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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Welltower, Fourth Quarter 2019 Earnings Conference Call. At this time all participant lines are in listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference may be recorded. [Operator Instructions]
I’d now like to hand the conference over to your speaker today Mr. Matt McQueen, Senior Vice President, General Counsel. Please go ahead, sir.
Thank you, Liz and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC.
And with that, I'll hand the call over to Tom for his remarks. Tom.
Thanks Matt and good morning. I'm pleased to announce our Q4 and annual results to you today, as they reflect the strategic path to growth that we outlined in our Investor Day in December 2018.
Simply put, in 2019 we did what we told you we would do. As the clear market leader and dominant provider of real-estate capital to the health and wellness care delivery sector, Welltower has redefined this asset class in terms of quality, operating models, technologically advanced building design, data insight, deal structure and transparency. This has placed us on a sustainable growth path that has generated $4.16 in FFO per share in 2019, a 3.2% increase over 2018 and fuels the optimistic outlook for 2020 we report to you today.
The $5 billion we deployed into new investments between January 1, 2019 and today, was not generated by playing the old game of overpaying for real-estate through auctions or being the passive take-out for old school senior housing operators more focused on their personal development profits than running an operating business. For Welltower, that game is over.
We are the partner of choice for a next generation of residential senior care operators who enter into aligned structures that rewards strong performance, yet don't leave REIT shareholders holding the bag when things don't go according to plan, and in business as in life, things don't always go according to plan.
We have also become the partner of choice for health systems. I'm sure you saw Jefferson Health’s recent announcement of a broad partnership with Welltower. Jefferson, one of the nation's largest urban academic health systems has elected to work with Welltower to advance its strategy of health care with no address.
This partnership will help recapitalize Jefferson's existing ambulatory assets, build and capitalize their next generation of ambulatory assets, connect Jefferson health delivery capabilities into our existing greater Philadelphia Senior population of over 20,000 lives and together conceive new models of housing and wellness care that can drive better outcomes for an aging and at risk urban population.
We are honored to be working with Dr. Steve Klasko, his team and the Board of Jefferson. They are truly redefining the future of healthcare delivery.
Our platform approach is demonstrating that there is value that can be captured in our real-estate beyond collecting rent checks. Our CareMore Anthem collaboration is a great example of this and illustrates that third parties can bring clinical care models into assisted living communities, and with modern Medicare advantage products, reduce out of pocket costs for our residents, enhanced resident experience, improve outcomes and increase occupancy and length of stay. What was a California pilot last year is now being rolled out into other markets. Stay tuned for other innovative models like this one.
For an example of how Welltower is driving the next generation of residential care design, I point you to our building on East 56th Street and Lexington Avenue opening in late spring. When this building opens, it will be the most technologically advanced residential care facility in the world for seniors suffering with conditions of frailty to memory care. Not only is this purpose built building designed to meet the needs of this population, but it will incorporate state of the art Phillips Technology that will enable more effective and efficient care, as well as enhance the experience for our residents and their families.
Welltower conceived this project and has driven the development process from day one. This will be followed by our next Manhattan Project on Broadway at 85th St, new urban models we will deliver in Hudson Yards and San Francisco as part of our related Atria joint venture and in Boston with Balfour.
These are just a few examples of how we have positioned Welltower to redefine and reimagine the built environment that can deliver better healthcare outcomes and lower costs, particularly in view of the aging of the population. We have largely moved beyond the issues that would have slowed our growth and that enables the optimism you hear from me this morning. It is our job to deliver a path of sustainable growth. In our 2020 outlook of $4.20 to $4.30 and FFO per share illustrates that. And I will remind you, this does not include any new net acquisitions or investments that have not been announced.
Now Shankh Mitra will give you a closer look at our Q4 operating performance, as well as discuss new investments. Shankh.
Thank you Tom and good morning everyone. I will now review our quarterly and annual operating results, provide additional details on performance, trends and recent investment activity and new operator relationship.
A year ago when we set our guidance for 2019, we told you that we felt cautiously optimistic about our senior housing operating portfolio or SHOP and set the same store guidance at 0.5% to 2%. We are delighted to inform you that we have achieved 2.7% growth for the year, primarily driven by stronger pricing power and better than expected labor cost inflation.
We want to remind you that our SHOW portfolio consists of 600 communities spread across 25 portfolios of different operating partners focused on different price points, acuity levels, geographies and operating models. We quantitatively manage our SHOP portfolio to drive low cross correlation, which creates real diversification benefits.
We have added a new disclosure on slide 39 of our corporate presentation that gives you a snapshot of our ability to do this. If you compare it to randomly chosen operator from that disclosure and compare the long term NY growth rate by occupied room, you will get a median correlation of 0.23. This remarkably rose statistical correlation in a business where casual observers believe all operators in the same genetic business called senior housing is debunked.
We provide further context using 2019 performance. We had three operating partners that experience mid-single digit to double digit NY decline, and we had four operating partners that experience double digit NY growth, with all other operators where in between. This demonstrates our unique business model and portfolio that is able to absorb downside volatility of certain operating partners with the contribution of others.
Other specific highlights of 2019 include significant outperformance of assisted living over independent living, and out performance of large core U.S. markets above smaller markets. We have built a highly differentiated and uncorrelated portfolio of assets by using a barbell approach a portfolio construction focusing on high end senior housing and more affordable communities with limited service, while exiting the product in the middle.
2019 saw addition of several new operators to the Welltower family; Atria, Balfour, Clover, Frontier and LCB. We are delighted to mention to you that we're off to a great start in 2020 and have already welcomed three new operators to our family, who we have been working with to come to terms for the last six months.
Let me give you some details here. We are delighted to partner with Michael Glynn, Andrew Teeters, [inaudible], along with Mark Stephens [ph] to offer a lower acuity, differentiated lifestyle based, highly amenitized and stunning housing solution to seniors under the Monarch brand. We also partnered with Arun Paul of Priya Living to offer a highly differentiated and relatively affordable product targeting a [Audio Gap] and tremendously under sub market in large core U.S. MSAs. In both cases, our exclusive relationship spans multiple years and will provide a multi-billion dollar investment opportunity in the next decade.
Reflecting on the fourth quarter specifically, I will mention that we are positively surprised by few trends. First, with respect to the seasonality within senior housing business, occupancy typically peaks in late fall and trends down through the winter months. However, we did not see that seasonal drop-off this year and occupancy has been pretty much flat sequentially through the year and into this year.
Second, I'm cautiously optimistic about what we have seen on the labor inflation side. While a couple of quarters does not make a trend, sequentially compensation per occupied room was flat in Q4 and is the best we have seen in the last five years.
This, taken together with consistent pricing power, gives us the confidence to provide a guidance of 1% to 2.5% in SHOP, relative to 0.5% to 2% this time last year. We have a long year ahead and we need to execute diligently, but we remain relatively optimistic today as compared to this time last year. We believe demand is increasing in assisted living business and impact of deliveries is improving on the margin.
A couple of other notable items from Q4 would be significant increases in insurance cost that I discussed during the Q2 call, as well as $2.4 million increase in incentive management fee in Q4 due to significant outperformance, one of our operating partners in our RIDEA 3.0 construct that was previously not contemplated. In terms of our 2020 guidance, we assume a $4 million increase relative to the incentive management fees.
I would like to now shift to our health system portfolio. On our last quarter call we told you that we're expecting $300 million of EBITDAR in our HCR ManorCare ProMedica portfolio for 2019. I'm delighted to inform you that HCR has achieved $307 million of EBITDAR in 2019. This resulted in a full year 2019 EBITDAR coverage of 2.13x. More importantly, for the first time in seven years all three business lines of HCR ManorCare had year-over-year increase in EBITDAR in Q4.
While the Q mix shifted in skill nursing continues to be a headwind for the business, we’re seeing length of stay flattening, occupancy starting to build, cost remains under check, synergies are getting realized and Arden Courts and home health and hospice business is firing with all cylinders.
In addition, HCR is an active negotiation with several health systems to help meet them, their post-acute needs. I'm optimistic I'll be able to share with you some of the success stories in 2020. ProMedica which is an absolute pioneer in the social determinant of health side will drive significant value from the HCR platform for years to come.
One the MOB side, we have significantly upgraded both our operating platform and asset portfolio in the last few quarters as we have acquired or announced roughly $4 billion of high quality MOBs under Keith and Ron’s leadership. We now own the largest commercial platform of medical office released in the U.S.
We have used an air pocket in the capital markets to scale up this business in the last few quarters. However, it appears though some of the pricing frenzy of 2017 is resurfacing. If our reading of tealeaves is correct, we will be largely absent from the acquisition of MOBs this year and instead focused on privately negotiated deals with the owner such as our health system partners.
Overall on the transaction side we had the most active year in the company's history with $4.8 billion of high quality investment and $2.9 billion of disposition. We have discussed this transaction with you in detail and they are listed on our earnings release. I would like to note few general observations that drive our capital allocation strategy and market trends.
One, we invest capital to make money on part share basis for our existing shareholders as opposed to solving for any exposure or chasing the latest and greatest asset class. To the contrary, we buy assets when they are out of favor at the right price in the right structure.
Our investment in HCR skilled assets as $57, 000 a bed, just 18 months ago and the disposition on this quarter of three older non-core assets at $156,000 a bed reflects our philosophy and our laser focused execution. The same goes for our absence in MOBs market in 2017 and a rapid growth in ‘18 and ‘19.
Two, we invest capital when we can match the timing, cost and duration of capital. We do not speculate what our cost of capital will be in future years and fund transaction on a granular, and current basis.
Three, we think in real-estate, basis and unlevered IRR matters significantly more than cap rates.
Four, we invest granularly with our opening partner. In this model it is critical to work with well aligned partners focused on methodical and smart growth. We have grown with all five 2019 class of operators since our first deal earlier in the year.
For example, I hope you noticed our presently, on our development Hudson Yards with our partner Related/Atria. This is the second major development we announced in last six months after our 1001 Van Ness project in San Francisco.
Five, we engaged in marketed transactions only when we believe that we have a significant age due to our data analytics platform or our relationship with health systems or payers.
Sixth, we see an incredible demand of U.S. senior housing product amongst the most highly sophisticated institutional investor today. We cannot be happier with our benchmark transaction in 2019. We started this year with another significant senior housing transaction that we reported last night with our earnings release at a very attractive price to our investor.
Our guidance of $1.7 billion to 2020 disposition includes this transaction. Though we have a $1.1 billion of announced acquisition building to our guidance that Hugh will discuss in detail, needless to say that we feel very optimistic that we’ll have a very strong year of net investment.
With that, I'll pass it over to Tim McHugh, our CFO. Tim.
Thank you, Shankh. My comments today will focus on our fourth quarter and full year 2019 results, our balance sheet and our initial guidance for full year 2020.
Welltower returned to growth in 2019, reporting normalized FFO of $1.05 per share for the quarter and $4.16 per share for full year 2019, representing positive 4% and positive 3.2% year-over-year growth respectively.
Results for the year are to be categorized by three main themes: The consistency of our internal growth engine; the volume of accretive capital development activity as we invested $4.8 billion across high quality senior housing and outpatient medical opportunities; and the discipline of our capital recycling efforts, as we had $2.7 billion of property disposition, including $560 million of high yielding LTAC and post-acute assets, and had $192 million of loan payoffs, reducing our loan investment portfolio to its smaller size since 2015. The result of all this was a year in which Welltower returned to earnings growth, while also significantly improving the quality of our asset base.
Now let me provide some details around our portfolios performance. First, our seniors housing triple-net portfolio posted another consistent quarter with positive 2.9% year-over-year same store grow. Sequential occupancy was flat in the quarter and EBITDAR coverage declined by 0.01x.
Next, our long term post Q portfolio generated positive 4.3% year-over-year same store growth, driven in part by an easier 4Q ‘18 comp, which included partial rent recognition from a tenant that is now current on rent. We also benefited from fair market value step-ups and a well-covered conflict healthcare lease acquiring the acquisition of QCP. EBITDAR coverage declined by 0.03x, driven in part by the addition of four development assets, the trailing 12 month pool.
As a reminder, we reported our coverage a quarter in arrears. So this September 30 trailing 12 month coverage does not reflect any impact in the new PDPM Medicare Reimbursement System, which is implemented at the start of October.
Turning to medical office. Our outpatient medical portfolio had another solid quarter, delivering 2.3% same store growth, bringing the full year average to positive 2.1%. We continue to make meaningful progress in our same store occupancy as well ending the year at 94%, 60 basis points ahead of fourth quarter of 2018.
Next to health systems, which comprises of our HCR ManorCare joint venture with ProMedica. This portfolio entered the same store pool for the first time this quarter with 1.375% year-over-year growth and EBITDAR and EBITDARM coverages of 2.06x and 2.77x respectively.
Lastly, our senior housing operating portfolio continued to report above our expectations with total same store growth of positive 1.5% in the quarter, bringing full year average total senior housing operating growth to 2.7%.
As of prior practice, I will now provide details of pool changes in our senior housing operating portfolio. In the fourth quarter, we had a nine asset sequential change in our senior housing operating same store pool. There was an 11 asset West Cost portfolio removed and moved to held-for-sale, offset by two assets entering the pool.
At year-end 2019 we had a total of 77 senior housing operating assets classified as transition properties, a net increase of two properties since the end of 3Q, driven by three assets that transition from triple-net to RIDEA and one former Brookdale asset that transitioned to a triple-net lease.
The remaining 74 former Brookdale and Silverado transition assets, 71 have been successfully transitioned and will all reenter the same store pool by or during the fourth quarter of 2020. Our guidance assumes a slightly positive impact on results from transition properties in 2020 and we’ll provide more color on this as we progress through the year.
Turning to capital market activity in the quarter, we continue to take advantage of a very strong bond market, issuing debt across two geographies in December. First, we issued our inaugural green bond, raising $500 million or seven year debt at 2.7%. Welltower’s ESG team led by Kirby Brendsel put a lot of time and effort in preparing for the reporting requirements that come with Green Bond financing, and has paid off with tremendous support received from ESG investors. Welltower is committed to staying at the forefront of ESG initiatives, and we look forward to growing this part of our capital stack going forward.
Secondly, we return to the Canadian debt market for the first time since our inaugural offering in 2015, refinancing our 2021 Canadian dollar maturity to the issuance of $300 million of seven year debt at 2.95%.
In turning out our last remaining unsecured 2021 maturity, we removed all major unsecured maturities through 2022, meaningfully derisking our balance sheet for the next three years and increasing the weighted average maturity of our unsecured debt stack to 8.8 years.
Additionally, we continue to access the equity markets during the quarter via our DRIP and ATM programs. In the quarter we issued approximately 4.3 million shares and the weighted average price of $85.19 per share for estimated proceeds of $364 million. As of today's call, through our forward ATM program we have sold 6.8 million shares of common stock that have yet to settle, representing $583 million of estimated proceeds.
Turning to leverage. We ended the quarter at 6.2x net debt to adjusted EBITDAR temporarily above our long term target range. This is due to the timing of capital recycling and more specifically to the fact that $1 billion of our previously announced acquisitions closed in mid-December.
When adjusted for a full quarter of acquisition cash flow and for the updated investment and disposition guidance, along with raised but not settled forward equity, leverage is expected to return to the mid to high five’s by the middle of this year.
Lastly, before walking through our 2020 initial outlook, I want to address three items pertaining to our total portfolio of same store policy, an outline of which can be found on the investor sector of our website.
First, we use duration based qualifiers as frequently as possible in our policies in order to eliminate as much subjectivity from our disclosure decisions as possible. For developments, properties enter the same store pool following five full quarters of being in service.
Development plays an important role in our senior housing investment strategy, and the lower development pipeline represent a small fraction of our total senior housing portfolio. We’ve determined it’s useful to provide more insight and its contribution to our same store growth by providing a stabilized senior housing operating growth metric, as a complement to our total portfolio senior housing growth metric.
Stabilized is defined as nine quarters after being placed in the service. Given the broad range of products we develop, from senior apartments to assisted living, we believe we are using a duration based metric that is representative of the entire pool stabilization pattern, is more straightforward for investors and its helping to create rules for each bucket.
Second, on normalizers. We normalized our same store results for changes in currency and ownership, as well as for unusual and non-recurring items such as property tax refunds, insurance reimbursements. We believe this to be beneficial to investors in understanding our run rate business.
We’ve disclosed all normalization amounts in the back of our supplement since 2016. Per supplement disclosure, 2019 average full year SHOP NOI growth would have been 50 basis points higher, without normalizing out unusual and non-recurring items that benefit us in 2019.
Lastly, in 2020 we will continue our efforts to further align the reporting of our same store in our quarterly filing with our same store and our supplemental presentation, with an intent to reach full alignment.
Now, on to our 2020 outlook. As indicated in our press release, we are initiating full year 2020 FFO guidance to a range of $4.20 to $4.30; the total portfolio same store growth, NOI growth of 1.5% to 2.5%. At the same level this NOI is comprised of outpatient medical grow a positive 2.25% to 2.75%. Long term post-acute grow of positive 2% to 2.5%; health systems grow a positive 1.95%, and senior housing triple-net growth of positive 2.25% to 2.75%, and total portfolio senior housing operating growth of 1% to 2.5%. At the midpoint of total portfolio senior housing operating growth stabilized same store NOI growth is estimated at positive 1.25%.
On to guided investment activity. Our initial FFO guidance assumes we are net sellers for the full year, with initial disposition guidance for the year of $1.7 billion of Welltower share, with an average yield of 5.1%. This includes a little over $1 billion of previously announced dispositions, including $740 million from our Invesco MOB joint venture and $675 million of under contract dispositions announced last night in our earnings release.
On acquisitions, as always our initial guidance only includes acquisitions closed or announced which totaled $1.1 billion as of today's call, made up of $320 million, that has already closed and approximately $820 million of remaining MOB transactions that will close in the first half.
Lastly, on developments, we are approaching an inflection point with our development pipeline as it pertains to spend relative to deliveries. We are relatively light here in the delivery front for the first three quarters of the year, before delivering $210 million of our $302 million of full year deliveries in the fourth quarter.
In 2020 we will deliver another $714 million of deliveries against $468 million of spend. So as this development portfolio starts to run out a little bit, we will feel a bit of near term dilution, certainly from the SHOW part of our development pipeline. As you will have 400 million of deliveries in the fourth quarter of ‘19 through year-end 2020, creating $0.02 per share of drag on FFO for 2020 before stabilizing over the next two years at positive 6% to 8% of FFO contribution per share.
Develop pipeline upside beyond 2020, along with upside from transitions and the continued recovery in senior housing are what makes us optimistic well beyond 2020, as our portfolio is positioned exceptionally well to benefit the demographic trends across all of our geographies.
And with that, I'll turn the call back over to Tom.
Thanks Tim. So you’ve head us repeat the word optimism throughout our prepared remarks this morning; this is sincere. The green shoots from our core portfolio we saw in late ‘18 that grew in 2019 are fueling this optimism.
Our senior strategy to align with major health systems have been validated and we are mining many interesting investment opportunities that will enable accretive growth and drive shareholder value. We look forward to talking more about this with you throughout the year.
Now Liz, please open up the line for questions.
[Operator Instructions] Our first question comes from a line of the Steve Sakwa with Evercore ISI. Your line is now open.
Thanks, good morning. I guess Shankh, first on just the acquisition environment and kind of the pipeline. Could you sort of give us a sense for how big the pipeline is today versus say six to 12 months ago? And in what areas is it sort of most robust?
Thank you, Steve. Good morning. The pipeline is as big as we have felt this time, you know really throughout the year, but particularly relative to the last 12 months, the pipeline is significantly bigger. As I told you in my prepared remarks that the pipeline is focused on two areas one is on the senior housing side, the other is our deals that are sourced through our relationship with health systems.
Mostly you will see that this year other than the transaction that we have made or we have shaken hands 12 months ago or six months ago plus, will be mostly out of that MOB markets this, so senior housing and health system transactions directly with the system.
And is there anything without get specific. Can you share anything just about pricing trends or cap rates kind of as you look to deploy capital versus maybe look to deploy capital versus maybe where you spend capital in 2019 or are things better, getting tighter?
So on the senior housing side, if you look at sort of the top end really pretty assets, really good markets, very good operators, cap rats are extremely tight and they have gotten really tighter in the last say 12 to 18 months, particularly the last six months. The transaction we announced yesterday sort of shows you that.
On the other hand we are seeing the emergence of distress. In memory care and in markets where you saw the first burst of supply in ’15,’16,’17, everything in the middle is sort of, it depends right. If you look at our pipeline and look at our history, you will see that we grow with our operating partners with a development of off-market acquisitions one or two efforts at a time and that market remains extremely favorable.
So we have a lot of you know either very small portfolios or a lot or one-off assets, two assets, three assets that are in the pipeline that add up to a big volume, but that's where we get our pricing and that becomes very accretive. So we are very, very optimistic; very, very optimistic about the deal pipeline this year.
Okay, and then just one follow-up for Tim; I appreciate all the commentary. I couldn't quite get all the numbers so I might have missed an exact spread. I think you said that the developments do help do same store a little bit and that you're, you know almost putting a second number out there. So can you just quantify what same store I guess is being boosted by in 2020 just from the developments?
Yeah. So Steve, the numbers that I gave were 1% to 2.5% range for our total SHOW portfolios to 1.75% midpoint, and at that point assume the stable portfolio grows at 1.25%.
Got it! Okay, thanks very much.
Our next question comes from Jonathan Hughes with Raymond James. Your line is now open.
Hey, good morning. Tim, thanks for walking through your same store definition policy and providing the slide deck on the site. I was hoping you could give us maybe this RevPar occupancy and expense growth component embedded in your SHOP NOI growth guidance?
Hey Jonathan, I'll take that. So you know as we talk to you about this before, the three big variables which moves, where we land on the same store NOI growth obviously that occupancy, that's pricing and obviously labor, right. I mean they are the three major components.
Without getting into too much on how those things will obviously change each other or influence each other though, I want you to sort of think about is what we have seen in the last, call it four to six quarters, you will see flattish to slightly down occupancy and you will see 3%-plus growth in the rates and we will see what we get on the labor side.
As I said, two quarters doesn't make a trend. We are not assuming that trend will continue, but if we do get some help on the labor side, what we have seen in fourth quarter if that continues, obviously there'll be upside.
Okay, so we can kind of extrapolate may be the past couple of quarters and roll that forward and that gets to your embedded guidance. Any different to your non-core portfolio?
No, we have the non-core portfolio. You know obviously there's a significant difference to performance. I'll give you an example, just in fourth quarter. Again, don't take one quarter and run with it, but just if you look at U.S., in fourth quarter large for core U.S. markets were up 3.5%, 3.4% to be specific in NOI and other smaller markets were down 2.5%. There is a significant difference of performance between large core U.S. markets versus smaller markets. We're seeing that, so I don’t know exactly what that will get to, but I suspect that you will see a big difference between the two as we roll through 2020.
Got it, that's great. And then just one more form me. Tom, you talked about your partnerships with healthcare providers and capabilities in the prepared remarks, but I was hoping you could talk about how your new partner, specifically the senior housing partners ascribe value to gaining access your data analytics platform.
I mean the world at Washington capital, I think a lot of these operations should go out and admittedly find cheaper sources, but clearly they come to you to gain something others don't provide. So I'm just trying to figure out, how us as outside analysts and investors ascribe value to this part of your business because it is so unique.?
Well, thanks Jonathan, I'd say that it's helping our senior housing operators understand where to focus, because we can provide them such granular information about their target populations. It really helps them become much more efficient and effective senior housing operators and we are now talking this expertise and bringing it to health systems. Health systems are now working with us to figure out how they can build market share in certain markets that are important to them, and this is a tool that they’ve really not had in their arsenal before.
So you know we see it as truly a differentiator and I’d also say that our senior housing operators are also seeing the other capabilities we bring. You know I talked about the CareMore Anthem collaboration. That is a win-win for everyone involved, including the resident, their families, the operator. And from a senior housing operator standpoint, we see expanding the operating model of a senior housing facility by collaborating with third parties like a CareMore can drive occupancy and increase length of stay, and may offer opportunities to enhance revenues.
So we think that – you know we're always focused on alignment, that you hear that's a word other than optimism you hear from us a lot, which is alignment, and you know it's not just talk, it's real, it's happening, and that's what's driving the senior housing industry. The people that see the future and know that the future of the senior housing industry is not what exists today for the most part and they want to be – work with Welltower.
Okay, yeah. I mean from us in the outside it’s just trying to understand how maybe we priced it into the metrics that we see in terms of the yield on you know new partnerships, so…
Yeah, so Jonathon, its early days. I think you'll start to see – it's going to help you I think, and over time we’ll point you to where we're expanding the service model in senior housing through these types of collaborations, and there should be – you should be able to see better performance, so that'll – again, its early days, but as I said earlier, we’re starting to roll these programs out into multiple markets across the country and I think that's when it'll be more tangible.
Jonathon, just – you know these things are hard to model, but I would just – one way to think about it could be that if you look at just in the last 18 months, we have talked to you about eight new operators, right. I mean to your point they're coming to work with us because of our – these capabilities, not of our cost of capital, right. Where there are significant chief sources of capital the world is divested with capital.
These are these capabilities, so you can – one way to think about it, you know you can think like how many of those operating partners that we may or may not be able to get over a period of time and then think about how are ongoing investment with them as I mentioned in 2019.
Earlier in the year we sort of announced our batch of 2019 partners and so far you know today, as of today we have invested more with every one of them. So that sort of gives you a sense of – we’ve been trying to get a sense of what the platform is what as Tom talks about. The platform is what more than just the asset and you know obviously that's the way you can get to the platform value. That might be one way to think about that.
Yes, alright, thank you very much for the color guys. I appreciate it.
Thanks Jon.
Our next question comes from Nick Joseph with Citi. Your line is now open.
Thanks. Maybe just sticking with partnerships, Tom what should we expect in 2020 from the Jefferson one.
Well, we’re hopeful in 2020 you will see kind of the first stage of a joint venture around some of their ambulatory assets. That is something that we are currently working with them on. They've identified some of the assets that will go into that joint venture, so I would expect you will see that this year.
And then the next piece of it is bringing Jefferson's services into our senior housing and post-acute portfolio in the greater Philadelphia region. We have a concentration there. We have 20,000 lives, particularly 20,000 lives of people that are mostly paying out of pocket to live in high end senior housing is a very important population to Jefferson and that's one of the keys here.
I think you're going to start to see more health system presence in our senior housing portfolio. It’s happened already, but I think with respect to Jefferson it'll start to be – it'll start to be derivative scale, because they are such a large system and we have a large portfolio. So I’d expect you'll see that in 2020.
Some of the other aspects of our relationship are a little bit more longer term focused. You know I talked about – you know you’ve heard us talk about our Clover housing model. Concepts like that, that might include Jefferson clinical, particular from a primary care standpoint being co-located in those types of communities is something that we are very actively looking on, because again you know Jefferson talks about healthcare with no address. That is allowing them to push out their products and services outside the hospital campus and that's very much a focus of what we're doing together.
Thanks, that's helpful. And then Shankh, just on MOB cap rate compression that you've seen there, can you put some numbers around that and then who are those incremental buyers that are driving cap rates down?
I mean, I'm not going to give you numbers. You have seen some very aggressive trades in recent times. You know again, if you look at our – what we're closing or have talked about, in real estate transaction you should take everything with a six to nine month delay. So think about the announcements sort of we made during the REIT [ph] and we should date that back six to nine months ago, right.
So the cap rates are tight, they are coming down. A lot of public REITS, institutional owners, private equity, I don't want to specifically name someone, but the whole point is we, as we said several times, we think that our bogey that we have to head on an unlimited ROI basis is 7% or pretty close to that and we think that asset class, if that asset class gets priced somewhere in the 5 – you know low 5 or 5, that makes absolutely no sense for our investors. So if the pricing gets there we’ll stay away. If the pricing remains sort of mid-five, we will be active.
Thanks.
Our next question comes from Rich Anderson with SMBC. Your line is now open.
Good morning. So I wanted to talk about your peers and you and the same store discussion Tim that you went through. I'm just reading the team leads and it seems like maybe you were involved in a kind of cooperative process to get on an equal playing field. I don't know, maybe we’re involved.
Can you just describe, if in fact you weren't – what were the hold ups that didn't sort of get you to a point where you were in exact agreement with your peers, namely Ventas in TEAK and you know, is there a chance that we'll get there at some point in the future, so that you know we do have this sort of a more agreeable sort of environment among the three of you on that topic specifically.
Good morning Rich, its Tom. Let me jump in on that first, and then we'll see if Tim has any additional comments. You know I’d say that Welltowers had a same store policy for years and that policy and our adhering to that policy is reviewed quarterly by our audit committee. By the way, this policy applies across all asset types at Welltower beyond senior housing to triple-net MOB and the others.
So yes, you referred to the chatter about same store senior housing policy, which I suspect has much to do with the significantly stronger performance of our assets versus the others you mentioned.
Look, I hope our earnings results that we report today, that we reported throughout the year, and the fact that we proactively dealt with our problem children over the last three years speaks to the quality differential. And so you saw that we posted the policy that we’ve had in place for a number years; you can take a close look at that, you can talk to Tim about that, we’re a very different business, we are a very development focused business, the type of senior housing assets that we'd like to buy don't exist, so we have to build them and we're the ones who are driving that process.
So I don't think we're talking apples-to-oranges here necessarily in terms of senior housing portfolios and I hope that we are putting this matter to rest, because it's not a productive discussion.
Yeah, [Cross Talk] You know the intent of the conversation, I think the alignment around it is that you tend to bring more information to investors transparency, comparability and the rest of it, and I think you're seeing some positive outcomes from that. I think from our – the presentation or the outline of our historical policies that we put out last night, you'll see there's a lot of familiarities between policies and know what our commitment is to continue to provide investors with more information they need, particularly as it pertains to the kind of differentiating quality between portfolios.
Okay, so like total portfolio versus just the shop portfolio.
Well I guess, part of it is – part of our thought is that the total portfolio is the focus right in having – what we posted last night is our total portfolio approach and that you know I think that the ideas that you buy Welltower because of our – the exposure we have across all of our asset types and what that does to the consistency of our cash flow and so just a morals approach gives you a better view of how that entire business is operating.
Okay. Tom early in the conversation you said sometimes things don't work out, that’s life and business and generally. Can you give an example where something didn't quite work out the way you had hoped, but that you have dialed in protection mechanisms at the point of the negotiation to protect the downside and protect your investors. Do you have one or two in mind where that in fact has happened?
Yes, but I wouldn't be able to tell you specifically about that, but yes, that's one of the reasons why you know our performance is better. But I'm not going to call out specific operators on this call, but I will tell you that we give our operators an incentive to outperform and that, when you work with the right people is hopefully – that's driving the performance versus the downside protection. We don't go into any arrangement hoping that we're going to be able to pull the downside protection lever.
Rich, this is an inappropriate conversation to call people out on the call, but I can talk to you offline, but think about how we have changed the business and on what an ideal trio structure is. It’s very much laid out for that downside protection. It also significantly provides upside participation.
If you think about how we have moved away from – you know I'll give you another example, which is obviously it's very easy to think about senior housing, but just think about what we have done on our loan books, right, which essentially where cut in half. We don't make OpCo loans anymore, we don't make this kind of you know lending money to operators or lending money at the OpCo level, why is that?
It's because you know that downside protection will be that if you are a lender in a specific asset or box, you should be able to take over that box if things don't go right. We are a REIT, we’re not allowed to own an OpCo right completely. So the fundamental you know idea behind this kind of loans are flawed, so we don't do that anymore. So that's why you see that our loan boo has come down. But anyway, I hope that those two examples sort of gives you some idea as to in what line to think about, we’ll have to just speak with you offline.
Yeah, I didn't mean to put you on the spot there, but you know I thought the good example is ProMedica, which you know had its downgrade and all that, so but yeah, here you are producing or they are producing over 2x coverage versus the 1.8x starting point. So I think that would be one example, no fault to them. It just was a function of you guys setting that up. Well, so I just wanted to…
That’s a credit transaction, that we’re protected by the credit at the parent level.
And it's a very good example of you know this organization which is not-for-profit health system, but has an extraordinary business mind. If you’re seeing Justin what happened in the insurance business last year and they have taken really tough calls and exited business. You don't generally see that in a lot of not-for-profits right. They said they made that promise to their bond holders and they did it, they executed it.
If you go back and look at their presentation that they presented at the JP Morgan healthcare conference, that lays it all out. So a very, very good example, that's why our interests are aligned and you will see that we will continue to grow with them.
And that’s coming from a guy who didn't like it very much at the outset, so you know, so good for you.
We understand Rich.
Thanks Rich, we appreciate it.
Thanks very much. Thank you.
Our next question comes from a line of Derek Johnston with Deutsche Bank. Your line is now open.
Good morning everybody. The $740 million SHOP portfolio that is subsequent to quarters end slated for sale. Can you give us some more details, including you know what percentage of these assets were already converted to the RIDEA 3.0 structure or had they not been and then also, what percentage of your going forward SHOP operators have been converted to the new structure?
Thank you very much. Very good question. It’s a transaction in process, so I'm not going to get into too much of what the transaction is. I will tell you that this is not a portfolio in RIDEA 3.0 and the second thing I will tell you about this then the buyer of this portfolio is an extraordinarily smart and very well-known institutional investors. We have a tremendous amount of respect for them and we do a lot of business with them in different places.
So we think not only that this is a great transaction for us, we think this is going to be a fantastic transaction for their investors. About 80% plus of our operators today and number of operators today are in that RIDEA 3.0 operating.
Derek, what I’ll add to that is, perhaps when you see high quality portfolios being sold by Welltower. That may be an indication that that operator was not interested in a RIDEA 3.0 structure perhaps.
As a general comment?
As a general comment, so that's something you should consider as to why we might you know choose to sell some portfolios that look to be and are very, very strong portfolios of real estate.
Okay, very helpful. Just switching gears quickly to health systems, I noticed the same store NOI assumption of 2% growth. I mean I think this is the first time you're including this in guidance. So I guess while you know the health system build out is in the early days and the growth rates maybe initially lower and possibly ramp over time, the question is you know what do you feel will be the long term growth rate of the health systems?
So Derek, so that is obviously, that bucket is if you think about it, it’s a ProMedica bucket. As you know the first year their Collider was 1.35% -- 1.375% and going forward its 275. I believe we closed the transaction on July 26. So you have a mix of 1375 and a 275, but when you get the full year you will get to 275.
Okay, great. Thanks.
So part of the year is 1375, part of the year 275, going forward 275.
Got it.
Our next question comes from Vikram Malhotra with Morgan Stanley. Your line is now open.
Thanks for taking the question. Shankh you referred to this sort of the senior housing barbell approach, and obviously in other asset classes you can think of multifamily as a BC and asset classes, some different breakups, but just curious as you described the part of the barbell that you've just started building. Can you talk about how competitive that market is pricing, what type of structures you may be employing similar to sort of the RIDEA 3.0 that you've done with the existing portfolio. Just kind of walk us through how to think about that market in terms of differences, in terms of pricing and structure.
Yeah, I'll be sort of describing to you a high level basis what I meant by barbell approach. If you think about just purely from a pricing perspective, on the high end you can pass the labor inflation that's been happening and across the market, but if you think about generally speaking across all markets, wages have been going up. Whether that’s sort of a move on minimum wage somewhere closer to $15 or you know whatever that metric is for a given market or just general you know sort of a lift in wage because of low unemployment that is happening across the board.
In certain markets, in high end markets you can pass that to your consumers and you're consumer understands that’s the case right. That you are not just jacking up rates because you want to jack up rates. They understand there's so many people who serve them and their wages are going up meaningfully.
In other markets where I'm talking about is the lower end, sort of we call lower rent market where you don't have a lot of people. It’s a low service model, so higher margin. You're not impacted by sort of the people and of the inflation that much. So we think somewhere in the middle the problem is your still facing the labor and a move towards that you know $13, $14, $15, yet you don’t have the price to justify that.
That sort of a dichotomy today is the first time we're seeing irrespective of market, labor growth has been pretty much towards a much higher number than they have been. So you got to concentrate on the markets, where you can do past that pricing or you have to be in markets where you are not providing that one-to-one hands-on care and you are sort of a low service model, so that’s sort of we’re focused on.
Addressing your next question, sort of where you were asking for what are we doing on the lower service model side? Remember these are apartment assets, effectively seniors’ apartment and as a REIT we can own apartments and have complete control. We don't have to get into a RIDEA 3.0 type structure where there is a, you know what we're allowed to own a third of the OpCo or not. That does not apply for those kinds of assets. You have a much higher level of control there.
Great! And then Tim, could you just clarify, you mentioned the 50 basis point delta between the same store portfolio growth and then applying that sort of stabilized layer onto it. Can you just clarify, I may have missed this. I dialed in late. When you say stabilize, what are you sort of excluding? Because the development properties I think you laid out, they come in post five quarters.
Correct. So the developer properties come into the pool post five quarter, so we got a duration based rule on that, and they don't stay – what we said is we – they don’t stabilize for this metrics purposes until they are in for nine quarters and in my prepared remarks I went through some of the reasons for that. So the non-stabilized portion of the same store portfolio is made up of those assets that bunch with the pool, but haven't hit that stabilization point.
The nine quarter, okay. And what is the stabilized number for 2019?
The stabilized number 2019 is 150 basis points lower than our 27.
Okay, great. And then Tom just one last one; you've talked a lot about the partnerships with the health systems, kind of how – what shape Jefferson may take. I’m just sort of curious as to how long that sort of partnership took. What were sort of the push backs and you know do you see this as being – what types of systems do you think would be more open to this sort of partnership?
Very good question Vik. These partnerships take a long time, because you have a myriad of people internally that you need to deal with and establish credibility with, and there's also boards involved. And I think one of the things that made Jefferson successful is that we had established relationships and credibility amongst the management team, as well as with the board of Jefferson. But these are not you know quick – they put an RFP and you're responding to it. These are very nuanced relationships that take time, and so there are a number of them simmering on the stove right now that looks like Jefferson.
I mean the fact is truly the high AA plus health systems for the most part will believe that they're better served by raising debt in the capital markets. We tried to remind them that debt has to be paid back. We have a – we're offering them a long term solution to help them grow. Not that they won't take advantage of low interest rates in the debt market, but we're just another oar in the water of capital, so.
I would tell you that there are some relationships we have been developing that some may look like the Jefferson partnership and some might look a bit different. So I would just say stay tuned, but we're actively – this is an area that we've been very actively engaged in for many years.
I’ll just add one thing Vikram. If you think about it, there are health systems who still believes that healthcare should be delivered primarily within the confined four walls of the hospital and you know so they probably will have a different tag versus a lot of health systems believes that healthcare needs to be out in the community or in where people live and sort of it having more of a comprehensive approach to health and wellness, and you will see more of them will be a partner.
Yeah, it's beyond cost-to-capital. If it's just cost of capital, some health systems you know have a very low cost-to-capital. This is broader than that and I think that is an element of why anyone does business with Welltower. There’s a broader value proposition that we present. It's not just about cost-to-capital and that's why we're growing the way we're growing through off-market transactions, because if someone is going to put out an RFP and wants to get the lowest priced capital, well sometimes maybe that might be us, but that's not how we're thinking about growing our business.
Okay, thank you.
Our next question comes from Jordan Sadler with KeyBanc Capital Markets. Your line is now open.
Thanks, good morning. Just moving to the shop portfolio for a second, can you talk about the new lease spreads versus renewal increases that are baked into the guide for 2020?
We'll just tell your Jordan that we think that we're going to get overall pricing above – you know our expectation is our pricing trends will remain very strong. The spread between new lease and renewal differs from operating partners to operating partners, building to building. So it'll be an impossible task to get into that, but generally speaking, you know people usually don't live our you know exceptional communities, which provide exceptional care just for a small increase of price that is justified by what is happening in the labor market.
So, I mean I know there's obviously a pretty broad disparity, you know probably also in terms of the same store NOI performance across the portfolio. But I'm just kind of thinking, lending across the portfolio, if there is any granularity you could offer in terms of what's sort of happening on the mark-to-market basis upon releasing?
Yeah, so let me tell you about the disparity. I talked about the disparity of operators from an NOI perspective, right, mid-single digit negative to double digit positive you know and not just – I'm not picking the end points here. Just give you a pretty big granular difference there, let's talk about the pricing.
We have one operator who has seen pricing in the mid-5 range. A bunch of operators have seen pricing in the sort of the 4 to 5 range and a lot of people have seen that sort of 2% to 3.5% range. That sort of gives you the broad spectrum. I've seen one that has the sort of the lowest of 1%, 1.5%, but that sort of gives you the range.
The second question you asked is on a mark-to-market. Remember what happens on an overall cost basis. You come in at an assessment level. Over a period of time that assessment goes up, right. So from a care revenue perspective and eventually to say you know there are care levels of 1 to 5. I'm making this up to make a point.
Yeah, I get it.
You come in at a 2%, but you know you leave at 4%, 4.5%. There’s always a different of you know pricing on care on a mark-to-market basis, because the next person coming into the 2%, 2.5% right. So – but from a – so what we’re seeing and we have seen, this is no secret to anyone, we try to keep the level same, so when the higher acuity people leave, lower acuity residents come in, so mark-to-market on the care side is always negative.
On the real estate side, remember there’s two price right. The rent side we’re seeing rental increases cross the board. Pretty much that sort of mirrors what I told you. The market rent I'm talking about, mirrors what I've talked about on the pricing side. So that gives you a sense of what happened.
Shankh, I'm sure you've done this work with you data team. Would you share what the seasoning impact if you will is on same store NOI grows, you know from you know just basically folks aging in place across the portfolio?
I will.
Acuity of care rising.
Yeah, I will take that up with my team and talk to you offline.
Okay. And then one other, just PDPM, Tim obviously you pointed out nothing in the quarter. Any early comments in terms of what you're seeing across the health system portfolio and/or with genesis just basically in your conversations with these tenants/partners and then perhaps expectations coming from CMS regarding recommendations for reimbursement come April.
Yeah, so first is, I think it's too early to comment on what’s the impact of PDPM. So we first – sort of that is something, it will take time for everybody to understand and will have different impact on different platforms, you know very different impacts, so that’s sort of – I'm not going to engage into that and pretend I know exactly what's going on. I will tell you that this is exactly why we don't want to do and that's why we structure the [inaudible] in the way that we did. We do not pretend that we’re the expert in CMS rate increase and then annual basis, which is not.
Second category, totally given that I told you that we are obviously not an expert, we’ll stay away from what might or might not be coming. I will just remind you that generally speaking as I said, across the board we're seeing civilization of that business. That business has been pretty much under attack for years and years.
I think our regulators understand that. There’s been a lot of bankruptcy filings in that sector over the last two years. I think regulators understand that that is a very much of a needed sector and our health system partners will tell you that that is very much of a needed factor. I think whatever happened, I have zero insight and whatever happens will be reasonable and will have an impact positive or negative, generally on different platforms.
Alright, I’ll yield the floor. Thanks guys.
Thank you.
Our next question comes from Joshua Dennerlein of Bank of America Merill Lynch. Your line is now open.
Hey, good morning everyone.
Good morning.
I’m curious, how involved were you guys in the site selection of the new related trio development in the Hudson Yards.
The specific one or in general?
I guess just what’s that partnership like? Is it your data team kind of leading the charge on like, ‘hey, these are good sites. These are what you should consider.’ Just curious on that front.
So generally the way it works, that you have an extraordinary related you know team of professionals that’s led by Brian Chow [ph] related who leaves this particular vertical. Brian tracks with my team and works with the data team directly. It's a two way process; they are an extraordinary good developer who will look at whether they find the site or we find the site we’ll look at it. Then what we do is we run that sort of analytics process, see demographically, typographically what it looks like, why this is different and this is a two-way process.
But you’re correct, that every site, possible site we look at we do it through our – that goes through our analytics process and we then debate. I'll give you an example. For example in DC, we have so far past on several pieces of parcels, because we couldn't get to what we're actually trying to build. So there is a lot of sauces making that goes on and obviously our data analytics team is very much a part of that in the front end from the very beginning.
Great! Thank you.
Thanks Joshua.
Our next question comes from Daniel Bernstein with Capital One. Your line is now open.
Good morning. I wanted to go back to the comment you made about owning and operating your – you know the lower end businesses with senior apartments maybe independent living. You know there's a lot of competition in the apartment space, Greystar, other private equities, Carlyle. How do you think about the risk of that sector given the competition versus the opportunities and maybe how do you think about creating and building your own Welltower brand within that segment.
So Dan, 85% of seniors have incomes of less than $50,000 a year and surprisingly there is very little product for that population. A lot of the independent living you've been referring to sells at a premium to other multifamily in the market and that is not what we are doing at Welltower. There may be markets where we will bring a premium independent living product, because the demand is there for that type of a product, but when we talk about some of the markets in this country that we currently own assets in, these are addressing a tremendous unmet need and you know the opportunity for people to live in safe housing, that is designed to accommodate a long arc of aging with rents of $900 to $1200 a month.
There's a tremendous opportunity there, and what we're doing is when we can connect that housing concept with a payer, because these are people that are on Medicare advantage plans, and when you can work together with the Medicare advantage plan, you can really help them reduce risk and hopefully create better environments for this population to live in. This is a population that's never going to be able to afford to live in senior housing, at least the seniors housing that we own. This is a new asset class. And your point about will Welltower brand this sector, stay tuned for that. You'll hear more about that this year.
Dan, if you have time, come over to New York at some point and sit down with our leader who runs the business, Ayesha Menon, and understand how we are working and thinking through the exact same problem we talked about, but we're not focused on the high-high end of that business.
So if you think about it, you talked about Greystar and others. I don’t pretend to be an expert in Greystar’s business, but my understanding is that they are focused on the high end of that product, very high price point, you know $3,000, $2,500 something like that. If I understand correctly, we’re focused on the lower end of that product, the $1,000, $1,200, $1500; it's a different product.
That’s actually really helpful to understand that and I will take you up on your offer to come up to New York. One other quick question, MOB’s have shown some improving occupancy. To get that occupancy, are you giving away any extra TI, anything that might cause a little bit of drag on that the FAD, AFFO or is that simply you know the MOB’s locations next to the hospital and there is demand there and that's driving the occupancy. Just trying to understand that a little bit better.
Dan, this is Keith Konkoli. I would say, actually our capital expenditures are below our historic experiences, so we're really not giving away any additional CapEx or improvements to get tenants into the spaces. We’re really just very focused. Our team is really in the market, canvasing the market, and it's really just driving activity through focus on the business, I would say is what's really resulted in our increase in our occupancy.
Dan, one thing I will tell you that your sort of question implies, that in billing being right next to the hospital is what get them leased. I saw you at Revista. You probably have heard me saying that on the panel, we do not believe that on campus MOB’s are aware the industry is and what the industry is going.
We have sort of no horse in this race. Our portfolios is roughly half on campus and roughly – you know roughly off campus. We do believe that consumerism in healthcare is real and healthcare is moving to where people are going.
So it is asset-by-asset, system-by-system, relationship-by-relationship, but I want to make sure that you understand our view. Right or wrong, that's our view and we do not believe that on campus MOB is that sort of this asset class that we need to stride for, we just don't. We just don't think that’s the model of healthcare where the future is going to be.
There was certainly the view at Revista as well, I think so. I appreciate the color and I’ll hop off. Thank you.
Thanks Dan.
Our next question comes from Michael Carroll with RBC Capital Markets. Your line is now open.
Yeah, thanks. Tom or Shankh, can you provide some color on that little Judy senior housing product that you guys have been talking about throughout the call. What type of investment should we expect out of there? Does this product exist today or do you need to really build most of it?
We have invested significantly in the last, call it 12-months we’ve invested close to $0.5 billion. Some of the products do exist and our team has actually just closed a transaction of three assets in Vegas recently, actually the last couple of weeks.
The products do exist, but not in terms of the acquisition volume that you would expect from us, because just what we're trying to address, you will see acquisition, you'll see development, but I'm not willing to give you a number that would suggest that we have a target, which we don't, which is the most important point of the call. I read so much about – you know two years ago we were targeting your idea, we did. We actually saw that when the price was right, we saw a lot of idea, but for these days I see people say we’re targeting to buy one of these, we don’t, and we have been absent from the market.
I already indicated to you, we’ll be absent from the market, probably this year. There is no target portfolio in our head that we are trying to get to. It is all an IRR driven model. So, I just want you to understand that, that's a very important part, we are not trying to solve for an exposure. We are trying to invest capital. We are investors not deal processor.
That makes sense. How many operators do you have right now that are focused on this? I know Clover is and I think you mentioned Mark. I guess how many operators do you have that are focused on the type of product?
We have a bunch of relationships that are in discussions. You mentioned obviously Clover, but there are others. Too early to comment on how many people that will be doing business with. You will see more of this conversation as the year rolls. But I can assure you that we are conversation. As I offered to Dan, come over to New York, sit down with Ayesha. She will be able to give you much broader and more sort of accurate view of what's going on in the business.
You know Mike, I would say at our Investor Day later this year this will be an area of focus that will present. So you'll get a deeper dive on this business line later this year.
Okay, great. Thanks.
Our next question comes from a line of Tayo Okusanya with Mizuho. Your line is now open.
Yes, good morning everyone.
Good morning Tayo.
Hi. Your initial guidance in regards to acquisitions and dispositions actually has you guys you know set up as a net seller, at least to start the year. I think again, just kind of given your cost of capital that’s somewhat surprising to a lot of people, but at the same time seeing the amazing prices you're getting on some of these sales also makes perfect sense.
So the question I have for you is you know 12 months from now do you guys kind of still see yourselves – if you kind of look through the mirror, on the backward, but then do you still see yourselves as a net seller for the year or do you kind of think given your positive commentary on the acquisition front that you could still kind of see sort of the net buyer by the end of 2020.
Tayo, we just gave 2020 guidance this morning, now you want 2021?
No, I was going to look at 2020 backwards is what I mean.
Okay. No, I think that you know this from how we give guidance. We are not going to speculate on acquisitions and you know a big reason for that is because acquisitions are cost capital dependent and so Shankh spoke to the optimism we have on that side of the business, but we're not going to, certainly not going to put things into numbers before they've been funded.
So you know part of the reason you're correct in saying we're net sellers, we certainly, we control the sales and we control the buying process of stuff under contract, but there's a reason we don't kind of put anything speculative in there in that.
So you've got an idea what's driving our numbers, and I think you're likely correct that it will be surprising given the current backdrop that we would be net sellers, but that’s what’s currently driving our outlook, is that net seller.
If this current capital markets stays where it is, I would be very, very surprised if we're not a significant net buyer by the end of the year. Again, but it is capital markets dependent, it is opportunity dependent, it is return dependent.
Got you, that’s helpful. And then ProMedica, again great pricing. In fact amazing pricing there. Any thoughts around maybe monetizing more of the portfolio, going forward?
We are extremely, extremely happy with the relationship that was an opportunistic sale. If there are more like that comes up with ProMedica and we come to the same conclusion that we should take advantage of that, we’ll do that. But in generally speaking, we are very happy with the relationship, and we will continue with the relationship, but obviously it's not going unnoticed, and that’s sort of, was the point that even Rich was trying to point to remember.
We own this real-estate, we're just not the only owner of this real-estate. We own this real-estate with ProMedica. We’re 80% owner they are 20% owner, they are as happy with this pricing as we are and you know they are very sophisticated business people. So they are thinking about the same thing that you and I are, so we’ll see where we get to.
Good, thank you.
Thanks Tayo.
Our next question comes from Steven Valiquette with Barclays. Your line is now open.
Great! Thanks, good morning everyone. Thanks for taking the question. Just to come back to your comment on the flat trend for compensation per occupied room in senior housing, which is obviously encouraging. It kind of sounds like you were hopeful that the improving trend would stay, but you didn't have perfect visibility on it.
I guess I just wanted to drill in a little bit deeper on what you think are the primary drivers of that improvement, whether it was just serendipitous or is it related to some specific programs where you are getting some early traction or maybe it's just too early to declare a victory on sustaining those trends. Just any extra color would help. Thanks.
Thank you very much. I want you to understand my comment. I said sequential trend on you know on the labor cost was flat. It was a sequential comment, not year-over-year comment.
You know, I do not want you to think that labor cost is being flat. My whole point was on a sequential basis and perhaps, just perhaps the second derivative of that growth is somewhat flattening. So it is still a big number that’s going big time, maybe the rate of growth what we have seen in the last three, four, five years hopefully that is not going to be as bad as we have seen. It is a combination – and that is a hope. I specifically said, that we did not put that in our guidance. So if we do get that, it will be an upside to our numbers, but we did not obviously model that, because it could just be something serendipitous as you said.
There is a lot going on. If you go back about four quarters ago, I talked about different technologies that we're experimenting with and rolling out in different operating platforms. I think I specifically mentioned the use of one such that has helped one of our largest offered Sunrise to reduce their turnover, you know 30%. So we are not sitting on our hands and trying to get to somehow trying to outperform the market, we are trying to add _ through technology and is sort of that's where I will end. Tom.
Steve you saw that Phillips put out a press release a few months ago about the collaboration with Welltower at 56st Street. This building will have technology that no one in the senior housing industry has ever seen. We're hoping that this technology which will help monitor the needs of that population and anticipate their needs, will over time be able to – allow us to have more efficient labor models around how we manage this population.
You know when I took this job, and when I came off the board to be the CEO here, I remember the management team saying, ‘Wow! this is such a great operator. They have two FTEs to every resident.’ And I remember thinking and that's a good thing, that's not a good thing; that is not sustainable. And so we're looking for how do we improve resident experience and care and do it at a lower cost of labor, and the only answer we can think of is technology.
And the fact is we're going to have a great example to look at, which I know is just a few blocks from where you work Steve. So we’ll have a chance in the later part of the spring early summer to have you see what's happening there, but we're excited about that. That's part of what we think we need to do as a company.
We are advancing this. This is not happening in the industry, it's happening because Welltower is using its tentacles and relationships to challenge the historic operating model in what was essentially a hospitality business, which has really become part of the healthcare continuum. That has been something we've done. That's not happening in the industry, so stay tuned for more of that.
Okay, also I definitely got the sequential part by the way. I mean on page three on the supplement you can see kind of the raw, dollar numbers on compensation, flat sequentially and then up about 3.5% year-over-year, which is a bit better than the 4% to 5% that’s gets talked about.
Also just final thing on the subject, I was going to suggest a little bit tongue and cheek that perhaps you're grabbing all of the therapists that are being laid off in the skilled nursing sector because of PDPM, maybe re-employing them at lower wages in the assisted living, but obviously it’s not that simple. But it could at least be a general factor in supply demand dynamics around skilled labor overall or do you think that's not really a factor.
Steve, I'm not an expert in that area and they'll stay away from making any comment. I'm happy to connect with you – connect you with our operating partners and the CEO of those operating partners, but by no means I want to pretend that I'm an expert in that area; we’ll stay away from that comment.
But just to answer that, what I have seen is as the senior housing concept moves more in the direction of being part of the healthcare continuum. It attracts a different caliber of labor force, and you see that – when you see, there are a few health systems in this country that actually have their names on senior housing properties and also they also want skilled nursing properties. And they will tell you that there's an extra level of credibility, because these properties are associated with a highly respected health care system. So it does attract a better labor force and often times they have to pay them less, because people see a broader value property being associated.
So I think as we at Welltower start to move our portfolio more in that direction, towards the health system, the types of collaboration that you understand we have with payers, just legitimizes this business from the old age homes that exist all over the country and are still being built and still being invested in by REITs, that’s now what we do. We are in a much higher value part of the chain here and we're driving that. So again, I always say this, but stay tuned. I mean we're so excited about where this is headed.
Okay, I appreciate the extra color. Thanks.
Our next question comes from Nick Joseph with Citi. Your line is now open.
Hey, its Michael Bilerman here with Nick. I have a couple of, hopefully just quick follow-ups. In terms of – Tim, in your opening comments you talked about the balance sheet being a little bit more highly here today given the timing of the deals in the fourth quarter, and then you have the forward and then the disposition effective guidance that’s there, which by the summer if you take them more forward would get you to the mid to high fives.
How should we think about, and it sounds like there’s a lot of optimism here on investing pipeline, that you're not going to end up with the $600 million net disposure. How should we think about the funding of that net investment from this point forward?
Yes, thank Mike. I think that the – my prior comment on where disposition or where acquisition guidance is relative to where it may end up, is my intention in saying that it was directed towards this question, which is if we end up being a larger net acquirer, we're going to being a net acquirer, we will fund that all in real time.
So on the capital recycling side, particularly as you kind of report that leverage metric four times a year, you can have a bit of choppiness in it, but there is just a bit more of choppiness in general when you're talking about selling buying assets, if we are not selling any more assets, you can count on us being capitalizing any further investment in lockstep.
So, you should assume that kind of leverage. My language around leverage holds our list of where we end up on the net disposition or acquisition side for the year.
Okay, so is your – I guess based on the acquisition pipeline you noted today, what should we expect you would do a big forward equity offering, so that you can take down this proceeds as those deals close or are you more apt today to sort of look into your portfolio and say, ‘you know what, let's push more into the sales market today,’ because obviously selling assets and raising equity given where your stock trades has very different accretion and implications and it's hard to see now which way you were leaning.
I think that the way that we think about that is, you know the sale of asset is being driven by the value that we are seeing in the market for them. And so it's been opportunistic and if we don’t think there is kind of value there for assets, we’ll continue to sell equity.
Your point on accretion is dead on, that we have not been selling assets because it’s been more accretive to fund through this position of assets. We’ve been selling assets because it's creating a much more, sustainable and high quality earnings stream from long term.
So the decision to sell has not been driven by where the capital markets kind of are at. In fact it's been counter to that and that was part of my opening remarks, just try to get that point that we are – there's [inaudible] from how we’ve been continuing cap or recycle, but we think that’s the right move and you know this is you, the cycle is – we are not calling the cycle but it certainly is closer to the end and the beginning and we are very aware of that.
So that plays into the way that we capitalized and lockstep and certainly plays in the way that when we see bits per assets. We are not trying to real time value that relative to where our stock trades.
One thing to that, and I think you are now tired of hearing it from me, accretion is a question of – near term accretion is a question of cap rate, and we are not a cap rate buyer or cap rate seller right. We are total return buyer and total return seller. So there are still – there are assets on a total return basis that make sense to sell that will not make sense to sell if you just look at cap rate driven near term accretion.
Right. Tim, just going back to the same store policy and thank you for the presentation. Remind me between the 10-Q, 10-K and the supplemental, I know currency plays into it pro rata in terms of the Q and K doing a 100% and 0% of the unconsolidated. How does the stabilization on development methodology or guideline differ between the same store that you put in the queue, versus the supplemental. Is there a difference in methodology?
Yeah, no difference. There will be no different the methodology there, and the two points you made, FX and pro rata are explained. The 80% plus of that delta and then we talk about, when I talk about aligning our policy and our SEC docks more with kind of how we look at in the supplement, part of that is that we things like transitions, these impacts same store. Those policies differ between those two docs at this point. So that’s the idea that we’ll align those more as years go on.
Right. But historically the stabilization methodology, the five quarter that you – or four quarter in the role from the fifth, that application was identical between the number in the Sup and the number in the 10-Q and 10-K. There is no difference in guideline or methodology or rule that you are using specifically on that item.
Correct! We’ve always – that’s – I mean the commentary, we are suppose to kind of give you an idea. The reason why we approached if from a duration based test is because we think it's the simplest and the least subjective way and I think what’s come out of this conversation is going to continuing. We think we provide ample disclosure to see how that, impacts our results and we are committed to continuing to do that, but that five quarters in is in both of those pools.
Okay, and then Tom just a review just on this topic and it sounded like from your answer to Rich’s question that you know you guys have had a policy for less number of years, it’s checked by the audit committee. You’ve had discussions with the other two. The other two clearly came out consistent on Tuesday night. It seems as though there are differences or else you guys would have all come out at the same time. I'm reading from your comments if I read the tea leaves that I guess they weren't willing to come to you versus you're not willing to go to them, in terms of agreeing to a disclosure. Is that fair?
This is Tim here. I wouldn't say that. One, I think that we want to avoid kind of getting into how that conversation played out. I think that as I said in my comment earlier, I think that the positive parts of this is for investors and analysts, I think there's alignment in getting more information out there. That certainly is our first and foremost goal here. But I think what was stressed there was that we wanted – our approach to this is on a total portfolio basis. So the idea is you know metrics matter. All of our metrics matter to investors. It’s the way to value the entire portfolio and I don't think there's anything to read into of who would come one way versus the other. It's just an approach, a different approach.
And Michael, as I said earlier, we believe with respect to senior housing, we are a very different business than those other companies, and so we – our policy is what we believe is the best representation of how our assets are performing. What I would say is that our policy also has some downside risk to it for us as well.
Because something moves into a same store pool, a new development moves into a same store pool, doesn't mean that in a year the occupancy might drop 10%. So it’s not just an upside we are trying to play. I mean this is – you know we have thought very long and hard and with taking advice from others who we respect to build the same store policy that we think gives the best indication to our shareholders about how the assets are performing. So we stand by that and given that the scale and the dominance that we have, we think we're in the best position to dictate what policy should be.
Right, and that’s 150 basis points to 275 down to the 125; the impact of the stabilization from the development, that’s for 2019. Tim, are you saying that the effective 125 that you would report for a stable portfolio, is that supposed to be mimicking what Pete [ph] and Ventas are now reporting as their same store definition or do you believe there are still differences even on that measure.
I’m going to be clear to say that we’re not – we’re certainly not trying to mimic anyone else's disclosure. We're trying to provide disclosure to investors that allow them to compare and do what they need to do. But that – your question on kind of the mimicking side is – our intension is to get more disclosure around it, so you can make adjustments or kind of use the numbers how you want to across different companies, but most importantly this is for our investors and the way we think investors should view our number. So I'm not going to comment on kind of how that compares to other policies.
One thing I would say Michael, if you just, you took the 150 basis points comment, but the other differentiation point that Tim laid out is the normalizers right. So you – if you are trying to get to a specific type of disclosure, I would not just take one, I would take both. So the net difference would be 100, not 150, and obviously Tim laid out the impact, that could be for next year.
Right. I was just trying to – by going to producing this, what you call stable, whether that was supposed to get closer to a comparable number. I understand the normalizing being ahead with this year, I’m just trying to put all the pieces together to try to see whether there's commonality or not.
Yeah, I mean that's what I said. The intent of it is to provide more, an answer to the discloser, to give you more information. I think that’s what we are hearing from you, investors, etcetera, and that’s what we’ll continue to provide.
Okay, I appreciate you guys taking the time.
Thanks Mike.
Our next question comes from Chad Vanacore with Stifel. Your line is open.
Alright, since the call is running long, I’ll just keep it to one question. Just think about your managed care, it seems like you hit your expectations and since you’ll be asset from the MOB market, can we see any expansion in the SNFs portfolio this year, maybe add some details about how you're dealing with the market for SNFs in terms of risk and returns.
Yes, thank you very much. Managed care portfolio did not hit our expectation, it exceeded our expectations significantly. If you go back and look at last call transcript, we talked about $300 million EBITDAR. As you look at in my prepared remarks, I said that we achieved $307 million EBITDAR, so that’s point number one.
Point number two is, we are buyer of any asset class, skilled nursing included at a price. We think that today's skilled nursing market pricing is so hot that we should be a seller not a buyer.
Our next question comes from the line of Michael Mueller with JPMorgan. Your line is now open.
Yeah hi, just a quick one. Same store policy aside, what has been the average time to stabilize your senior housing development and as you look at these urban projects that are going into the pipeline, do you think they will stabilize faster or at a similar pace?
We underwrite three years to stabilization. It depends on obviously product-to-product is different, market-to-market is different. Usually we have seen sort of between call it 18 months to 36 months of stabilization.
It does matter in a different product, at a different place. I will tell you an example of a product that would have taken a long time to stabilize, but has stabilized in 18 months. We have an asset that’s with our partner Belmont Village in Westwood that opened weeks after Lehman Brothers collapsed. We thought that obviously that product will probably take three to four years to stabilize; it stabilized in eight months. So it really depends what the product is, what the offering is, when the demand of the market is, but a three year stabilization is on average what we underwrite.
Got it! Okay, thank you.
Our next question comes from Lukas Hartwich with Green Street Advisors. Your line is now open.
Thanks, just one left for me. The year-over-year growth from the Belmont village portfolio has been pretty volatile. Can you provide a little color there?
It's actually not volatile. What you see on the sub is an annualized number. So if you look at in any given quarter, you are looking at year-over-year, you have to divide that by four and it is actually not volatile, it is one of our most consistent out performer of all assets we own.
I guess, I am doing that, I'm comparing 4Q of ’18 versus 4Q ’19.
That’s what I’m saying, you can’t do that because that’s an annualized number. What you see on the sub is multiplied by four is what you get. You understand what I'm saying? That is…
I guess my question is, if the methodology is consistent throughout the years, wouldn't the trends be comparable?
No, it wouldn’t be. I can tell you exactly. I don't want to get into these discussions of different operators, but I can tell you that Belmont actually had a very, very good year and the NOI was up for the year. Again, it’s not a quarter-to-quarter business, it was up in the mid-single digits.
Okay, maybe I'll follow up. Thank you.
Thank you.
Our next question comes from a line of Nick Yulico with Scotiabank. Your line is now open.
Okay, thanks. I'm going to avoid some of the philosophical discussion on same store, but instead I just had a question about for the guidance on 2020 senior housing operating. What percentage of the senior housing operating business is actually captured by that same store number? If you had it on NOI or number of assets, and the fourth quarter was 80% of your senior housing, NOI was in the same store, 67% of the properties. What is it for 2020?
So it will grow throughout the year. By the end of the year we’ll be back at more than 90% of the pool is going to be and or our assets will be in the pool. So one of the reasons as you know that it gets below that kind of historical number has been the transition piece and importantly that's not what those essence were in senior housing operating, they were in triple-net. So we’ve added assets to that SHOW pool, but you'll see as the year progresses that number will grow when you'll be back above kind of 90% and the delta at that point will be primarily just acquisition activity.
So in reality if we don't buy anything it probably is well above 90%, but just thinking about kind of where it’s at historically, we are back at or above kind of historical trends by the fourth quarter.
Thank you.
Thank you.
I'm showing no further questions in queue at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.