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Welltower Inc
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Good morning, ladies and gentlemen, and welcome to the First Quarter 2019 Welltower Earnings Conference Call. My name is Nicole, and I will be your 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’d like to turn the call over to Tim McHugh, Senior Vice President of Corporate Finance. Please go ahead, sir.
Thank you, Nicole. Good morning, everyone, and thank you for joining us today to discuss Welltower’s first quarter 2019 results. On the safe harbor, you'll hear prepared remarks from Tom DeRosa, CEO; Shankh Mitra, Chief Investment Officer; and John Goodey, CFO.
Before we begin, let me remind you that certain statements made during this conference call may be deemed forward-looking statements in 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 assurances these 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, 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.
And with that, I will hand the call over Tom for his remarks in the quarter.
Thanks, Tim. I'm pleased to report a strong quarter completely in line with the expectations we laid out for you at our Investor Day last December. These results are the product of consistent growth across all of our business segments, in particular seniors housing, where performance is being driven by an ongoing stabilization of occupancy which Welltower began to benefit from in 2018. We expect this to continue through the rest of the year.
We also continue to benefit from excellent access to capital which allowed us to both fund our contractual investment pipeline and position the balance sheet for opportunistic investments going forward locking in long-term value creation for our shareholders.
Our differentiated strategy and approach to capital allocation has resulted in a total of $2 billion in new investments, closed or announced, since the start of 2019 bringing accretive new investment volume to over $6 billion since early 2018. This is enabling Welltower to deliver the earnings growth we report to you today. Simply put, we run Welltower to deliver sustainable and reliable growth to our shareholders. Our results demonstrate that our strategy works.
Shankh Mitra will now give you a closer look at our operating performance in the quarter as well as our new investment activity. Shankh?
Thank you, Tom, and good morning, everyone. I will now review our quarterly operating results, provide additional details on performance, trends and recent investment activity. At our Investor Day in December, we gave you a detailed look into our view of senior housing supply and how adjusted competition units and yet-to-open inventory shocks impacts our best-in-class portfolio within our specific micro markets.
While pundits proclaimed supply headwinds for years to come using their gut feel as it suits their story at a given moment, our data analytics team of statisticians and computer scientists, armed with machine learning, not gut feelings, informed our prediction of the turn in our operating trends that I have discussed with you over the last three quarters.
However, I have to admit, our first quarter SHOP results exceeded our expectations in all three main drivers; rate, occupancy and labor cost. Same-store NOI for the SHOP portfolio is up 3% year-over-year, driven by 60 basis points of occupancy growth, 2.9% rate growth, partially offset by a 3.6% labor cost growth. These are the best fundamental results we have seen in a long time.
Sequential results are even more encouraging. Sequential revenue growth of 0.4% in a usually seasonally weak first quarter is one of the best we have seen in years, and is driven by both strong rate and occupancy. More interestingly, this quarter, for the first time in five years, we saw sequential revenue per occupied room growth of 3.3% outpaced compensation per occupied room growth of 2.8%, resulting in a positive spread of 50 basis points.
One of the most underappreciated aspect of our company is the strength and diversity of our senior housing operating platform, which has 23 operators in three countries. In any operating business, growth is not always a straight line as many of us wish it was. However, due to significant diversity of our operating partners across geographies and through these spectrums, that volatility is softened in the aggregate. Over the last few years, we have routinely seen parts of our portfolio results that resemble the challenges of the industry at large. But, these operators have consistently been pulled up by other operating partners who serve a completely different customer need in another part of the country.
Having said that, this quarter, we experienced broad strength across majority of our operators. Exceptional UK results are driven by significant asset management efforts by our UK team headed by Justice Skiver, a deep negative comp in prior years and the lease up of a couple of low occupancy assets. We expect UK results to normalize as we move through the year. On the other hand, the Canadian platform facing a tough comparison year is expected to normalize upwards as the year progresses.
We continue to be encouraged by our U.S. portfolio this quarter. NOI is up 2.2% year-over-year driven by 40 basis points of occupancy increase, 2.8% rate growth and particularly encouraging 3.8% compensation per occupied room growth. We have seen broad-based trends across larger and smaller market. From a product-type perspective, our industry leading assisted living and memory care portfolio drove results with 4% NOI growth. While a handful of quarters does not make a trend, we are cautiously optimistic that our portfolio is positioned for significant cash flow growth for years to come.
While results were in line in our other lines of businesses, I want to highlight a few things to help you understand the trend. First, in our senior housing triple-net segment, the reduction of progress is driven primarily by the removal of StoryPoint portfolio, which we sold in the quarter, and somewhat by Brookdale underperformance. As you know, we consider StoryPoint to be one of our best and most strategic operating partners yet we sold this asset at an offer we could not refuse.
We sold this 20-year-plus-old asset at a 4.6% yield at an unlevered IRR of almost 19%. For our eight-plus years of ownership, we achieved an NOI CAGR of 7.2% in face of significant supply headwind. We continue to grow with StoryPoint through a new RIDEA joint venture with two brand new assets that we just bought, several in development and are transitioning many more community to Dan and Brian that we believe we’ll see cash flow growth similar to that experienced in the portfolio that we just sold.
While we are not working on any lease restructuring in our senior housing triple-net portfolio at this moment, we have plans for every asset. And frankly, we'll be happy to get back many of these assets so that we can transfer them to the operate like StoryPoint so that you, as our shareholders, can enjoy significant upside.
Secondly, our post-acute portfolio is declining coverage is driven by a handful of L Tax [ph] we own, which is less than 1% of our asset base. Skilled nursing license asset which constitute a vast majority of our post-acute bucket either in the traditional sense or in the short stay category are stabilizing as I have described in our last quarter earnings call and you subsequently heard from Genesis. While mix shift is still a headwind, we're encouraged by occupancy growth, recent reimbursement announcements, and upcoming PDPM implementation in Q4.
Third, we're very happy with the capital deployment plan, ProMedica HCR ManorCare assets. ProMedica HCR ManorCare team is working diligently with our data analytics team to prioritize capital deployment. We have 45 assets slated to go through this CapEx program in the next two to four months. And last, as I have no noteworthy update for our outpatient medical operating results, we’re very encouraged by 2.1% net rent increase in the quarter and the dramatic changes that Keith and Ryan are making in that platform to position us for growth next year and beyond.
On the capital deployment side, we're busier than ever. We have closed $778 million of investment so far this year and have significantly more that are closing in coming months. These investments have been made both in senior housing as well as medical office segment. In senior housing segment, we continue to grow with our existing partners such as Chelsea and Discovery.
We are very excited about our new joint venture, RIDEA relationship with Frontier Management that we established this quarter. Portland, Oregon-based Frontier is one of the finest operator in the high acuity segment of the senior housing business. Greg Roderick, who is the CEO and majority owner of Frontier, is a third generation operator and leads one of the most operationally-focused teams that we have seen in this industry. We have significant plans for growth with this team in the future.
As we continue to acquire attractive assets with great operating partners or health systems, we will fund this capital need through disposition and common equity. We expect the supporting yield on disposition will be similar, very similar to the initial yield on acquisition, but our thesis is to drive higher total return, or IRR in that trade, through higher growth rates and lower CapEx.
Whether through disposition or common equity, we only allocate capital when we believe this thesis holds. However, there can be a timing difference when the capital is raised and an acquisition is closed. This timing difference, which has no impact on our run rate earnings, can impact quarterly earnings, but we're willing to make that trade-off in order to minimize the balance sheet risk and locking in long-term value creation, as Tom described. We are not interested in rolling the dice in this volatile capital market by playing a short-term game, a short-term earnings game, but rather driving long-term cash flow and NAV growth.
Beyond our significant organic acquisition machine, we are beginning to see the emergence of value-add opportunities. By definition, these transaction are not accretive to cash flow day one, but they come at a significant discount on all real estate valuation metrics, such as price per door or price per foot, and will drive significant IRR and NAV growth. We believe our acquisition of South Bay portfolio with Discovery that we closed subsequent to the quarter end fits in this bucket.
We’re exploring a few opportunities in the medical office space in this category as well. We are looking for the right opportunity, but we’re very much like the idea of what these assets can become in hands of kith and kin. In summary, we are very encouraged by accelerating prospects of both internal and external growth opportunities. This will be a very busy year for us on all fronts.
With that, I'll pass it on to John Goodey, our CFO. John?
Thank you, Shankh, and good morning, everyone. It’s my pleasure to provide you with the financial highlights of our first quarter 2019. As you just heard from my colleagues, Q1 has been another successful and very active quarter for Welltower as we’re highlighting our differentiated portfolio and corporate capabilities.
During the quarter, we completed $367 million of gross investments including $259 million of high quality acquisitions at a blended yield of 6.3% with twice that value already closed today in 2018 Q2. We also completed $612 million of dispositions in the quarter at a blended yield of 6.7%. In addition, we received $14 million in loan payoffs.
Q1 was especially active for Welltower on the balance sheet and capital racing front. During the quarter, we successfully raised $538 million of gross proceeds from our common equity issuance via our DRIP and ATM programs at an average price of $74.69 per share. In addition, we elected to affect the mandatory conversion of all our outstanding 6.5% Series I cumulative convertible perpetual preferred stock into common stock.
During the quarter, we successfully accessed the senior unsecured notes market issuing an aggregate of$1.05 billion across 5- and 10-year tenants using the proceeds to redeem an aggregate $1.05 billion of existing notes during 2019 and 2020. In doing so, we increased our average debt maturity profile by 6 months to 8.1 years at the quarter end. Finally, we initiated an up to $1 billion unsecured commercial paper program providing us with an alternative source of short-term financing.
In summary, Welltower continues to enjoy excellent access to a plurality of capital sources to fund and pre-fund our acquisition pipeline and future growth opportunities. Our Q1 2019 closing balance sheet position was strong with $249 million of cash and equivalents and $2.6 billion of capacity under our primary unsecured credit facility. Our leverage metrics improved from last quarter with net debt to adjusted EBITDA falling to 5.47 times.
Moving on to earnings, today, we're able to report a normalized first quarter 2019 FFO result of $1.02 per share representing growth of 3% over Q1 2018. As in the past, we do not include one-off income items such as these bifurcation or loan repayment fees in our normalized numbers.
Our overall Q1 same-store NOI growth was an encouraging 3.1% for the quarter with all our segments recording solid growth. Senior housing operating same-store NOI grew by 3.0% in the quarter with the UK delivering a standout result. Senior housing triple net grew by 4%, outpatient medical grew by 2.3%, and long-term post-acute grew by 3.2%.
I’d now like to turn to our guidance. For the full year 2019, we are reaffirming our expected normalized FFO range of $4.10-$4.25per share and our previously announced expected average blended same-store NOI growth of approximately 1.25% to 2.25%, with growth expected in all our business segments.
We are also reaffirming our segmental guidance of senior housing operating, approximately 0.5% to 2%; senior housing triple-net, approximately 3% to 3.5%; outpatient medical, approximately 1.75% to 2.25%; health systems, approximately 1.375%; and long-term post-acute care of approximately 2% to 2.5%.
As usual, our guidance includes only announced acquisitions and includes all disposals anticipated in 2019. Finally, on May 28, 2019, Welltower will pay its 192nd consecutive cash dividend being $0.87 per share. This represents a current annualized dividend yield of approximately 4.8%.
With that, I'll hand back to Tom for final comments. Tom?
Thanks, John. Now, Nicole, please open up the line for Q&A.
[Operator Instructions] We will pause for a moment to compile the Q&A roster. The first question comes from the line of Daniel Bernstein with Capital One.
A good quarter. Wanted to expand on the comments about value-add opportunities that you first opened up your comments with. What sectors are you seeing that in and maybe what is causing those opportunities to pop up? Is there a private equity pulling back? Is it simply developers have kind of hit the end of their line on their development funding and now need to go ahead and sell assets? Just wanted to kind of understand kind of the scope and extent of that.
Good question, Dan. I'd say it's all of the above. We're seeing opportunities across all of the sectors that we have focused in historically. And there are value-add opportunities we see outside of our portfolio, and we've talked about value-add opportunities we see inside the portfolio. Shankh, you want to expand on that?
Yeah. I think, Dan, you’re right. What happened is if you think about – we think about supply as it impacts operating portfolio, right, operating results. And also, you think about supply, you think about a lot of inventory that you can either acquire or inventory that people have built, people who are not from this business.
Think about multifamily developers. People who have never been into an operating business have built, and now they can lease up, right. So that's sort of the point. They’re hitting a wall, so you can buy these things at 40%, 50%, 60% occupancy at a very, very good price door. I'm talking of seniors housing segment. And you can do very well with them.
On the medical office, they’re few and far between. As I said, we're looking at a couple of opportunities. A great price per foot. And the ownership of some of these buildingseither have changed their strategic objective or they just could not maintain a capital structure that will require ongoing investment like we do in our portfolio, and great owners, other great owners are doing that portfolio. So, we're seeing that more in seniors housing but we have some significant opportunities in medical office as well.
Okay. But will those opportunities require a significant amount of CapEx or is it more of an operational improvement that needs to happen just trying to understand – I know it’s not accretive from day one, I’m just also – just trying to understand…
Sure.
How much do you need to put in and how long is that going to take?
Yeah. So, if you buy a 60% leased senior housing portfolio, it’s not going to be accretive day one, we know that.
Okay.
Some of these assets are newly built. So, you don't have to do anything. Some of these assets are older that you need to bring in operational improvement and refresh the physical plans. So, it can be both. So, if we do require – if some of these things require CapEx, that will be part of our underwriting, right? We’re not going to think, okay, if you think about what we do with the four Sunrise assets we bought from SNH, it was a great value-add opportunity. We put the capital and we underwrote as a part of it.
So, it can be both. We are seeing – now the one portfolio we did with Discovery, it's a newly built portfolio. So, you don't have to put any CapEx in it, and we're seeing opportunities that we do. We’re seeing both.
And if the value-add is bringing in one of our operators into a, let's just say, less than optimally-managed portfolio of senior housing assets, understand that doesn’t – that’s not like flipping on a switch. It takes some time. There is always going to be some level of disruption. So, that – and we’re seeing many opportunities like that where we’re seeing assets and the types that Shankh was referring to or actually, our operators are seeing assets in their markets that are struggling where they know that their management template could significantly turn the performance around. So, it's a little – it’s coming from lots of different directions there.
Okay. One more quick question if I could. Just want to ask about how you saw the flu impact in the season? I know it's just a quarter and there's normal seasonality. But, the flu season did start late, it's ending late. How did that impact 1Q and how do you see that rolling through your same-store numbers as we get into second quarter?
So, I will just start and then Mercedes will add color to that. So, first is that, we're very encouraged by, as I said, we're seeing in rate growth, occupancy growth as well as first time in the expense growth. So, I would not characterize our first quarter results driven by flu. Having said that, we have, as I said, we expect UK to normalize down and Canada to normalize up as we go through the year. We have high hopes for rest of the year as we have seen. But, Mercedes, you want to comment on flu?
Yes. Something specific I would say that it’s been a slightly longer flu season that we traditionally see. Having said that, we haven't had any reports from any of our operators particular impact that it’s noteworthy.
Okay. Okay. Appreciate. Thank you. I'll hop off.
Your next question comes from the line of Vikram Malhotra with Morgan Stanley.
Thanks for taking the question. So, Shankh, just wanted to expect – I just want to get more color on sort of value add not only product but just thinking about geography as well? Obviously, I know you focused more on micro markets and sub markets. But, as these opportunities come about, how do we thinkor how should we think about sort of your focus on the traditional coastal markets that you have focused on versus maybe newer markets or newer opportunities in the new markets?
Vikram, it’s a very good question. So, we're seeing these opportunities across all markets. As you know that we don't focus on just what the headline major MSA looks like. We're focused on micro markets. We believe there are seniors that you need to pick up in every market. It just needs to be the right price point. And as you’re getting into that investment, it needs to be the right price per door.
So, as you can see, that even in Michigan, Ohio portfolio on StoryPoint, we sold that asset at 19% unlevered IRR. I want to repeat, it’s unlevered IRR. So, you can make significant amount of money if it’s the right assets with the right basis with the right operator.
So, no change on template. Across the U.S., we are seeing this kind of opportunities. We're seeing sort of emergence of certain opportunities in UK. We're seeing certain emergence of opportunities in Canada. We're just – we're interested in all three of our countries across all products.
Okay.
What I would add to that, Vik, is that when you see us go outside of the core coastal markets or the major metro markets in Canada and the UK, it’s very operator specific. We cannot underscore enough the operating excellence of companies like StoryPoint who faced tremendous competition from new supply and have outperformed consistently because of their focus on operations. These are not real estate developments that are trying to participate in what's considered a new sector of real estate. These are people that come from really the health and technology sectors who have a differentiated product, again, in not first tier markets and they perform consistently. That’s who we align ourselves with.
That makes sense. And then just second question, we've obviously seen you be fairly active on the MOB side. But maybe, Tom and Shankh, can you sort of remind us or update us? You've talked in the past about opportunities with health systems and sort of opportunities both that could be specific to health system but also to senior housing. So could you remind – can you maybe update us on what sort of opportunities you were seeing with health systems and tie that back to the ProMedica deal?
I will just talk about the medical office cost aspect of your question, and Tom will add on the health system side. If you look at – we have seen as we have described in last call of 18 months, really we have seen sort of air pocket in that aspect, that part of the capital market where the cap rates have become more reasonable and we have done a lot of transactions. As we told you that we need to hit give take 7% unlevered IRR to do any transactions, so we are still seeing opportunities to do that. And there's many ways to get there, but we're focused on unlevered, not levered returns. And if those pricing changes, then we will see that we will get out of the market again like we have two to three years prior to that.
What I'll say about health systems is that when I came here or I came into the CEO spot here five years ago, I came with a knowledge and relationships about the large not-for-profit health systems. I have been engaging in that space over the last five years initially by myself and then I brought other people to the company like Shankh and Mark Shaver who have helped really develop the dialogue and relationship.
And the one thing I will tell you, as major health systems start to consider their futures, they are thinking much more outside of the acute care hospital space about where they will meet their customers. And I'm saying – I said that word specifically, not necessarily patients because patients means that you are sick, where they will meet their customers as their models evolve more towards health and wellness of the population rather treating sick people in acute care hospital beds which is simply not sustainable.
So that is leading to multi-level discussions with major health systems. And what I can tell you is it takes a lot of time to develop these relationships. This does not happen overnight and we're making very good progress.
Great. Thank you.
Your next question comes from the line of Jordan Sadler with KeyBanc Capital.
Thanks. Good morning.
Good morning.
Wanted to just start on the same-store performance and particularly relative to the guidance, it seems like you guys came in very strong particularly relative to the guidance and particularly within the senior housing operating portfolio. Can you maybe just comment on sort of what the expectation is that's embedded in the rest of the year's performance for…
Yeah. So…
…the overall portfolio but SHOP, in particular?
Yeah. So, as you know, by policy we do not update segment level guidance for the year. We are – you are right, Jordan, that we are very excited about the same-store performance, really, in the SHOP, but also medical office also outperformed as well. So, we are excited about with how sort of the year will shape up, but it’s too early to change overall same-store guidance, but just remember that we do not change segment level guidance through the year.
Well, have you just a guide…
Yeah. Go ahead.
I was just going to say, is there something we should be looking at that will soften up the trajectory like – so, in other words, you did 3% in the SHOP portfolio in the quarter versus your guide of 1.25%. But as I look out to the next three quarters, is there something either comp-wise on the revenue or expense line item that should cause a meaningful slowdown that I may not be focused on?
No, I'm not going to comment on that. That will be giving you guidance. I would say that we are just focused on different three countries. I expect UK will normalize down, Canada will normalize up, and I expect continued and I’m very, very encouraged by the U.S. performance. Just focus on what I said on a sequential basis, right?
First time in five years, we saw RevPAR growth that outpaced ComPAR growth, right, if you just think about that? What that does for the P&L rest of the year, I will leave you to that math. But I will just say – answer to your question, I don’t see anything that dramatically slows down the performance of the SHOP portfolio except the UK and UK dynamic that I just read – just described.
Okay. That’s helpful. And then could you maybe just talk about the character of the StoryPoint buyer so we can get an idea of who’s out there chasing assets like this?
I can’t because of NDA, but I can tell you that it’s everybody and anybody. We are in the public markets that’s focused that we know when – many participants are focused and when those business exactly times, which quarter, which year, private lives or not. We are seeing a multiyear trend that's coming and people are excited to deploy capital.
So, from private equity to all the institutional investors that we are seeing, everybody's interested in the asset class but this is obviously – there's an operating aspect of the business. So, people are trying to partner with the right types of operating partners or people like us.
Okay. My last one is just regarding the provision you took in the quarter. Is that something based on something that's already happened? I just was confused by the footnotes, $18.7 million charge related to a planned restructuring of seniors housing triple net.
Jordan, its John. Is that exhibit you’re looking at the Exhibit 2.
I guess your normalizing adjustment, yeah, correct.
Yeah. I mean, that was a provision for -- second provision for a loan loss and the restructuring of a couple of triple nets loss and are restructuring a couple of triple-net buildings or in special purpose entities.
That was – yeah, that occurred barely in the quarter and there was no – the income impact in our restructuring was out there in the quarter.
Okay. So that was just another like a conversion when you say restructuring a…
No. You think a provision. This is a provision in case something happens, right. So, this sort of provision you had a lot…
Oh, okay.
It’s provision against the loans that we provided for a non-full recovery on. Then, we did not recognize interest income on that loan in the quarter.
Oh, got you. Okay. Thank you.
Your next question comes from the line of Chad Vanacore with Stifel.
Right. Since we touched on StoryPoint a couple of times, it looks like the – you sold the triple-net portfolio but you actually expanded your idea of a relationship there. So, could you tell us what was the coverage on a triple-net portfolio and then what is the rationale behind selling it to the operator of a purchase option if you want to reduce Michigan exposure or is it something else there?
Yes. So, we did not expand on RIDEA portfolio created a new RIDEA joint venture…
All right. Thanks for clarification.
So that's sort of the first one. Second is the coverage was almost 1.7 times. The reason to sell the operator – those particular assets is what I told you in my prepared remarks. If you can hit 20 plus years building or buildings, you can hit a 4.6% yield to get to 19% unlevered IRR. You do that all day. Every asset is for sale at a price. So, we sold assets because we thought we got a fantastic value. There’s nothing to…
Sorry. Did you go to the operator? Did the operator come to you?
No, we got an unsolicited offer.
Okay. All right. And then just thinking about the shop portfolio, you've got Brookdale assets. Looks like you transition about 18 of those. What's the expectation of performance there? What's left to also transition there?
So I'm glad you asked that question. Our same-store pool has for our shop portfolio has not changed. It was 473 assets. It is still 473 assets. A total number of shop assets changed to 599. Why? Because the restructuring of Brookdale that we talked about last summer got done, finally got done, some of that assets in California and other places this quarter. So you saw those transition from Brookdale to Vegas has happened this quarter, actually on the one. So that changed the overall number of show assets. But I want to reemphasize again that our same-store pool did not change.
What is the expectation? We told you that we're pretty happy when we did the Brookdale transition. We transitioned the assets so that we have good coverage, right. Our EBITDARM coverage for the Brookdale assets is not the 1.3 times, right. Having said that, is it – I don't want to talk about specifically about Brookdale. Any assets we have an operating portfolio. Just think about it. Just our idea portfolio has 23 operators.
Our triple net portfolio has several operators. There are assets that can be maximized. The value can be maximized in different operators. So we have plans for every one of these assets, and I went through this in detail two quarters ago, how we think about it, how we look at it. We're more than happy to transition any of these assets if we need to is now about 2.5% of our total operating – our total income. So, it is very, very manageable that its cover and we think that under the current leadership is turning the business around. If not, we have other operators who deal to transition their assets too as we have done in last year.
…we have 10 more buildings from the transition portfolio to transition from Brookfield to other operators and we expect that to be done over the next few quarters.
All right. Thanks, Tim. And then just one more question on there which is the 10 more building, is that outside of you had a restructure agreement I think that's about $5 million or so of rent. Is that outside that? And then when would you expect that to be a factor?
Now, that is – so these are still part of the original restructuring plan. There's been no further asset after that since the original transaction. So, it's just a matter of we gave that as kind of a pro forma when fully transitioned with the difference in income would be and that 10 assets from that originally described transaction.
All right. And I just want to sneak one more question in here which is labor costs looked like they were down quarter-over-quarter shop. Is that seems to be often the senior housing market you're seeing. So what was the contributor there? And then what's your expectation going forward through 2019?
Labor cost is not down, Chad. Labor cost is up significantly. The trajectory for the first time we saw is on demand. So, if you look at what I talked about that if you -- in the first quarter sequentially…
One second. OpEx from last quarter to this quarter and it looks like it was up like 24% which is flattish, right? And that probably shouldn't be the expectation there going forward, right?
I'm sorry. I don't understand the question. Occupied unit the labor cost is up 2.8% sequentially quarter-over-quarter.
Okay.
And which rate is up 3.3%. You understand what I'm saying? Labor cost is still up significantly year-over-year. I'm talking about…
Yeah. Should we expect – you got rate going up much higher than OpEx and labor cost.
No. What's higher? Let’s not be dramatic.
No. I mean that’s a pretty good portion of growth right there.
For 75 years, we got a positive spread. I will take it. But just let’s not be dramatic. It’s not – it’s 50 basis points. But look, as we talk about labor cost has been increasing. In our portfolio of 5-plus percent on an occupied room basis for last five-plus years. I mean now you see in the market – I'll give you an example. Let's just talk about New Jersey where labor cost is a problem.
New Jersey is not slated to be a $15 market until 2021. If you look at our portfolio across the board it's $15-plus today. So maybe the regulatory side in many aspects hasn't changed but the actual labor market because of competition has already moved there. Recall that I talked about some of the regulatory driven change, which is a 15 move to the $15, let's talk about California. L.A. has hit $15 last summer.
San Francisco has hit $15 last summer. L.A. is doing that this summer. To offset that, you’re going to get more of a market driven increase rather than just a big move from 11 to 15 or on a percentage basis the big number. So, I'm not suggesting the labor cost is not going to be a problem. All I'm saying is I'm happy that finally that has been undermanned for the first time. Too early to comment whether that continues or not.
All right. Good quarter on that side of the expenses but maybe changes going forward?
We'll see.
All right. Well, thanks for your time. Appreciate it.
Your next question comes from the line of John Kim with BMO Capital Markets.
Thank you. The occupancy gap between senior housing, triple-net and SHOP has widened over the past year. I think a year ago was basically the same. And I'm wondering if this is the reflection of the quality difference between the two portfolio, sort of difference in CapEx spend and what do you think happened as the year progress?
So, look, I mean we have our SHOP portfolio in the market in better locations. Generally, that's true. And we also have some really good operators in the triple-net portfolio, right? We talked about different operators over a period of time. I think it's just different. If you think about the recovery, this is a fundamentally a local business, different parts of the country is participating in the recovery in different times.
So, I wouldn't suggest there is fundamentally something different about senior housing business. We're encouraged by the first quarter results. But this is not yet the time to take a victory lap. But we do think, if you think about it longer period of time, we think that you will see improvement in both sides of the house.
Okay. And then on the supply in a 3-mile, 5-mile ring around your assets, I know that's not really how you look at it, but it has increased sequentially. And I'm just wondering how much of a headwind do you think this will be this year given you have maintained your guidance with your…
I think you, of course, you have the answer John. That's not how we look at it. We give you how we look at it which is adjusted competition unit and you need to open SHOP and we described that we expect roughly 15% to 20% reduction this year and walk you through the details of that on Investor Day, we still expect that. Now what happens is delays happen some 2018 flows into 2019, and then 2019 flows into 2020. So, obviously, all of these things can be stretched out. But, as you can see from our results, the thesis that we had directionally is playing out.
That level of supply increased the price use given it seems like it's impacting your markets more than the national average?
We -- again, we don't look at it that way. The way we look at it it's actually down which is on…
Oh, we're not surprised.
Got it. Okay. Thank you.
Your next question comes from the line of Karin Ford with MUFG Securities.
Hi. Good morning.
Hi, Karin.
I appreciated your decision to over equitize the balance sheet again this quarter and keep your powder dry. Just was wondering if the capital markets stay open will you continue the strategy and how do you expect leverage to trend over the balance of the year?
Yeah. Karin, on the – I’ll take the leverage side first. So, beginning in our Investor Day, we talked about keeping leverage flat throughout the year. You’ve obviously taken it down significantly.
As a just a quick note on that, at the time of the Investor Day, we spoke about that from a debt-EBITDA perspective, and it was not part of our plan to convert our preferreds. In the first quarter given our stock was trading, we were given the opportunity to force a conversion on those, and we did, so we now expect our leverage on a preferred basis to come down significantly during the year, as it already has.
And then I'll just add to that. We think about the impact when you – when you act to raise capital, whether through disposition or ATM [indiscernible] acquisition, there's a gap because – not because we did not know what we'll do with the capital, but because it takes time, right? So, if we generally think about match fund when we signed the PSA, but you think about the diligence after that. And you know if you think about a medical office building, you have to think about a role for a process which a health system is on the side. They don't respond in seven days because we'd like to close the deal.
On the senior housing side, you have to think about just look at [indiscernible] and Pegasus this transaction. In California, it takes six to nine months for you to get the license transfer. So, these are the reasons that things change. We're not looking at our either stock or an asset to stay. That's a pretty good level. Let's just do that. We are doing a match fund basis.
The difference of timing comes from all these things that are just part of life if you do real estate transaction. I hope that helps you to understand. We do match fund. We're not looking at our stocks. We’re not looking at a price of an active and say, that looks pretty good. Let’s just do it, right? We are match funding, but when you sell a stock on a given day, you got the money that day. When you got the license, ultimately, in California to transfer to close a deal, it probably takes six months. We're not going to roll the dice to think what the capital markets will be six months from now.
Okay. Just to finish that, we expect leverage to come back up as we close on our under contract pipeline not more than expected and then on ATM, as Shankh said, we've got nothing planned as of now, but you should expect that to continue to match on as we see opportunities and we're very optimistic on that front right now.
Understood now. That's helpful. And the second question is on ProMedica and HCR continuing integration. I think you said on your comments that you're happy with the way that's going. Can you give us any metrics on that front, can you talk about what trends are in occupancy, margin or synergies just to flesh that out a little bit?
Well, I think you heard about many of those on our Investor Day directly from Randy and Steve, so I'm not going to get into too much. I was trying not to do it. I'll just give you one so that you are happy that your question was answered. We’re looking at occupancy both on the skill side as well as on the Arden Court side which is the city housing occupancy up in both sides of the house and still it's up 100 plus basis points. And it’s in the housing side, it’s close to that but less than 100 basis points. But I'll just leave it at that.
These things take time and we are focused on what the long term looks like, but we're happy, very happy with how the short term has played out whether that's on the reimbursement or on the cost side, on the synergy side. So, we are excited about it. And obviously, the part of our thesis was these assets we bought at a very, very low basis that was capital starved and I touched on that finally that program, it takes time to do this thing.
Finally, that program is on the way. We have 45 assets or so. Actually, really exactly 45 assets to go through that program in next two to four months. So very, very excited what will happen then. Some of them are complete, some of them are catch-ups, some of them are in between. So it’s just going through a whole series of renovation program both on the skill side as well as on the senior housing side.
I appreciate your answering the question.
Thank you.
Your next question comes from the line of Lukas Hartwich with Green Street Advisors.
Thanks. Hey, guys. Just a quick one for me. On the StoryPoint sale, was there a near-term rent reset or something like that that explains the low cap rate?
No, it doesn’t.
All right. That was it. Thank you.
Your next question comes from the line of Michael Carroll with RBC Capital Markets.
Yeah. Thanks. I wanted to touch on the long-term post-acute coverage ratios. And, Shankh, I believe you mentioned that the sequential drop related to the LTACs which is a small part of the portfolio. Can you kind of go through what's actually happening with those LTACs? It seems like it had to be a pretty big drop to impact coverage that much.
Yeah because you can't see what's happening in the LTAC industry that would suggest that you are right about your assumption.
So what's the plan for the LTAC? Is that something that you guys are going to have to address here in the near term or do you expect that they have some things that they can pull to help improve the results or what's the outlook with that part of the portfolio?
Well, I could comment on that. But as you know that we are – it's a very, very small part of our portfolio, right. We own a handful of assets. We look at everything from a total return perspective. And if we have budgets, we'll address, but I just want to remind you again that it is a very, very small part of our portfolio. That's why I wanted to have the differentiation. Post-acute is now less than 10% of our overall cash flow. From a value perspective, it’s much lower than that. But 10% – less than 10% of our overall cash flow.
Primarily, that is skilled nursing license businesses, which means also Genesis rehab short stay with its technically skilled nursing but obviously it’s a completely different business, but also traditional skilled nursing. That's primarily what that bucket is. With the handful of packs that we own, we’re thinking about how to maximize value there.
Okay. Great. And then just to touch on my question on the value-add projects that you're looking at, what size of the pipeline does value add represent right now?
I couldn't even tell you what the pipeline size looks like. We just don't do business that way. So, everything is a function of total return. And if we see opportunities that are great, we'll do it. Is that 100% of the pipeline or 5% of the pipeline, that is – we’re not trying to sort of put those things in the bucket.
All right. Great. Thanks.
Your next question comes from the line of Nick Yulico with Scotiabank.
Oh, thanks. I just wanted to go back to the SHOP same-store pool, just a clarification. I think you said the pool did not change this quarter versus the fourth quarter, is that right?
Yes, I did.
Okay. So, what I’m confused about is that if I look at the supplemental, why did the numbers change now versus the fourth quarter in terms of revenue and expenses for that pool?
I'm not sure I understand the question because there was growth?
It’s a different quarter.
No. I just mean if you look at the historical results of the same-store pool in the fourth quarter supplemental versus in this supplemental, those numbers are different, the revenue, the expenses and some NOI. And so, I'm just wondering if there was a change in accounting or if there's something else, if this is – since this supposed to be the same, I guess the same pool seems a little strange?
There was no change in accounting. They're exactly the same 473 assets. The only thing you have to think about the change is FX. Remember, we owned assets outside the United States.
Okay.
But what makes you do raise a very important question that just sort of I hear a lot of noise in recent months about our same-store policy and our same-store and there’s just a lot of wasted time on it. So, I would like to address that question. John?
Yes. Certainly. I think Nick we essentially disclosed to same store premises. One is the one that we spend a lot of time talking about our Non-GAAP sort of supplemental disclosure. That is essentially our economic participation in those same-store buildings. And what do I mean by that? I mean that is prorated for our ownership position as you know with our 23 RIDEA partners.
We often have joint venturing agreement. So, we're not a 100% owner of those buildings, and therefore, not 100% owner of the income stream, whereas for GAAP disclosure, we are required obviously on the GAAP to do a consolidated view. So, we have to take all of the buildings where we have greater than 50% ownership, consolidate that and then report on 100% basis.
So, we actually have to two different pools, which is why you see two different numbers between the supplemental sort of business view that we use and we talk about with you because we believe that's the one that drives our view of how we're performing and drives your view – should drive your view on how we're performing versus the GAAP, which is essentially a mathematical equation that we have to produce to comply with our GAAP accounting requirement. So, that's why it's different. Sometimes that number is above. Sometimes it's below. It doesn't have necessarily a consistent trend over time.
Okay. Thank you.
Your next question comes from the line of Todd Stender with Wells Fargo.
All right. Thanks. Just to drill into the Chelsea acquisition. Obviously, it shows you still have an appetite for triple net. But can you share some of the decision behind that? I guess not going RIDEA? Is it the growth trajectory, labor cost or maybe just some of the rent coverage in underwriting? Thanks.
So, Mike, if you look at – I believe two quarters ago I addressed this issue in holistically on our earnings call. We completely believe in the triple-net business. I cannot emphasize that enough that we're sitting here trying to say RIDEA is the only way to go. Of structure is secondary. Primary focus is the quality of assets, the quality of markets, and an alignment with an operator.
Several ways you can get to that alignment. You can do it in what we call RIDEA Trio. Obviously, it's a different bells and whistles on a normal RIDEA contract, which makes it very, very different. You can also do it on a triple-net lease structure. And as we obviously have different bells and whistles around it. So, we continue to believe in that business and we think CLC is a good operator and we're going to continue to grow that business.
And, Shankh, how about the rent coverage it was underwritten at and how about the maybe the CapEx responsibilities at Chelsea? Thanks.
Yeah. So, rent coverage, it was underwritten at – roughly, what we do is we under – when we underwrite a new triple-net assets, we're underwriting at it north of 1.5 times EBITDARM basis or 1.2 times EBITDAR basis. As you know that we – I believe in our Investor Day, we talked about that some of the assets that we're buying, that a $1 billion pool has an average age of four-and-a-half years.
Some of the Chelsea assets that we are buying, they were just developed so, if you think about it, from that perspective, the NOI, the EBITDARM is still ramping up so – but the stabilized coverage, we believe, will be in that range that I described.
Thank you.
Your next question comes from the line of Steven Valiquette with Barclays.
Great. Thanks. Good morning, everyone, and congrats on these results. So, there's been some…
Thank you.
…a lot of big picture questions so far. I guess I have another one here for either Tom or for Shankh. Basically, over the past month or so, I mean, the Medicare rate updates for 2020 from CMS have been pretty strong for most healthcare facilities’ business models. But I guess I'm curious to hear whether it feels like this has helped to keep momentum going with health systems and other partners just regarding development projects and other transaction activity in that context.
And also, conversely and maybe more importantly, my guess is that Medicare, for all proposals and discussions, are probably way too preliminary to give anyone pause or hesitation on development or planned projects, and I'm wondering if you're just able to corroborate that view as well. Thanks.
Yeah. Steve, I would definitely agree with you on the Medicare for all you point. That is not driving up the strategic thinking at the health systems today. I think it's very early and I'm – I sit on the side of – I think it's a completely something that would not work, but we will get into that in another time. But, I'm going to have Mark Shaver who spends a lot of time with the health systems comment on your earlier point.
Hey, Steve, thanks. This is Mark. I think we track pretty closely what's happening at CMS. In fact, Tom and I were just at a session with administrative maybe two weeks ago. And I think we – the country holistically is moving more towards valuable EDPM that Shankh alluded to on our post-acute side and new CMS reforms last week around primary care. We feel it's moving in the right direction. But, just like all of our businesses, in certain markets, value is accelerating in certain markets fee for service and the traditional commercial business is very important.
So, we continue to work with the health systems in different markets that we think are progressive. Understand where value is going but also understand reimbursement under the traditional form as well. And as Tom mentioned, we're working pretty closely with the systems on alternative sites of care and lower cost than use of care. Everything that we do is outside the four walls of the hospital which we think bodes well for how reimbursement is moving in the country.
Okay. Appreciate the color. Thanks.
The next question comes from the line of Nick Joseph, Citi.
Hi. I just want to clarify one question on guidance. In terms of the segment same-store NOI, do you plan to update that throughout the year?
No. Nick, I addressed that before on this call. We, by policy, we don't do that. We don't update segment-level, same-store guidance. We will update, if necessary, the total guidance for the same-store pool. And, honestly, you can look at the trends and you can come to your own conclusion. The problem of updating guidance in segments is that over emphasizing any segment, we're not – we don't have a favorite children among the segments, right?
As a buyer of Welltower stock, you get to buy all of them, right? So, we are trying to de-emphasize any part of our portfolio and have you focused on are we good capital allocators? Are we good manager of the portfolio? Those are the decisions. But if we look at the numbers and the trajectory and sequential, you should be able to get pretty close to what those numbers look like.
Right. But why give segment-level guidance and not update it throughout the year if you're going update other line items of guidance?
Because we don't want you to emphasize on any particular segment. We will update the total if it's necessary. We do think that market to focus too much on one segment versus the other when we, as the manager of the business, don't focus on one particular segment versus others.
Thanks.
Your next question comes from the line of Rich Anderson with SMBC Nikko.
Hey, thanks. Good morning, everyone. Hello?
Good morning.
Okay. So, Shankh, I know you don't want to talk about ProMedica in advance the real numbers coming out, but I just wanted to make sure I understand the starting point as we get closer to the time where you have some more real-time info. The coverage that was identified when you did the deal I think was really – if you look at the math, there’s really something higher than that or should be based on I think a function of the 8020 joint venture on the real estate. Am I thinking about that correctly about how the coverage is in reality from a real cash flow perspective?
I'm not sure I completely understand the question. I will give you two answers which hopefully will help you get to the answer. One is Karin has been able to get me to talk about it.
So, I actually gave some real time sort of feedback on how the portfolio is performing and I don't want to repeat myself but I did say that occupancies are both on the skill side as well as on senior housing side. And we're just starting the CapEx program, which we think will dramatically change the businesses.
Going back to your question, 20% - we 80% ownership in the real estate and our partner Promedica is the 20% owner and our cash flow is – rather their cash flow is subordinate to our cash flow. And that’s how the…
Okay. Okay. Maybe I'll take a little bit more offline later.
Yeah. You can always can go back – Rich, by the way, welcome back. You can go back to the call we did or when we did the deal and I walked through line by line of how that is calculated. But anyway regardless, welcome back.
Thanks. Second question is on medical office. I think I recall you saying something about cap rates drifting up and it got you guys more interested in doing deals on the outpatient medical and you obviously did with CNL very early this year. Is that an observation that you would agree with that there has been a trickle up on cap rates that have made the asset class more interesting to you. Just some clarity on that, please.
Yes, Rich. We think the cap rates, I forgot two years ago or 18 months ago, I can’t keep the track of time, got to an unsustainable level. And since obviously it has gotten to a level, it definitely has trickled up.
I think I mentioned that probably last few calls, every call, we have done not just P&L. We have done 2-plus billion dollars of medical office acquisition in the last 12 months. So, they have come to a level – they have come to a level where we think that IRR now makes sense. We kind of give you a guidance, but we think we need to hit a 7% IRR to get through the transaction. It’s still there. But as I said, if they go down again because people want to be aggressive again, then we will get out of the market again.
Right. So, what does that say about this investment in particular? Like, to what degree is the over under that cap rates still trickle up following the closing of the transaction and perhaps making the investment you made less effervescent or something, you know? Do you worry about that going forward?
I don’t. No, I don't. We're trying to get the total return. We're not a buyer or seller of any assets on a cap rate. We are not trying to top-tick the market, bottom-tick the market. We're trying to get to a total return and IRR and fund it through capital, whether equity or asset, but the total return would be lower, right? And that's sort of what we're trying to drive value. That’s the difference.
But if cap rates go up in your IRR calculation on the terminal value change, and that's the part of the concern perhaps you – I guess, you don’t have…
No, we don’t, because we will continue to deploy capital. And remember, that would be a concern we will continue to deploy capital and remember that would be a concern if we debt finance the deals. We’re not debt financing the deals, right. We’re equity financing the deal. So even if that's the case, A, we will continue to deploy capital.
We hope that happens. And if it doesn't happen, then we’ll just wouldn't do it. You understand my question is if it is equity-financed transaction, the value of what we just bought on a spot basis does not matter. We locked in a difference off a total return on what we bought versus what we sold.
Okay. Got it. Thanks very much.
Thank you.
[Operator Instructions] The next question comes from the line of Sarah Tan with JPMorgan.
Hi. Good morning, everyone. I’m on for Michael Mueller. Just had one question regarding the development pipeline. I think last quarter you guys talked about the $3 billion development pipeline locked up across the seven different project. Could we get an update on which other projects have been underway?
So I will just say I think you probably misheard. It’s not seven different products. It’s seven different operating partners.
Yes.
And I'll just say many of that you will start to see later this summer. So let’s just – today’s call is not the appropriate time, but more to come.
Okay. Thank you so much.
Your next question comes from the line of Tayo Okusanya with Jefferies.
Hi. This is Austin Caito on for Tayo. Thanks for taking the question. I guess just a follow-up to that. I saw that the New York development project was pushed out the conversion date another quarter, and at the Investor Day, the expectation was that construction was done by 1Q and, just curious, any new updates with that project?
Yeah. I mean, everything seems to be proceeding according to plan, both in terms of costs and time line, up to this point. So, there's no real update to…
I don't know where – there's been no announcement of any change.
I don't know. Where do you saw that? I mean, our expectation is still pretty much what it was during the Investor Day.
Yeah.
Okay, great. Thank you.
Thank you.
Yes. This is Tayo. Could I just actually ask one more follow-up question?
Go ahead, Tayo.
Yes. It’s actually more around, again, your data analytics platform. Again, I think you guys really put that on display during the Investor Day, and I'm just kind of curious, just kind of given the micro level analysis that you do, if your data analytics platform is telling you anything different about operating trends today versus your Investor Day, whether across senior housing or any of your other business segments?
Oh, the – our data analytics platform did give us that insight, which is why we started talking about three quarters ago that the business is turning when the topic du jour was it's going to be really bad for the next five years, that's what I hear. So, it's hard to talk about stuffs that already happened and take a victory lap. That’s just not a display of humility, I would say. But, as you can see, these people are very, very good, and they have called a turn, and you are seeing the results, you're seeing that turn in the results. From December to today, Tayo, we’re making 10, 15, 20 decisions. I mean like, from December to today, it’s – we don't change our views like that.
Remember, we're not making a call on the industry sector with our data analytics. This is very specific to the Welltower portfolio, our operators and the locations of our assets. As you learned at our Investor Day, we do look at the country on a micro-market basis. So, we have been managing our portfolio over the last five years and are making tough decisions that always didn't reflect well in quarterly performance, but they were the right decisions for the long term, and that is what you're starting to see flow through our results.
So, yes, our data analytics gives us what we believed to be unique and proprietary insights into the way we run our business. But again, we are not – do not think our results and what we're seeing in our portfolio is a call on the senior housing industry changing.
Got you. I appreciate the explanation. Thank you.
Thank you very much.
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