses for individual 65 and over in the United States when compared to last year, and a 92% increase when compared to the difficult 2014, 2015 period. The season is not over, so it's hard for us quantify the precise impact of the flu at this time.
Having said this, we’re satisfied with the work our operating partners are doing to care for their residents and staff and also to minimize the financial impact the flu may have on our communities. Finally a quick comment about Brookdale Senior Living's announcement this morning, we hope that their decision to end their strategic review process which has been the focus of much of management attention for a protracted period, will now allow them to get back to the basics. That we’ve said before, we're satisfied with our portfolio holdings with Brookdale and we will continue to collaborate with them going forward just as we have before.
With that, I will turn the call over to Shankh Mitra.
Thank you, Mercedes, good morning everyone. I will review our quarterly operating results reflect on our full year 2017 operating performance relative to our initial expectations and provide you with our preliminary assessment of 2018 operating environment with a specific focus on our SHO portfolio. Our same-store portfolio grew 2.1% in fourth quarter bringing the total average same-store NOI growth to 2.7% for 2017 towards the high end of our initial expectation of 2% to 3%.
Our senior housing operating portfolio grew 1.5% in fourth quarter, which was below our expectation for the quarter. Late quarter occupancy declined due to flu, contributed to this performance. This has tempered our outlook for 2018, despite that we believe will have a year of positive same-store NOI growth in that business representing a significant relative outperformance due our best-in-class assets and affluent markets run by premier operators.
Specifically our 2018 outlook for SHO portfolio is flat to 1.5%. As you know actual results will be driven by a combination of rate growth, occupancy and expense growth. Low 3% rate growth, 50 to 100 basis points of occupancy decline and a 3% to 4% expense growth built to our same-store NOI growth expectation. We set our initial expectation of 1.5% to 3% growth in SHO portfolio for 2017 and achieved 2.5%, however, this was done through a different combination of rate, occupancy and expense good then we thought. Rates were better, occupancy was lower so were expenses.
In addition to our operator focus relationship strategy, our heavy investment in data and analytics capabilities are starting to bare fruit. We’ve outperformed in the up cycle and was continued to outperform in the more mature part of the cycle. We’re confident that this superior relative and absolute performance over the entire cycle every year on a consistent basis was ultimately a result in significant differentiation in cost of capital at some point in time. Another important update for the quarter is regarding Genesis, as we started this journey our focus was to maximize shareholder value on our total capital committed to Genesis.
Since we last spoke to you in November, we are continued to be encouraged by the relative stabilization of cash flow in our retained portfolio. Additionally important changes have taken place in this relationship. As Genesis announced last night, they have come to a restructuring agreement in which all of the credit parties have come together to recap Genesis' balance sheet and put the Company in a position of strength. A key element of this structure is an injection of $555 million of fresh capital into the Company by Midcap Financial Trust, a wholly-owned subsidiary of Apollo Global Management, a strong vote of confidence in Genesis and the industry.
This recapitalization is a critical step in Genesis' previously announced broader effort, which is expected to result in 80 million to 100 million of annual fixed charge improvement through the combined effort of the multiple credit parties. Our main contribution to this restructuring is a reduction of $35 million of annual cash rent as I mentioned in the last call. However, we also negotiated a five year lease extension and an option to reset the rent to after five years to recoup that $35 million. Genesis also committed to payback $105 million of loans by April 1st.
So, so far we have sold $1.9 billion of Genesis loans and real estate with a realized IRR of 10.3% and with today's restructuring Genesis is now 5.2% of in place NOI with a pro forma trailing 1.34 times of EBITDAR and 1.7 times EBITDARM coverage at the profit levels, with the corporate guarantees that is significantly stronger. As with any asset in our portfolio we retain the complete optionality with this high quality PowerBack heavy portfolio in the future. Since the $400 million Genesis purchase option expires in March of last year, we have been communicating multiple possible path of action while negotiating with the public tenant that has been in clear need of a recap for last two years.
We have aim to keep our investor attuned to all possible outcomes while maintaining a public negotiation posture that ensure our optionality in order to maximize our shareholder value. We feel strongly that our approach with Genesis has substantially enhanced our flexibility and providing the highest value outcome for our shareholders while minimizing reliance on any one operator. Today we have a maturely strengthened corporate credit standing behind a well covered lease which is in the stark contrast of what you're seeing in the industry.
A recapitalized Genesis refocus on its core market is forced to win market share, more broadly in context of shrinking supply and a pending demographic surge, demand for skilled nursing bids is projected to surplus inventory by 2025. While the $35 million income loss is not ideal though necessary in the short term, we will participate in this positive trend through our rent reset provision occurring in year five of the restructured master lease.
We'd like to thank you our shareholders for supporting us in this transformation journey, as dispassionate capital allocators we change when facts change. It is important to summarize that we're noticing the following changes. Operating performance is stabilizing in our retained Genesis portfolio. Two, a material credit improvement as a result of Genesis recap has happened. Three, we feel a tectonic shift in the sentiment of smart investors towards us for secured space, all publically announced deals you have noticed the Humana, Welsh, Carson, TPG in case of Kindred and now MidCap forward in case of Genesis. We believe you'll see more. Number four, we preserve full optionality going forward.
With that, I'll pass it over to John Goodey.
Thank you, Shankh, and good morning everyone. It's my pleasure to provide you with the financial highlights of our fourth quarter and full year 2017 and our guidance for 2018. Despite the challenging U.S. senior housing market conditions you have heard about from others, our portfolio delivered solid financial results for Q4 and in 2017 overall and we are positive on the prospects for 2018. Once again our superior portfolio, excellent operator relationships as well as the strength of the Welltower platform to allocate capital and asset manage have enabled us to outperform our peers. In addition, it is noteworthy that our 2017 financial results are being delivered in a year where we've also continued to refine our portfolio and lower our financial leverage.
In 2017, we generated $1.5 billion of dispositions with a gain of $344 million realized and a realized IRR of 11.3% and further improved our balance sheet to be one of the lowest leverage in the REIT industry. These actions placed us in a strong financial position to pursue our strategic plan in 2018 and beyond. As detailed by Shankh, our show portfolio grew by 1.5% in Q4 2017, with seniors housing triple net and long term post acute both growing at 2.8% and outpatient medical growing at 2.0%. Overall same-store NOI growth was 2.1% in the quarter and averaged 2.7% for 2017 overall. This quarter's growth was augmented within quarter acquisitions and joint ventures of $223 million along with a $142 million of divestments and loan payoffs. They've enabled us to report a normalized Q4 2017 FFO result of a $1.02 per share.
Overall, we delivered $4.21 of normalized FFO per share for 2017 in total. In addition to this quarter's joint ventures and acquisitions, we've completed $42 million of developments bringing full year deliveries across all operating segments to $548 million at a stabilized yield of approximately 7.3%. We're truly excited by the future earnings growth potential of these new state-of-the-art buildings. In Q4, we normalized a number of items including allowance for $63 million relating to a Genesis loan restructuring. We also normalized $58 million of non-controlling interest in unconsolidated equity impairment, the majority relating to write down to certain non-consolidated JV investments.
In addition, we also normalized $60 million of other expenses and transaction cost, $41 million of which related to the donation of our Toledo headquarters and $18 million of which is a mark-to-market impairment against our Genesis public shareholding. Additionally, we normalized $17 million related to a deferred tax and valuation allowances including the impact of a Tax Cuts and Jobs Act. Welltower continues to focus on our own corporate operational efficiency by further optimizing systems, processes, human capital and physical infrastructure.
Our G&A for the quarter was $28.4 million a 13.5% reduction over Q4 2016. For 2017 overall, we reduced our G&A by nearly 21% compared to the year prior. We continue to implement further initiatives to improve our operations and efficiency in 2018. Our balance sheet remains in great shape and leads our peer group. We will continue to maintain balance sheet strength and financial flexibility. During the fourth quarter, we extinguished the $137 million of secured debt bringing our full year retirement of debt and preferred securities to $1.4 billion at a blended average rate of 5.4%.
We ended 2017 with cash and cash equivalents of $244 million and a $2.3 billion of available borrowing capacity under our line of credit. Our leverage metrics remain at or near historically low levels with net debt to adjusted EBITDA of 5.4 times with a net debt to un-depreciated book capitalization ratio of 36.3%, and our adjusted fix charge cover ratio remains strong at 3.4 times. Based on announced 2018 acquisitions and planned dispositions for the year, we see year end 2018 leverage being in the low five times net debt to EBITDA area.
Our debt maturity profile remains well controlled and we will opportunistically access bond markets in 2018 to further manage our profile. As we previously noted to you, our deep liquidity position affords us significant flexibility to pursue value enhancing acquisitions, development opportunities and to reinvesting in our portfolio to drive growth. I will conclude my remarks with our outlook for 2018. As noted in our earnings release, we have adjusted our overall same-store NOI and long-term post-acute growth outlooks for the impact of the $35 million Genesis Master Lease restructuring.
Starting with same-store NOI, we expect average blended same-store NOI growth of approximately 1% to 2% in 2018, which is comprised of the following components. Senior housing operating approximately 0% to 1.5%, senior housing triple net approximately 2.5% to 3%, long term post-acute care approximately to 2% and 2.5% and outpatient medical approximately to 2% to 2.5%. We anticipate funding developments of approximately $297 million in 2018 relating to project underway as of December 31, 2017. And we expect development conversions during 2018 of approximately $413 million, which are currently expected to generate stabilized yields of approximately 8%.
We’ve incorporated approximately $1.3 billion of disposition proceeds at a blended yield of 7.2% in our 2018 guidance. This includes approximately $553 million of proceeds from dispositions previously expected to close in 2017 and $741 million of incremental proceeds from other potential loan payoffs and property sales. We also replaced the 2017 Genesis disposition placeholder of $400 million in proceeds with $225 million of expected dispositions and loan paying downs this year. This comprises of $120 million of non-core property sales, representing approximately 10% of our portfolio, which are in advanced negotiations stages and $105 million of expected loans payoffs tied to the Genesis restructuring recently announced.
Moving to G&A expenses, we anticipate 2018 general, administrative expenses of approximately $130 million in 2018. This level remains significantly below our G&A spend for 2015 and 2016. Based on the above, the aforementioned Genesis restructuring and other items discussed, we anticipate 2018 normalized FFO attributable to common stockholders to be in the range of $3.95 to $4.05 per diluted share, with normalized net income in a range of $2.38 to $2.48 per diluted share. As usual, earnings guidance excludes any additional acquisitions beyond those which have been announced, but does include our planned dispositions.
I am pleased to announce the Board of Directors approved the 2018 quarterly cash dividend at the maintained rate of $0.87 per share being $3.48 per share annually. As such on February 21, 2018 Welltower paid its 187th consecutive quarterly cash dividend, the current annual dividend represents the yield of approximately 6.4%. Based on our overall outlook for 2018, strong liquidity position and our high quality portfolio poised for growth through operational gains, accretive acquisitions and development pipeline delivery, we remain comfortable with our dividend at this level.
With that, I'll hand back to Tom for his closing comments. Tom?
Thanks, John. When I became Chief Executive Officer, almost four years ago, it was the tailwind of a rapid asset accumulation period. I knew that was not sustainable nor was asset accumulation a viable long-term business strategy. Since then, we've taken advantage of strong asset pricing, and by year-end 2018, we will have sold nearly $5 billion in real estate at an IRR of 10.5%. While radically improving the overall asset quality, we also massively de-levered the balance sheet.
You now know about the plans for Genesis. Three years ago we made the strategic decision not to abandon the post-acute sector. This is a critical component of the healthcare delivery continuum and we see a role for Welltower in reinventing how this sector operates and is capitalized. From here Genesis has a stronger capital structure and a refocused business strategy on its core markets, to effectively participate in value-based care.
It feels like we're coming to the end of our asset optimization journey, and I believe both sides of the balance sheet are now positioned for growth. I want to thank the shareholders who have stood by us through this process. We benefit from a business construct based on an operating platform that is focused on delivering real estate settings that promote wellness and provide healthcare at lower costs than acute-care hospitals. This platform is built upon our unique alignment with the leading senior housing companies operating in major urban markets in the U.S., Canada and the UK and health systems like Providence St. Joseph's.
I am also now proud to say that I work with the smartest, hardest working, most diverse and highest integrity team in this business. This team is now completely aligned around the objective of driving long-term shareholder value. On February 28th, we shared our old stock symbol for one that speaks to the strategy, W-E-L-L, now WELL will bring wellness to the attention of the global financial markets as well as Welltower. Now, Nicole, open up the line for questions please?
[Operator Instructions] Your first question comes from the line of Vikram Malhotra with Morgan Stanley.
Shankh or maybe Tom, just sort of stepping back on your last call, you talk about sort of providing a rent cut and simultaneously doing an asset sale, the size obviously was not known, but at least I took it as being a fairly large chunk of the portfolio. You sort of walked through some of the components of maybe what's changed, but maybe if you can elaborate what has changed between then and now, and more specifically on the outlook given, what you're seeing right now, should we expect potentially more dilution from any further asset sales on Genesis?
So, Vikram, I'll tell you the few things have changed, right. If you think about Genesis management has done an extraordinary job of bringing all its credit parties together, just not real estate owners, but all the credit parties together to get to a point of a sustainable capital structure, that's extremely important which we thought basically they're making progress. But they have really surprised us on the positive side for bringing $550 million -- $5 million of fresh capital into the business. So, that's something financially puts the Company in a position of strength going forward. But more importantly for our retained portfolio as you can see our portfolio now is obviously is a much smaller portfolio that is much more focused, it’s PowerBack heavy and we see for us a long time as I mentioned and stabilization of cash flow in that portfolio.
So that's one of the other things have changed. So operating performance has changed, credit quality has changed. Now as you can imagine that as capital allocators we look at every asset in our portfolio on sale, right. So, we're looking at this asset quality that we owned, we know the coverage we know what the operating -- really the operating outlook for those buildings and we're thinking at these prices is a buy, is it a hold, is it a sell. And I don't know the answer to that question like every asset that Genesis assets are also for sale at the right price. We retain complete flexibility and are slightly going forward. I'm not going to tell you that we'll not sell further I'm not also going to tell you so those assets will not be sold. So that sort of the messaging is we change when information change when facts change. And Genesis today is drastically a different operator that it was 90 days ago.
And Vik, let me add to that that we always look to enhance optionality in terms of how we manage this business and the strongest statement I can make to you is because Genesis is a dramatically stronger credit based on this restructuring going forward it means that Welltower is a stronger credit going forward.
Got it and just to clarify that I think you alluded to the fact that you're now in a position to sort of grow cash flow, grow earnings. Would it be safe to say that assuming there are not too many changes from here on and you keep things intact? Would you be in a position actually grow cash flow AFFO and see very little dilution, if any from Genesis?
We hope so Vik, that’s how we run the business.
Vik, as Tom said, like we like we’re at the towards the end of that journey, whether we’re in the seventh inning or eight inning, I can't tell you that, but definitely as everybody else seems to starting that journey which feel like we’re at the very end of that journey. We always looked to asset manage our portfolio. There will always be something for sell, but we feel confident with our balance sheet and with hopefully where we're in the cycle that we will be able to deploy capital as you've heard from Mercedes and Tom.
So, I’ll emphasize the fact that we made a number of tough decisions when the wind was at our back. We’ve never felt the wind less at our back then we do right now. And I'm very glad and you should be glad, we did take those tough decisions when we did them because this is not the time to be starting that. So I want to emphasize, we do believe we're kind towards the tail end of this journey, and we're -- that is what speaks to the optimism that you've heard from everyone here on this call today about the future. We’re very optimistic about the role that Welltower will play in fixing healthcare delivery. And if you red line certain sectors of the healthcare space or at least the non-hospital healthcare space, you reduced your ability to participate in this change which we believe will drive significant shareholders value in the future.
Your next question comes from the line of Michael Mueller of JP Morgan.
Couple of questions, so on the same-store NOI growth, if you would go in and I guess not adjusted for the 35 million ramp reduction. What’s the post-acute same-store number and the overall same-store growth?
So that was the question, if we've adjusted -- not adjusted, if we just as per the January 1 rent cut rate, I think it's at the midpoint it's minus a 12.25%.
And for the total portfolio Mike it's positive 0.5% to negative 0.5% midpoint of flat year-over-year.
And then, you talked about the pro forma Genesis coverages. What where the coverages beforehand? So how much improvement is there with all the transaction that had been announced?
If you look at our coverage, we will give you a range. And if you look at the range and the sub, which you will see that it was close to one. And it's very important question Mike, because if you think about the history of rent cut in this sort of rent free profile in this sector, you will see that majority of the times, the landlords have taken the tenant back to sort of one coverage, did not give them flexibility investment in the business, did not give them flexibility to actually grow their business. And that's why they went back to where they started, right. So we absolutely did not want to do that. As Tom said, we’re never afraid to take bold decision. This was needed and it happened. So, we feel like going forward that you can feel a very significant assurance that we have taken where we didn't kick the can down the road.
You next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.
So, today's news doesn't sound exactly like you're recommitting to the skilled nursing business or to Genesis per se, but it does sound at the margin that you are willing to hold today rather than be a seller at an excessive discount. I am wondering; one, if it's a fair characterization; and then two, would you be willing to invest in incrementally in Genesis beyond the incremental term loan piece you are lending?
Jordan, if you think about a triple net lease is a credit, right. So, with our credit significantly improved at the property level from a coverage perspective, as I also said the most important thing is the, EBITDARM coverage of above 1.7, and remember, management fee subordinate to the rent payment, right, and it is guaranteed by the corporate. So at every level you look at it, the three levels of stratification is materially improved.
So, I want to reemphasize that point, and I also want to reemphasize the point the rent reset that I talked about. So, if you look at the demographics and negative supply, if you believe in the demographics and you believe that nothing is going to change from a utilization perspective, there's going to be crisscross of demand and supply, not too -- in a not too distant future. And we'll be able to recoup that $35 million of rent as I said.
Will we invest in Genesis going forward? We are, already are. If you look at, we have a PowerBack development, that's in progress and we believe in that model, so if there're other opportunities to invest in that PowerBack hub and spoke model that Genesis drives its business from, we'd be happy to do that, that's no change from what we have done.
Jordan, you've heard me say consistently that we are not going to abandon this sector. Why do I say that because when you interact with the leaders of healthcare in this country, which are the CEOs that run the major regional health systems, they all say, they need a viable post-acute care option. The problems that the REIT sector has been dealing with were capital structures that were not sustainable given some of the changes that occurred in reimbursement.
And as Shankh said and I say a lot, you can continue to kick the can down the road, until you just keep kicking the can at the wall and it keeps coming back at you. What we've announced last night and what we've -- are talking to about this morning is a fix that needed to happen years ago, but the industry kicked the can down the road. We have fixed the Genesis' capital structure, not just Welltower, it was every one of their capital partners, and we brought in a new capital partner.
I think that says something about the future of Genesis, so we are in the business of maintaining and enhancing optionality. Optionality for where we deploy capital in the best interest of our shareholders. And so, nothing has changed, you've heard me say this, consistently, and I took a lot of stones and arrows for saying it. But I think our strategy will prove out to have been in the best interest of our shareholders.
Yes, no that's consistent I think with the messaging you've relayed over time. So my follow-up is really on Genesis again, I don't know if this is for John, but specifically as it relates to guidance. What is the total loan forgiveness that you either recognized in 4Q and that you expect to recognize in '18 of the $400 million plus or so that you've got to Genesis, you had to Genesis? And then what's the embedded total interest income that's in the $4 FFO guide?
Jordan, I'll answer the first part of the question, the answer is zero. We have not forgiven loans. We have reserved against those loans. So there is a significant difference in that and that you know and two hidden in your question is, something that I saw a lot of confusion about, if you go back and look at our financials for the last two quarters and see what we said our entire Genesis loan book was in payment in kind, we gave them as they were doing the whole restructuring for last few months. We did not go through a part cash, part payment today. We went from a complete pick to a part cash tactic payment today. And with that, I will pass it over to John.
And so I think on the penny front, Tim's got the answer for you on the actual pennies recognized in FFO from Genesis loan.
So part of that answer is and this is important to know this on a few notes this morning, we are just recognizing cash interest on Genesis in 2018. So in our FFO guidance, this morning is just the cash and as noted in both Genesis' release and that's prior to this, there was no -- these loans picked from 11/15 to the November 15th of last year through February 15th of this year. So if you look at the full year of 2018 important to note from January 1st to February 15th it was all pick and we did not recognize that through FFO. That's roughly a penny on a cash basis income that if you went full year for recognition we would have recognized and then for the rest of the year the pick component represents about five pennies that we have not recognizing through FFO. What we are recognizing is about $20 million of interest income in our 2018 numbers.
Okay so on the forgiveness piece, did -- I guess I'm confused because I'm reading the piece about the bridge loans, the 275, they have you want them to repay no less Genesis can do to make progress they've to pay no less than a $105 million of obligations. What happens to the 170?
As part of the announced restructuring for both Genesis and ourselves this morning is a commitment based upon contingency of having a financing partner step up in that $105 million of refinancing. The remaining piece is assumed to be outstanding for the rest of 2018. That 170 will be current cash paying, it is current cash paying right now because after February 15th, it went back to cash paying. And the assumption in our model is that $105 million is paid back around midyear and the remaining piece of that real estate loan and the term loan remain outstanding for all 2018 and are cash paying.
I don't think I'll just reiterate, Jordan, what Shankh said. We have not forgiven them loans we have taken a reserve again because some of this is collateralized that we have to test the collaterals that's underneath the orders as you can imagine make us do that. And that was the reserve that we have to take relates to the collateral, not to a write down of the loan, but Genesis will therefore be forgiven. So, there is big difference to Shankh that we've not forgiven the 60 million write down.
Your next question comes from line of Daniel Bernstein with Capital One Securities.
I just want to make sure I understand the 5.2% exposure to Genesis, is that including further loan pay downs or just where it is today?
The 5.2% is, so the way that we calculate our employees NOI is off of just our property NOI, so if you think about as of the end of the fourth quarter, what's currently in our supplement, pre rent cut is a 7% exposure to Genesis. The 5.2% is pro forma for the rent cut. So it's just…
As well as the asset itself.
Yes as well as the health for sales assets as 12/31 that 5.2% is essentially as our pro forma NOI exposure to Genesis after rent cut and asset sales.
You see if the change in view in Genesis so much the improvement of credit, but also the improvements at the property level, I think you mentioned that a little bit in your comment. So just want to understand a little bit of better. What's changing at the property level or operational level or Genesis, that makes you a lot more confident in the company there in your assets?
If you look at again I want to emphasize the fact in our retained portfolio. There is a portfolio that and obviously we're selling now that is transitioning out of Genesis an operator, Genesis has sold and in process of selling lot of none core space. It is important to understand they are refocusing on the core markets, core markets where Genesis always has done very well. In our retained portfolio, which is as I said is very power back heavy we’re seeing cash flow stabilization after long-term and we believe that if you think about how this plays out that we will be able to grow cash flow in the future.
So that’s one of the points and credit is obviously very self explanatory if you can look at the coverage and you look at the EBITDA coverage and EBITDA coverage, that significantly improve above market coverage and the corporate guarantee is extremely important here, which is today with the Genesis -- if we look at the Genesis debt to EBITDA got almost that in half, that definitely an improvement in the credit. So that’s where why feel optimistic again that sound say we can all of our optionality as in any part of our portfolio.
And just real quickly on the demographics, I mean that you talked about in skilled nursing, it sounds like you would apply to seniors housing. Last quarter, you talked about may be looking for opportunities to move some more triple net, leases perhaps RIDEA is that still something you’re thinking about working on?
This is Mercedes. Hi, we look at that obviously just selectively with our operators, I mean there is a lot of things that we might take into consideration as you know, we like to invest in RIDEA when we think that there is a lot more opportunity for upside then downside risk. And so yes, from time to time there might be portfolios that we're seasoning and the triple net structure that might actually become candidate for a conversion to a partnership and we don’t have anything to talk about right now but that something that we obviously look at all the time.
Your next question comes from the line of Tayo Okusanya with Jefferies.
My first question is around your same-store NOI outlook for the Shop portfolio. You guys do have an outlook that is positive, your peers have outlook that are generally negative. I am just curious, if we just talk a little bit about why your outlook is much more bullish than theirs?
So, Tayo, I mean it's a very good question. I would like you to look at our performance relative to or peers, every year for last seven plus years that we've been in the RIDEA business. That will give you the answer, but it is really -- it speaks to the quality of the portfolio and the operators and micro markets. So, you know, we have invested -- so if you think about how this industry has evolved, if you are mostly triple net investors, right, I mean you are investing in credit, investing in RIDEA invested in real estate equity that requires a different type of skill set.
And we're the ones who have invested in technology, in people, in data analytics and asset management. So, you've seen the impact of that pretty much every year probably every quarter and that outperformance should not be surprising, but we're obviously as I said that if you look at over a period of time we hope that will give a better cost of capital, that hasn't happened yet but hopefully people will accept that we have a much better quality portfolio.
And I do have to add that it also has a lot to do with the operators that we have partnered with, so it's a combination of great locations, a high barrier to entry markets, asset quality, but it's also of course having to do with the operators that are in the trenches and that are also willing to collaborate with us and the initiatives that we are trying to source for their benefit and for the benefit of the residents who live with them.
A lot of it comes from not being a passive owner of senior housing real estate. We see ourselves truly as an operating partner, and that drives better results.
And then just to confirm with Genesis it's as a result of the recapitalization plan that these zones are now casting rather than the status that we're at back in November, correct?
Correct.
Your next question comes from the line of Rich Anderson with Mizuho Securities.
If I could step back to November, December timeframe, could you describe what was going on there? Did you kind of have some sort of clairvoyant moment where heck, we better keep the Genesis assets and that's what rolled up to where we are today? Or did you -- was it, you kind of backed into the situation where you weren't getting the pricing you wanted, you weren't feeling like the rent cut in asset sales were going to protect your dead investments, and so the market worked against you and now you're kind of like woo, I'm glad we didn't sell at that time because of all everything you're saying on this call. I am curious the chain of events that got you to this point, was it luck or skill?
Probably a combination of both; if you look at what happened is it we always said that you know you think about what we're doing, right, effectively Genesis management as I said pulled off an out of code restructuring with all its credit parties that you never know that will actually be able to get to the finish point, right, finish line. Second, we absolutely did not think they'll be able to get fresh capital of the size that they did from the entity that they did. So there's one point you know, you are always interested, Rich, as an observer as a long term observer of the industry, how the tea leaves are changing. I would like you to see what happens in that time frame with Kindred and Humana, Welsh, Carson.
You can see today what happened with you know obviously fresh injection of capital, I can talk about a lot of other things because they're non public in nature but things that are happening in the industry, so going back to way specifically to your question do we have the ability to do a transaction, absolutely. Did you get the price that we wanted, absolutely? Is that counter party still around for us to do a deal? The answer is absolutely. So the question is today as we are thinking about it at 134 coverage with a company that has leverage has been cut in half right, from the 7 to 3 is this group of assets we have culled a part of the portfolio you heard from John right, the 10% of the portfolio. At that price is this a buy sell or hold.
That's what we think about for every asset class. I share the enthusiasm of the market participants have about 4.5 cap asset classes that grows 2% but think about at the end of the day we are here as a capital allocator to make money, despite all the noise around Genesis our unlevered IRR is double digits. The math that I just mentioned which you know in low 4% mid 4% cap rate going in with a 2% growth with a 12% or 15% you know CapEx you will never even get to 7. We're here to make money for our shareholders and every time we are making a decision on group of assets to see is it a buy, hold or sell. That's what we did.
Okay, follow up question is you know essentially what are shareholders paying for you know this Genesis lifeline and I'm not saying that tongue in cheek, clearly the fortunes of your tenants accrued to the REIT. So it is what it is. You did what you had to do but going forward you know you kind of get into this risky thing where we don't want Genesis, we do want Genesis, we don't want Genesis sort of if you ultimately were to sell more you know it kind of changes the narrative. So is there some risk that you kind of put yourself into a corner and almost have to commit going forward? Or you don't feel that way?
That is precisely what we did what we did. Tom said every call that were not getting out of the post-acute business right, triple net lease is a credit commitment right, we're happy to make that commitment if we get the right price investing in real estate is all about basis. So if we get the right price we'll sell, if we don't get the right price we think this is something that our shareholders can enjoy the cash flow growth we'll do it. But we absolutely believe it is de-risked not only from the position of coverage but all the escalators are downright from 2.9% to 2%, that should be appropriate for the business in the footprint that they are. So you know we have never flip-flopped should we sell Genesis, not sell Genesis. We're looking at all of our assets and thinking is it a buy, sell or hold at the price that the market is willing to bear.
We actively manage our business and like any business things change and we have to be able to be flexible to do what's in the best interest of the business which is ultimately in the best interest of the shareholder. The public markets were screaming at us to have taken a different approach with Genesis. I think we took the right approach. You may want to debate that with us and we're happy to debate that, but I think we took that we did the responsible thing for Genesis and for our shareholders. And I think that will prove out versus other roads we could have gone down.
Your next question comes from the line of Michael Carroll with RBC Capital Markets.
Tom, I wanted to dive a little bit on your comments on the prosecute phase. What is your outlook on the reimbursement changes? Where do you believe we're in this transition and are the major shift from the prosecutor space, now behind us?
I think it's very difficult to predict what will happen in Washington, the only thing I can say is that you've seen the current administration look for ways to take some pressure off, suppose to space with respect to litigation. So, I think that we take some comfort in the fact that there is a recognition that we have to drive individuals into lower cost settings. If the government continued to try and put the skilled nursing business because of their reimbursement programs, then we would have a much bigger problem in this country because people would be stuck in very expensive hospital beds.
I think there is a changing view in Washington and we hope that a rational thinking will prevail here. We need to drive people into lower cost settings. The health care industry, the hospitals are still trying to deliver valued based healthcare and fee for service build real estate that doesn’t work. We're will our economy will ham bridge, if we continue to think we have to keep hospital beds sold, we need to drive people to lower cost settings and so that is why we have never abandon this skilled nursing sector and it will be bumpy but we think now with the restructuring of Genesis, we have the right coverage and credit profile to would stand potential choppiness.
And so Mike that’s the most important point, there has been a lot of restructuring change, I mean lot of your reimbursement changes, other than RUGS-IV, none of them had been huge, they have been small, that 500 cut for sure, but why that has been amplified on a industry something that you know I would encourage all of you to think about, because of the massive leverage in the system, right.
If you think about what happen 10 years ago, people got really excited about ill chase and massively levered all these entities. And what we have seen this cycle is unwind of that. Has there been -- would have been choppiness even if you let equity finance all these deals, absolute -- probably would be, but this operators would be a in a much stronger positions. And that’s the key is post-acute industry like any other industry, but post-acute industry is a very interesting point in its lifecycle where they needs to be remained and recapitalized in a different way.
And I just want to clarify, your guy's stance on the post-acute care space. When you say you're committed to it, does that mean you just fund to kind maintain your exposure to Genesis and maybe for good deal pops around, you could grow with them? Are you underwriting new deals or you're looking for new investments outside of Genesis? Or do you just happy with your Genesis exposure right now?
We look to capital like, deploy capital, to good quality real estate in the right markets with good operators, in sustainable structures. So if all those pieces line up, and it's an interesting new post-acute operator for us, we will consider that, we would consider that if we think it's in the long term best interest of our business and the long term best interest of our shareholders. But no, we will not red line the space, because of some confusion about what's happening in the industry that was largely due to bad capital structures. Certain people made a lot of money, when these post-acute care companies found their ways into the hands of REITs, and REITs until RUGS-IV had well covered real estate, the world changed. And what you've seen us do is fix what was the problem that we've been dealing with for years. We think we've largely addressed that.
Your next question comes from the line of John Kim with BMO Capital Markets.
Turning to Page 11 on your SHO statistics, it looks like CapEx increased this quarter to 24% of NOI versus 22% in the third quarter. And I'm wondering A, why that occurred? And B, what is in the other CapEx, is that renovations or is that redevelopment CapEx?
So, the answer is quarter-by-quarter it does vary, we tend to historically understand our budget in the first couple of quarters, an overspent relative to the pro forma in the second quarter, that comes out roughly where we think. And so I think we do see some reinvestment in portfolios I think we've said on a number of calls, part of having a great balance sheet as we can, drive growth out of existing buildings through CapEx.
So as Shankh was saying, how do we look at capital, we look at the existing buildings on the buy wholesale mentality, for investing more capital, the capital doesn't come for free as you're well aware, so I think we do address capital requests in that way, and now the capital just -- it is added as other CapEx in those buildings in terms of our -- as I described, our I guess our significant reinvestment capital, as I described it I think.
Yes, and plus all the Vintage CapEx spent in the fourth quarter.
CapEx is above all, so we expect more normalized run rate sort of back towards normal, next year we don't have a substantially different view of CapEx need, this coming year than last year. Because there are number of projects we wanted to drive growth, but I'd say it again, we do that on a sort of ROI based model.
So, redevelopment CapEx is a separate bucket, this is more kind of renovation type work?
No, both.
You guys referenced Brookdale, the major announcement this morning. Can you just update us on your relationship with them going forward? Do you plan to reduce your exposure and sell assets or maintain it and also the rent coverage because I think last quarter you were mentioning that's 1.15 times just wondering given the outlook?
Yes, our portfolio is very steady, so like I said in my comments earlier, we are satisfied as that we're holding. We are always in conversations together. We have a lot of business together, so we feel very close to one another, so I expect that to continue. Other than that I guess I could just -- there isn't any -- anything that is glaring right now. We -- as you know always have options with respect to our portfolio, I mean that’s one of the real strengths of Welltower that we have such a diverse and geographically as well as in terms of different kinds of platforms you know operator based. And so we always have a lot of alternative, we feel always like we have a sort of a maybe a headstart in that perspective from that perspective compared to others so nothing here to report right now.
And when does your lease expire with them?
We have a couple of leases, few leases, three of them actually that are expiring later this year. We're not in a notice period with them yet, we again have had conversations with them about extending them. We have once again opportunities to put some properties with other operators and considering that the properties are you know -- these are covering of assets. We don't feel like there's any sort of friction that would come of it, if we had to move them to somebody else.
Your next question comes from the line of Juan Sanabria with Bank of America.
First question Vintage, what was the contribution to same-store NOI in the fourth quarter? What's the impact for 2018 guidance?
The answer to your first question is negative 10 basis points in the fourth quarter, I don't have the '18 guidance with me but I'll give that that to you later, I'll give you a call. The Vintage was a drag for fourth quarter because as I said -- and John said, that we spent a lot of capital on the renovation projects are going on in fourth quarter.
There's a lot of reams active commission in the capital store as well.
Which was part of our plan, Juan, let me just add something here we're talking about Vintage because if we're looking at this, we have to you know one of the value of that one portfolio was always kind of our long term outlook for the strains and the opportunities of having those really select markets, really markets that can be irreplaceable in some cases. And so just as they come in one of the things, even though we're working through all of the CapEx and [indiscernible] might be out of commission while we're working through all of that, I can tell you that the rate of growth in the Vintage portfolio actually exceeds the average Welltower growth rate which as you probably know exceeds the market average as well. So the cities themselves are the -- they're almost tenants holding out hopefully and that we think is an important driving decision for that investment.
So it's a benefit in '18 but it was a drag in the fourth quarter. Why was it a drag in the fourth quarter given the low occupancy starting point?
It’s a lot of CapEx as I said is being spent on Vintage right now, their renovations are going on. I would not necessarily think it will be a benefit to '18, it will be a drag in few quarters and benefiting few quarters right. I would be hopeful that Vintage as its run rate starts to help the portfolio growth starting '19. But as you can see from the CapEx page most of the CapEx started to get spend in the fourth quarter. So that's been a drag in Q1 and Q2 and you will probably see the impact of that in towards the fourth quarter of the year.
On the dividend what are you guys thinking about going forward, it looks like on your fad guidance it’s in the low to mid 90% payout ratio. So how should we think about that any risk of dividend cut at any point if you decide to sell more Genesis assets for whatever reason or are they high yielding assets?
No I think, when you look at our FFO pad ratio you know we feel comfortable with that, I think we’ve done a great job in the last, we think about it this way I guess Juan which is given in our output not an input and I think there is component to that, the first component is the quantum of your income stream to pay them and second is the quality of your income stream and obviously our FFO guidance for this year is down, by roughly 20 penny to the midpoint but the quality of that income steam is gone up very dramatically elements that refining our portfolio through 2017, elements of taking the rent restructure and genesis excreta.
So we feel very comfortable with the quality of that FFO given the stream which gives us comfort around paying the dividend that we proposed on both approved going forward. So we feel very comfortable with that, the other thing is we got a great deal of balance sheet flexibility, as you know we got a pretty much the lowest leverage balance sheet in the sector, so we have the financial flexibility on the balance sheet side as well.
I just amplify that in a very long-term based on the quality of the business model here because of the changes that we made, the asset quality, the improvement in the balance sheet and the strong cash flow from the decisions we made to improve the overall quality of that business, the dividend has never been more secure.
Okay just a quick question on genesis, is there any discussion with genesis with that formation with regards to dam tipping any equity or was part of this restructuring?
We talk to formation all the time, so I'm not going to get into any specific conversation about what we might and might going to have discussed with formation but you should assume that as majority on our sub genesis where in constant that information.
[Operator Instructions] Your next question comes from the line of Jonathan Hughes with Raymond James.
I don’t think I've heard this yet, but could you break down to your Shop guidance assumptions in terms of occupancy RUG-IV for and operating expense growth? And then may be how that occupancy comp should strength throughout the year given the strong flu season to start?
So I did -- I'll reiterate that for you. We’re expecting a low -- no, we're modeling, a low 3% rate growth that’s obviously we did, a 4% rate growth in '17, low 3% rate growth, 5,200 basis points of occupancy decline and a 3% to 4% expense growth. But as I said we will give you the, obviously this assumption at the beginning of last year, but we got to the same result, actually better than expected results using a different combination.
So I would not -- if I were you, I would not assume these are all independent variables, right? And see where we end up like we feel comfortable, they will be in the range probably through different combination, the rates could be better or they could be worse, maybe occupancy we're thinking down 50 to 100. It could be worse than that or better than that but expenses will be better.
So there are three levels that drive that number, so that’s how I would think about and now focus on one variable. And your other question was about, how occupancy will trend, obviously given the flu, you will see low occupancy at the beginning of the year, hopefully which will ramp back into the end of the year. That’s how, usually that’s how seasonality was in this business, anyway, so you will probably see that more pronounce this year because of flu.
Okay that’s helpful and then just one more on Shop. So with the national average U.S. renter I guess REVPOR like 4,000 a month in yours is north of 7. Is the new product under construction really even they're competitive to your properties? I mean I am assuming most of the newbuilds are going to price it about, 125% of markets that would be roughly 5,000 a month, just curious as to your use on how serious the new supply thread is to your U.S. Shop assets?
There is absolutely no doubt that the new supply is impacting our performance, but obviously it's impacting our performance lot less, than the market average and our competitors and one of the reasons is what you outlined, the another one is what Mercedes talked about is the quality of our operator. We have the best assets in the best submarkets, not only the markets, which is not only difficult to build, but also they're premier assets, obviously the quality of care and reputation of those assets in those markets matter, and -- do we think it's competitive? Absolutely, do we think that we're positioned better than our competition, rest of the market? Absolutely, yes.
Think about what Mercedes said earlier about Sunrise, and J.D. Power, there're six categories, they rank number one in five of the six, and the one they didn't rank number one in was price, which means they're probably a little bit more expensive than others, so they didn't get the number one ranking there, but that is very significant, you've never seen J.D. Power the most respective research house for consumer research every rank senior housing operators, and it's pretty extraordinary that Sunrise was by far the number one name in the business. And I would tell you if you haven't seen that ranking, we'll send it to you because I think it'll be interesting to see where some of the other names have ranked.
Thank you for dialing in to the Welltower earnings conference call. We appreciate your participation and ask that you disconnect.