Good morning ladies and gentlemen and welcome to the second quarter 2019 Welltower earnings conference call. My name is Zutania 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. If at any time during the call you require assistance, please press star followed by zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. Now I would like to turn the call over to Tim McHugh, Vice President, Finance and Investments. Please go ahead, sir.

Thank you Zutania. Good morning everyone and thank you for joining us today to discuss Welltower’s second quarter 2019 results. Following the Safe Harbor, you’ll hear prepared remarks from Tom DeRosa Chairman and CEO; Shank Mitra, Chief Investment Officer; John Goodey, CFO and myself. 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 that its projected results will be attained. Factors and risks that could actual results to differ materially from those in the forward-looking statement are detailed in last night’s press release and from time to time in the company’s filings with the SEC. If you did not receive a copy of the press release, you may access it via the company’s website at welltower.com. With that, I will hand the call over to Tom for his remarks on the quarter. Tom?

Thanks Tim. I’m pleased to report our second quarter results to you this morning as they demonstrate that the Welltower platform is delivering on the optimistic outlook and growth plan we presented to investors over eight months ago at our investor day. Outperformance from our core real estate portfolio across all business lines, most notably led by our U.S. portfolio, is driving this growth. As we reported last evening, FFO per share of $1.05 represents 5% growth over the second quarter of 2018. Behind this growth is same store NOI growth of 3.1% in the quarter and 3.3% same store growth in our senior housing operating portfolio. These results once again demonstrate the resilience of owning the highest quality senior housing and medical office portfolio in the industry as well as a management team that had the conviction to make a series of tough decisions over the past few years that are clearly benefiting our shareholders today. With respect to new investments, we had a busy quarter, completing $2.4 billion in accretive acquisitions. This brings the total for the first half of 2019 to $2.7 billion. Shankh will take you through a deeper dive on the quarter’s operations and investment activity, but I wanted to take a moment to call out a few noteworthy items. First, you have seen us deepen our relationships with names you already know, like Sunrise, Discovery, and Summit Medical, demonstrating our commitment to being a reliable, value-added partner. Next, I’m excited about some new partners who have joined the Welltower team this past quarter. Balfour Senior Living, led by co-founders Michael Schonbrun and Susan Juroe, develops and manage some of the highest quality senior living communities I have ever seen. Mike Joseph, founder of Clover Management, develops and manages independent living communities that deliver a quality experience to seniors at affordable monthly rents. I’m also pleased that we significantly expanded our relationship with Greg Roderick of Frontier Management, who has stepped in to take over the management of many of our legacy memory care communities. Frontier’s state-of-the-art operating platform is already generating significant NOI growth from this portfolio. I’m thrilled to welcome Michael, Susan, Mike and Greg to the Welltower family. This quarter, we also announced a joint venture with the Related Group and Atria. Like the other operators I mentioned, Related and Atria were motivated to work with Welltower not for our ability to provide capital but for Welltower’s unique capability set that truly differentiates us from any other REIT engaged in this sector. I’m also pleased to tell you that much of this growth was financed by the successful sale of our portfolio of senior living assets managed by Benchmark Senior Living. The proceeds from this $1.8 billion sale have enabled us to bring our leverage levels back to our 2019 target range. We have a lot to talk about this morning, so I will now hand the mic over to 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 activities. We came into this year expecting a slow and steady recovery to take hold in our SHOP segment; however, I have to admit for two quarters in a row, our SHOP results have exceeded our expectations. Strong revenue growth of 4.4% was driven by both rate growth and occupancy growth. Same store NOI for the SHOP portfolio is up 3.3% year-over-year, the best fundamentals we have seen in years. This significant [indiscernible] growth has been broad-based. Our U.S. portfolio has been a standout performer this quarter with our largest operators, such as Sunrise, Belmont, Brandywine, and Mill Gardens all contributing to the outperformance. Rate growth of 3.7% has been consistent and broad-based. The lowest rate growth we have seen is 2.5% with one operator and 5.4% growth being the highest with another operator, with central tendencies around the mid to high 3% range. On the expense side, contract labor and benefits are the main drivers of compensation growth. This has been especially true in the U.K. as the operators chase occupancy ramp. Insurance was and will continue to be a headwind for the rest of the year throughout the portfolio. To give you more specific color on product types and market segmentation during the quarter, we have seen significant outperformance in AL versus IL and in major markets versus other markets. To repeat what we mentioned last quarter, we expect U.K. performance to trend down and Canadian performance to trend up as we get to the end of the year. Our excitement around strong SHOP results was only matched by significant transactions within the segment. We welcomed Atria, Balfour, and Clover Management to our family…

Thank you Shankh, and good morning everyone. It’s my pleasure to provide you with the financial highlights of our second quarter 2019. As you’ve just heard from my colleagues, Q2 has been another successful and very active capital allocation quarter for Welltower. During the quarter, we completed $2.6 billion of gross investments, including $2.4 billion of high quality acquisitions across eight separate transactions at a blended yield of 5.4%, making Q2 one of our busiest ever for investment. We also announced that in July, we sold our Benchmark senior living portfolio for a gross value of $1.8 billion, booking a capital gain in excess of $450 million. Tim McHugh will be detailing our updated views on acquisitions and dispositions for the full year in a few moments, along with revisions to our full year guidance. During the quarter, we successfully raised $295 million of gross proceeds from common [indiscernible] issuance via our DRIP and cash settled and forward sales ATM programs at an average price of $80.28 per share, and we saw strong demand for our new commercial paper program. Welltower continues to enjoy excellent access to a plurality of capital sources to fund our acquisition pipeline and future growth opportunities. Our Q2 2019 closing balance sheet position remains strong with $269 million of cash and equivalents and $1.1 billion of capacity under our primary unsecured credit facility. With net debt to adjusted EBITDA of 6.33 times, our leverage metrics remain strong, albeit with some increase over Q1 2019’s close. This increase was temporary, cause by the timing of recent sizeable acquisitions and dispositions. With the closing of the Benchmark transaction, we have already seen leverage return to be in line with 2019 guidance levels, and as at July 31 our cash and equivalents balance has risen to $340 million…

Thank you John. I’d like to provide some additional details of the change in 2019 outlook provided last night. Starting first with property level fundamentals, our core portfolio has performed above expectation year-to-date, driven by our senior housing operating portfolio. This has allowed us to increase our total portfolio same store guidance for the year to a range of 2 to 2.5% from our prior guidance of 1.25 to 2.25%. With all the moving pieces in the quarter, I wanted to add a bit of color on the same store and full year guidance. Our continued focus on improving the quality of our portfolio from a real estate and operator perspective can result in sequential changes to the same store pool. In 2Q, we have 47 asset sequential change in our senior housing operating same store pool from the first quarter. We added 12 properties to the pool and we also removed 59 properties from the pool comprised of 43 properties that were moved to held for sale during the quarter and 16 properties transitioned from Silverado Senior Living to Frontier Management. If the 59 transitioned and held for sale assets had remained in the pool for the quarter and for the year, SHO same store would have 2.8% in the second quarter and full year total portfolio expectations would be approximately 10 basis points lower. A few other comments regarding sub-sector growth in the back half of the year. For our senior housing operating portfolio, back half guidance anticipates a drag from the insurance premium increases which Shankh previously mentioned. For our senior housing triple-net portfolio, performance should normalize to approximately 3% in the back half as we anniversary rent resets tied to the stabilization of development properties. For our health systems portfolio, the Pro Medica lease enters the…

Thanks Tim. If you take a step back from the results we just reported, I hope you see that the quarter was not driven by a bunch of deals - deals, a word that has become a pejorative around here. Welltower is a value-added platform that can efficiently and effectively address the capital needed to move health and wellness care delivery forward, particularly in view of the aging of the population. This is generating exciting investment opportunities like the ones we’ve already announced year to date. As Shankh just told you, we also decided to pass on billions of dollars of other opportunities because, while they might have driven short term results, we believe they would not have delivered long term sustainable cash flow growth for our shareholders. Before we open up for questions, I want to take a moment to recognize and say thank you to the tens of thousands of caregivers who work in our senior housing properties every day. They are truly unsung heroes who are doing their part to improve the many lives we care for to the benefit of our residents, their families, the overall healthcare system, and our shareholders. Now Zutania, please open up the line for questions.

[Operator instructions] Your first question comes from the line of Nicholas Joseph with Citi.

Thanks. You obviously had a very busy quarter and I understand the taking the upfront dilution to the future benefit, but could you give more color on the expected growth profile difference between the acquisitions and the assets that you sold?

We had relative difficulty hearing you. I think you were asking about the growth profile of the assets that we are acquiring versus what we’re selling - is that the question?

Yes, that’s right.

If you look at the assets we bought, we bought spectacular assets in great locations, newly built assets that opened in 2017, ’18 and ’19. If you look at the average ages, they primarily opened in ’18 and ’19 on an average basis. Of course, these assets are high 60s to low 70s. From a leasing perspective, they’re leasing up rapidly, so obviously there is going to be significant cash flow growth as you think about the marginal impact on profitability relative to the fixed cost of the community, right? You still need to have an ED, you still need to have sales staff, so there’s a significant amount of fixed cost in the community, and as they lease up you start to break even at a percentage above 60%, and then obviously the margin expands significantly from there. There is significant cash flow growth from just leasing up, but the other point is very importantly, these are newly built assets in exceptional sub-markets in a very high barrier to entry market relative to the markets around them, so you will see the capex mix of these assets versus assets that we are selling will also be different. As you think about the growth profile, I don’t want you to not only think about the NOI growth, I want you to think about cash flow growth, NOI minus capex growth, which we think will significantly surpass what we sold.

Thanks. I guess longer term once they’re stabilized and when you think on a cash flow basis, what is the spread between those new acquisitions versus the dispositions, do you think, longer term?

Obviously we think there is a significant difference, right, and that goes back to our micro market analysis, but it’s kind of hard to talk about it in general terms. But I can tell you that our internal model suggests that on a stabilized basis on what we are selling versus buying, there’s a significant spread, but it’s obviously a deal by deal basis and hard to talk about anything specifically on the call. I’m happy to take it offline with you.

Sounds good, thank you.

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

Thanks, good morning. I want to just touch on the pipeline. It sounds like there’s a good amount of activity, and I think you referenced 3 million square feet of MOBs, which seems like a big number. You guys have been pretty active in that space, so I’m just curious if you could shed some additional light on what you’re seeing, what’s driving the activity. I think we’re more familiar with the senior housing [indiscernible], but if there’s anything there to sort of flesh out, that’d be great too.

Thanks John, good morning. I talked specifically about the medical office pipeline because most of my comments are focused on senior housing in the earlier part, so obviously our senior housing pipeline is very strong, we’re very bullish on the business If you think about how we grow in that business, we grow with our existing operators and we also grow our family of operators, so we have significant opportunity for growth through development as well as acquisitions. We are seeing--like, you see in the Discovery example we mentioned, there’s a lot of product in the market that has been developed by multi-family operators that we’re seeing increasingly coming to the market. We’re seeing lots of people have been able to lease up their assets 50%, 60%, but not above that, so bringing in best-in-class operators like Discovery and others to lease it up and create value for our shareholders, we’re seeing that. On the other hand, the medical office, we have seen tremendous activity, as we talked about. There was an air pocket of capital 18 months ago and we have been able to negotiate and structure a lot of transactions. As you know, John, a real estate transaction takes a lot of time from beginning to finish, and then you have to go through a rofer [ph] process with the health system, so it takes an additional amount of time for medical office because of that. But the transaction that I talked about is a reflection of what the market was end of last year, beginning of this year, and you will see we’ll be able to consummate these transactions going forward. It seems like some of the frothy capital markets in medical office is coming back in recent times, some of the transactions we have seen. I want you to know that we’re not only focused obviously on cap rates, the credit, the lease and the details behind it, also price per foot. That’s very important. We’re not willing to buy assets in a location where the price per foot reflects a significant premium to replacement cost. So we’re very, very active on both sides of the house; however, we’ll only do transactions if we think--if we can make money on a total return basis. If not, we’ll walk away, like you have seen us in ’17 and early ’18.

The other thing I’ll add, Jordan, is our pipeline is largely off market. I think that’s a characteristic of what you see us buying. We are generating these opportunities from our deep relationships in both the health systems and more broadly the medical office sector.

The assets you talked about, the 3 million square feet, did you say those are under contract or just LOI? What’s the stage?

There are some under contract, some are in [indiscernible] negotiation.

Okay, then just on Silverado, can you explain what all went down there? I think we typically think of Silverado as a best-in-class operator in the space. What played out there, and what’s left of the relationship? We typically don’t see the transitions back from ridia [ph] to triple-net, but we did obviously in this situation.

Okay, so I think I’ll first address the structure. I think three quarters ago, my prepared remarks were all focused on triple-net, where I described how we look at triple-net leases and how we’re not opposed to triple-net leases, we actually like triple-net leases in certain constructs. I want you to understand that we have no bias for one structure or the other, we are open to any structure between triple-net and ridia [ph] and obviously including the two. Silverado is a fine operator, really great operator in their markets in California, that they kept the building in California and we removed the non-California assets to Frontier, which we think will be able to create significant upside to the cash flow and, more importantly, resident experience in these buildings. These buildings are not lease-up buildings, these buildings have been open for a long time, but obviously they are 67% leased and have a margin of, call it 6.5%, 7%, so of course we think there is significant upside for both our shareholders and the residents that Frontier will be able to get to. That’s the view. It’s just a view of senior housing is not a national business, it’s a local business, so you have to think about some operators are very good in certain regions and not so much in others, vice versa, so that’s all. There is no more secret than that . It’s just a simple thing, people are very good in certain footprints.

Can you shed any light on what the catalyst for the transition was? They obviously lost a bunch of properties here, and I’m kind of curious--

The catalyst for the transition is very simply I told you the performance of those assets. We are very much of a performance-oriented organization and we thought that Silverado should focus on their core California market and some other operator, namely Frontier, will be able to drive more performance out of those assets outside of California.

And as we mentioned, Jordan, we’re already seeing positive results of that transition. Frontier is doing an excellent job managing these assets for us, so it was clearly the right decision for Welltower and allows Silverado to focus in its historic core market of California.

Okay, thank you guys.

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

Thank you. Tim, thanks for the additional color on the impact of the assets taken out of the SHOP same store pool. Is it fair to assume that Silverado was the main drag and Benchmark held up okay, or can you just maybe provide some color between those two operators?

Yes, Benchmark was a positive contributor, Silverado was not, so net-net Tim gave you the impact.

On the Benchmark sale, can you just discuss a little bit more on how the transaction was originated? Did you put these assets up on the markets or did the buyer approach you, or did your partner approach you on the transaction?

We put 11 of that, as Tim mentioned, that we had in held for sale, that those assets were looking to sell. We got significant response from the marketplace. We got several bids, double-digit number of bids from there, and three of those entities, all of them are highly, highly qualified institutional investor private capital. They approached us and said, would you sell the whole portfolio, and as you hear from Tom that everything we own is for sale at a price, so we thought it was a good transaction for us, for the private capital who obviously replaced us, as well as Silverado communities and their residents. All in all, it was a win-win-win for everybody involved.

If I could just ask for my second question, Pro Medica looks like their occupancy increased this quarter to 85.6%. Can you just remind us if you’re going to provide EBITDAR coverage, and also if you could provide maybe some commentary on the CMS Medicare increase of 2020. It looks like they bifurcated between for-profit and non-for-profit as far as the increase [indiscernible].

I’ll start with the coverage and hand it to Mark for commentary on the CMS policy. We will add Pro Medica to our [indiscernible] health system coverage and then it will roll into total company coverage when we’ve owned it for four quarters, so it will come into our fourth quarter coverage.

Then as you mentioned CMS’ increased rates, actually it was the week after we announced the transaction, those rates are going into effect as is the change in payment methodology in the fall to PDPM, which I think as many of you know, is not going to be incredibly accretive in terms of economics but also not negative at all, but what it would allow both Manor Care, Genesis others in that industry to do is be more focused on patient care. I think the team at Manor Care and Pro Medica continue to allow them to grow their business and provide more cost efficient care to the patients they serve.

And John, just to remind you that Manor Care is now in a non-for-profit status.

Great, I just wanted that clarity. Thank you.

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

Thanks for taking the question. Just two around senior housing. Maybe first on the Benchmark portfolio, if I just look at the run rate NOI last year, given just the number of assets, is it safe to say, or is my calculation correct that the cap rate is around a 5, and can you give us some context on Benchmark as it fits in with your data team? How did the capital allocation versus the fundamentals fit in, in your decision to sell?

Vikram, we can’t specifically give you a cap rate. I think you found NOI for all 48 assets, so safe to say that you have to think about a couple of things, right? You’ve got the Q1 2018 NOI and you have to think about the growth o that NOI, whatever your assumptions are. We talked about that we sold the assets at a very significant gain, the impact of relative taxes, that will get you to a nominal cap rate, and then obviously the additional capex, whatever assumptions you have will get you go more of an economic cap rate or a cash flow view of how we look at it. So we’re not going to get into the details, but you are following the right track, and needless to say that we’re extremely pleased with the assets. Obviously we’re not looking to sell the assets. We got a price that we thought we can’t refuse, so that’s one thing; and second thing is we can sit here and debate, obviously, about cap rates, but I want you to look at the price per unit. That’s not debatable, and that will tell you--and you can see what we bought these assets for, and that will give you a sense of how we feel about this, obviously the price. We do think, as I said, that the price will--obviously this transaction is good for us, good for the buyer and good for Benchmark, so we do think that there’s a great story all around. We also think obviously that the buyer who bought the assets will be able to generate the level of return that we think they have underwritten, otherwise we would not have signed off for that $50 million earn-out, so that sort of gives you a sense of the portfolio. From our perspective, you know that we don’t look at markets, we look at micro markets, and obviously if you have very detailed granular micro markets, you can build a story of sub-markets in any great detail that you want to. We think about these issues deeply, we do think that this improves the quality of our portfolio. We also think the buyer that bought is a very sophisticated, very smart buyer. They’ll also do very well. That it was not a strategic fit for us doesn’t mean these assets are not strategic.

That’s fair enough. Your comments around per-unit make sense. Second question, building off of that, the Discovery portfolio, I was sort of intrigued - the per-unit costs in the 270 range seems to be lower than several deals we’ve seen in the 350-plus range. I know the occupancy is 72% so that’s interesting as well. Can you talk about maybe what differentiates the assets or the return profile, and then also expand a bit upon the billion-dollar development program?

Look, I’m just not going to sit here and talk about transactions that other parties in the marketplace have done. I just pointed out simple facts that these assets have traded at a significantly lower price, 50, 60, 70% than different transactions, not just one. Price per unit, as I said, is not debatable, and I also pointed out that these assets are concrete and steel construction, I2 construction, so they are not stick-built assets so there is significant differentiation. For certain of those transactions, what you might or might not know that we had the contractual right to buy those, the Discovery assets, and we passed on it purely because of price. So it is a question of difference, it doesn’t mean some of those transactions are bad transactions, it’s in our opinion we’re just not willing to pay that kid of premium to replacement cost to buy assets in a market that it’s relatively easier to build. It doesn’t mean it’s easy to build, just relatively easier to build. That’s all I’m going to say about this topic.

Okay, great. Thanks.

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

You there, Mike?

Can you hear me?

Yes, we hear you, Mike.

Now we hear you.

Sorry about that. Just thinking about all the new development agreements that were announced, when you look at what’s been in place before, what’s being added, what do you see as the average annual development spend potential over the next three to five years?

Mike, these are long term development agreements, so when I talk about--let’s just say that we have done--we signed a billion dollar development agreement with Balfour, that’s not what’s going to happen in the next three years, right, so these are 10-year development agreements. We are not looking to put X-amount of money out - that’s not our focus. We’re trying to find the best micro markets and not only with the population and the wealth and the willingness to pay is there, but also what we think is going to happen five years from now, six years from now when these properties will lease up. So think about the announcement we made in San Francisco - it will start next year, it will take two years to build at least, and then obviously these assets will lease up, so this is a five to seven-year time horizon. We are thinking of where markets are going and obviously we want to grow one asset at a time with our partners, so what we are doing is we are finding these growth rate deals and making decisions one asset at a time. Likelihood is our development spend will be robust, but it will be very targeted and very, very focused.

You know, Mike, one thing I wanted to add, which I think is a bit different, is that we’re partnering in the development process, so these operators are looking to us to help them identify those specific micro markets where it makes sense to bring their product offering. That’s a bit different than the historic disconnected relationship between the capital provider and the developer - the developer is going off developing assets, and then you hope to be able to acquire those assets at some point. This is really a much more collaborative model that you’re not used to seeing, so these are long term arrangements. We are thinking jointly about where it makes sense to bring new product and in which markets.

Got it, okay. Makes sense. That was it, thank you.

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

Good morning. I actually wanted to go back to the buy versus build question. If you look at your SHO development, you’re up over $500 million and you’re building a significant number of relationships on exclusivity on the development side that you announced this quarter. Should I read that just generally, and knowing that somebody approached you for the Benchmark portfolio, but knowing all that, is it better to build versus buy? Are you seeing advantages to build versus buy in seniors housing to improve your portfolio?

Absolutely not. It just purely depends on pricing. Let’s take an example that we pointed out in great detail in the press release. With Discovery, we are buying as well as we are building. Obviously we understand development comes with a certain set of risks, so we need to make better returns that we otherwise would in an acquisition; however, we are very, very conscious of price per unit and price per foot, and we’re seeing pricing in the marketplace that doesn’t make any sense to us relative to what we can do on the build. That’s the decision - it’s not one versus another, it is a cascade of decisions, do we want to be in this location, who do we want to be in this location with, and then it’s a question of do we buy it, do we build it, do we buy recently opened buildings? There’s a lot of product that has been built in ’15, ’16, ’17, ’18, including by a lot of people who are not necessarily from this business, and they might have underestimated how difficult it is to run these communities. This is an operating business, right, so we are squarely focused on growing our platform with our operating partners one asset at a time.

Okay. I guess the other question I had, and maybe we could take this offline afterwards, I just wanted to understand more specifically how the portfolio, the senior housing portfolio has changed from a statistical point - you know, age of the portfolio, demographics, etc. You look at the supplemental, it doesn’t seem like the numbers have changed that much, but again maybe that’s something we can take offline if you want.

Yes Dan, I will just give you a couple of data points for you to think about. We are squarely focused on several layers of the decision making process, right? You talked about age of the portfolio, obviously location is important as we said several times that market and sub-market does not tell you the story. You need to understand what micro markets you are in, what neighborhoods you are in, and how those neighborhoods are changing, then you can reconstruct the sub-markets and the markets back up. It’s not the other way around. Those change, so you need to understand that. The other layer that you need to think about is operating partner and the alignment of interest with the operating partner, so that’s something we should have a conversation. Contracts are changing, and they are changing not in our favor. Contracts are changing for alignment of interest. We are not trying to do contracts that are just one-sided contracts. We are trying to do where we’re aligned, right, so I want you to understand there’s a series of decision making. Location is one, operator is one, the contract with the operator is another one, all going to the direction of we are in this, from our perspective, to make a great return for our shareholders and to enhance resident experience. That’s [indiscernible]. We’re happy to take that question offline and walk you through.

Yes, that would be great. Thanks Shankh.

Your next question comes from the line of Karin Ford with MUFG Securities.

Hi, good morning. We were a bit surprised that the dispositions accelerated again this quarter, putting up over a $3 billion number this year. We were under the impression that the portfolio was more or less roughly where you wanted it to be. Was there anything about the Benchmark portfolio that did not fit your next generation healthcare model, and how much of the remaining portfolio would you say falls into that category?

Karin, I want to be very specific. As we said, we’re only looking to sell a very small part of that portfolio. It’s important for you that you focus on the fact we’re only looking to sell a very small part of the portfolio. We got a get price that we couldn’t refuse, so we sold the portfolio. As you think about as capital allocators, we have to think about--the capital allocation process is not just what your short term cost of capital is relative to your stock or bond price that day. Everything we sell, whether that’s assets or equity, has an IRR that is attached to it, right? IRR is not even the right word - it’s total return that is attached to it, so we look at the total return of everything we sell, including equity, and we look at every asset we own and we have a forward IRR associated with that asset, and the difference between the two is the value creation for our shareholders. So we are not looking to rethink what we told you. We stand by that. We own the majority of the portfolio that we want to own going forward, obviously. However, we got a price that we couldn’t refuse and we acted in what we think is in the best interests, long term best interests of the shareholder. We’re happy to do that over and over again, but we’re not looking to sell. There is not part of the portfolio that we want to sell, if that’s what you’re looking at. This is not a non-core portfolio that we’re sitting on that we want to dispose of at this point in time. We are past that phase of our life cycle.

Okay, fair enough. My second question is just on SHOP. Can you update us on how supply is trending in your markets? Are your data analytics still telling you that it’s going to be coming down 23 to 25%-ish, and anything you can share on how the portfolio has been trending so far in July?

We talked about on investor day with very specific details that we believe that total ACU, or adjusted competition units [indiscernible] for our portfolio is down roughly about 20% this year, and we have not seen much change from there. Just remember what I described last call, is you always see ’18 deliveries flow into ’19, and as we get to the end of the year you will see ’19 deliveries will go into ’20. That’s just the normal life cycle of developments that we see, but overall there’s not much of a change. Obviously you know how the demand and supply pattern is changing from 2020 and onwards, and it’s very favorable on both ends; but we’re confident that we will be able to deliver growth from our portfolio. Our portfolio, as we thought would turn, has turned, and we’ll see what market gives us going forward.

Do you have an early estimate on how much supply will be down next year?

We’re not prepared to discuss that yet.

Okay, thank you.

Your next question comes from the line of Steve Sakwa with Evercore ISI.

Thanks, good morning. I wonder if you could just talk a little bit more about that Summit Medical transaction. Are you characterizing that as an MOB or a health system deal, and maybe just the genesis of how that deal came out.

Hey Steve. We are categorizing it as an MOB, although it now is part of a broader relationship with Summit. This is an example of how we’ve been redirecting our business. We are engaged very deeply in building relationships with health systems and large multi specialty physician groups like Summit and looking for ways to help them transition their business models to make them more competitive in the future and improve consumer focus. When Summit and CityMD came together, it opened up an opportunity for us to look for ways that we could help facilitate the capital side of that combination, so that’s where the acquisition of the Berkeley Heights campus came in. One of the things we didn’t mention is this is probably one of the best large healthcare sites in the New York region, very affluent area, very high barrier to entry market. I think you and Sheila know it pretty well. We’re excited that there is the opportunity to help them think through that campus. There may be other MOB opportunities on the campus, there may be even opportunities for housing on that campus at some point, so again off market, very strategic opportunity for us, and an example of where we’re taking the business in the future.

Steve, that merger is--the live merger process is going through right now, we expect this to close next month or so. Post that, we’re happy to have more conversations about this particular transaction, but as Tom said, clearly you can see that we’re talking about healthcare is moving to a lower cost consumer setting, you are seeing the examples of that in many places, and that changes how these physician groups and the health systems are thinking about on-campus versus off-campus, so that’s an important thing to think about in relation. The other one to think about is very simply that how we’re helping our partners to achieve their strategic objectives. Obviously this was [indiscernible] process, a very important M&A process for them, for both parties involved in that merger, and they obviously trusted us that we will be able to quickly move, execute and be there. That reliability and that trust is very important. So post completion of the merger, we’re happy to have more conversations about it.

Okay, and just second question - if it’s too long winded here for an answer, we can take it offline. You talked about this new management contract with the operators and trying to better align their fees and your performance. I’m just trying to figure out, does this in any way, shape or form potentially slow the SHOP growth over time as they have better economics and maybe the upside of the performance of the assets?

If you think about it, if we have designed it, we’re not going to get into it - it’s a proprietary structure, so we’re not going to get into the call to describe to the world how it works. But definitely if we have entered into those constructs, and we believe we’re the only ones to do that - maybe other people are doing it as well, but we think that provides upside for our shareholders. As in any operating relationship, you would expect the financial cap partner will be aligned with the capital partners. If there is significant upside in this property, we would like to share that upside with our operating partner, but it also will be a fact on the other side, on the downside protection as well. I want you to think about as these are not--these structures, which I’m happy to walk you through and there are several versions of those, are not designed to take growth down. It’s quite the opposite - for an operator, it is to incentivize operators to focus on the ops and make sure they understand that running a building exceptionally well can be as profitable as developing the building. That’s what the focus is.

Let’s have a longer conversation about this, Steve. You and Sheila should come by one day and we’ll walk you through it in greater detail.

Sounds good, thanks .

Your next question comes from the line of Nick Yulico with Scotiabank.

Thanks. I just wanted to go back to the guidance on same store. Did you talk about what is embedded for senior housing operating and if there was any change there? I think there is still some--even if you hit the high end of the old range, there’s some deceleration in the back half of the year. If you could just kind of remind us what’s driving that

Yes, I’ll start with your question on the guidance change. We do not update sub-sector guidance throughout the year, so we didn’t change that. That being said, the SHO part of our total portfolio is, as you know, typically the most volatile as far as upside-downside, so it’s fair to assume that the biggest piece of moving that in our comments today, talking about how our SHO portfolio has outperformed our expectations, are consistent with that. It’s fair to say that that is what is moving total portfolio up.

And is there some deceleration we should expect in the back half of the year versus first half of the year?

As you know, Nick, we do not run the company from quarter to quarter. We feel very good about where pricing is. You can look at pricing and you can make your own assumptions. Only thing we would tell you, that there’s two things we want you to consider. One is the insurance cost, which is a headwind for the back half of the year - it was a headwind for this quarter as well, and you have to think about the operating leverage, and we also told that as we get towards the end of the year, U.K. should moderate down and Canada should go the other way, so you put all of those things, you decide where it will land. Clearly we can’t sit here and tell you what we want the Q3 or Q4 will be. We’ll see that the market gives us, but needless to say that if you think about the pricing economics, the occupancy and expenses will get you a number. We’ll see where we are in 90 days.

Okay, thanks for that. Just last question on capex. I know you have talked about your focus on looking at capex for the portfolio, and it’s kind of hard for us to see that other than if we look in the supp and you have the page on senior housing operating and you give your recurring capex, your other capex, and it looks like the per-unit recurring capex was up year-over-year in the second quarter. Can you just talk about what’s driving that, and as well I think your guidance for overall company capex went up a little bit. Thanks.

Let’s take a step back and think about capex. Obviously capex will change as the portfolio construction is changing, right, so you’re seeing that we are selling a lot of the older assets that will help capex. I also want to remind you that you have two non-repeating items in our capex - one is the vintage capex we talked about that is finally getting flushed through the system now, and the other, four assets we bought from S&H that we discussed is finally--those monies are being spent right now. I just want you to think about capex but in relationship with how the portfolio is changing. The third piece as you think about capex is we talked about when we announced the Brookdale transition that we think these properties have significant upside and some of them will need to be refreshed, so that’s also flowing through the numbers now. But there is no question, Nick, as we talked about, we are extremely focused on capex. We’re focused on total return - capex is a very big part of that, and some of our portfolio decisions are made because of that. On the other hand, I will tell you that on the medical office side, Keith and his team has done a tremendous job on the capex side and we are starting to see the benefit of that. So stay tuned, there’s a lot to talk about this topic as we get through 2020 and beyond.

As you mentioned the full year outlook, Nick, we’ve sold Benchmark so we have gotten rid of some senior housing operating assets, but we’ve also added quite a few, and then on the transition side when we moved stuff from triple-net to SHO, the capex obviously flows through our numbers then, so that’s a cause for some incremental pick-up in the guidance.

All right, thanks everyone.

And Tim, you are referring to the Brookdale transition, right? Pegasus and [indiscernible] now they are starting to flow through our [indiscernible].

Yes.

Your next question comes from the line of Steve Valiquette with Barclays.

Great, thanks. Good morning everybody. Congrats on the various transaction announcements. For the acquisition of the newly developed Sunrise communities in DC, San Francisco and San Diego, I think in your prepared remarks, if I heard you right, you characterized these markets as high barriers to entry. I’m just wondering if you’re able to remind us again, or just give us a little more color around the nuances that make these particular markets high barrier to entry from your perspective. Thanks.

Thanks Steve. If you think about some of these markets, I’ll give you an example. First, let’s talk about--Sunrise is a very example for you to understand how to create value. In Sunrise developments, we fund 34% of all development, so whatever the yield on cost on the development, a third stays with us, and that two-thirds that have rights on that we bought, so from an economics perspective I gave two numbers. For the two-thirds, the stabilized yield as we talked about is close to 6%, but I also said the overall stabilized yield for 100% of the portfolio is close to 7%. What’s the difference? It’s the third where the yield on cost obviously is very high. Now, that goes back to why the yield on cost is so high. If you do the math, you will see it’s a big number. It’s because these are legacy lands that Sunrise owned for a long time. Some of this goes back 10 years, 11 years, and it takes that much time, in some of these cases five, six, seven years to get through zoning, get through permitting to build these assets. So these two are very well connected, so obviously because of our ownership in Sunrise, and we talked about in other situations that we own up to 35% of different operators, what comes with it is an investment in those assets at a basis. Now, it takes time to build those assets, right, in these high barriers to entry markets because of zoning and permitting, but what you get at the other end is obviously spectacular assets at a great price, great yield, if that makes sense.

Okay, got it. Yes, appreciate the extra color. Thanks.

Your next question comes from the line of Chad Vanacore with Stifel.

Thanks for fitting me in. I just want to understand the Benchmark sale a little bit better outside of the price aspect.

Can you speak up a little bit? We’re having difficulty hearing you.

Sorry about that. Is that better, Shankh?

That’s significantly better.

Excellent, all right. I want to better understand the Benchmark sale outside of price. Maybe you can contrast the difference in terms of asset and operator quality or growth profile between Benchmark and then some of the new acquisitions that you closed year to date.

We’re not going to get into an operating quality conversation. Benchmark is a highly reputed operator, so we’re not going to get into that. We give you in-place NOI every quarter, so you can look at those numbers and you can decide what the in-place NOI and the growth has been. I’ll only point out to you that what we are buying is newly built buildings and a very specific micro market. The decisions we bought into when we bought these assets were not at the portfolio level. They are asset level, one asset at a time decisions, so of course we think the difference of age and the location, which is not just a question of demographics but also a question of typographics and willingness to pay will have significant better growth, not just NOI but also NOI minus capex.

All right. Thinking going forward, if you’re looking at just newly built buildings in specific micro markets, does that limit your growth profile going forward because it’s going to limit which portfolios you can invest in?

No Chad. We are a happy buyer of assets if it is in the right market with the right operator with the right alignment.

And the right price.

And the right price. The point is not that we are only focused on new buildings. The only focus was--I was trying to explain the trade of what we bought versus what we sold this quarter.

Chad, you know, if you think about the history of the REITs acquiring senior living assets, there was a period of time when a healthcare REIT bought Benchmark, you were buying a large diverse portfolio of assets created by that operator over time. I think what Shankh is also saying is that as we move forward, we’re much more deliberate about which assets we buy. If there are large diverse portfolios and the price is right, and most of the assets fit our criteria, we might be a large portfolio buyer. But we’re not going to pay up for assets that we really do not believe are critical to our focus going forward, and I think there was a time when there was lots of asset gathering between the historic senior housing operators and the REITs. I think that times have changed and I think we have a very different approach to acquiring assets today, but we’re as aggressive in finding tremendous opportunities to deploy capital I think that should be one of the takeaways from today’s call and our earnings release, is that we are driving a tremendous opportunity to deploy capital in assets we think are sustainable for the long term, not just getting bigger for the sake of getting bigger I think there was a lot of that historically, and a lot of what Welltower has been doing is working through that, so I think you’ll see going forward--I think we think we have a much better construct and a much better asset portfolio going forward than we had four years ago.

All right, thanks Tom. Adjacent to your comments, just thinking about what you’ve invested in this quarter and what you’ve disposed of, is now the right time to take more of a risk in lease-up in newer assets rather than stabilized assets?

No Chad, that’s what I want to mention, that we are more than happy to buy stabilized assets if the price is right, not just from a capital perspective but from a total return perspective and price per unit perspective. We’re more than happy to do that. It is not a question of are we looking to buy stabilized assets. Let’s take the example of Balfour. We bought six assets. Five of them are relatively stabilized assets, one just opened, and if you think about what happens when a building’s just opened, you have negative NOI. That’s how the buildings flow through. That’s what brings your cap rate down. Quite obviously, you lease up the asset, you go the other way. We’re not looking to buy just lease-up assets. It just happens to be some people have built a lot of senior housing assets in markets who are not senior housing operators. That’s not an easy business to be in, and many multi-family developers did not understand there’s an operating model behind the building which they do not necessarily have to think about when they build multi-family buildings. So we are finding those opportunities to step in with our operating partners, exceptional operators such as Discovery, one asset at a time. We’re not looking to do big portfolios. Now if we find a big portfolio of stabilized assets that we think we have a different view, we have to have a different view from the seller otherwise the asset will be priced for perfection, then we’re happy to step in, and we do that every day. It’s just we need to have a different view from the seller either on the revenue side or on the cost side. How do we know--what is an example of that, what we have recently done ? CNL. Look at what happened in CNL. The biggest credit part of the CNL portfolio was Novant, and that has only three and a half years left in the lease term, and see what we have done since we have taken over. So we have a different view from the seller or the other potential buyers when we can step in and create significant operational value.

All right, thanks. That’s it for me.

Your next question comes from the line of Lukas Hartwich with Green Street Advisors.

Thanks. You guys have talked a lot about selling assets with high capex needs, but won’t that get factored into pricing, or do you think there is an inefficiency here?

Every trade has two sides, a buyer and a seller, right, and everybody has their reasons to buy and their reasons to sell. As I said, we think this particular example, this particular transaction is an example of win-win-win. We do think the buyers who have bought these assets will make money, and how do you know we believe that? Look at our earn-out structure. We also think this is very good for the assets. These assets will take reinvestment and then be revitalized as Tom raised in his comment in our press release, so we are not necessarily predicting there is a significant inefficiency here. We are only telling you that we’re extremely happy with the price, otherwise we would not have sold, and we are not looking to sell. We are only looking to sell a very small portion of this portfolio and we got a price we couldn’t refuse.

Great, thank you.

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

Yes, thanks. I just want to talk about the dispositions a little bit, and I think you guys did a good job on the first half sales. Can we talk about the second half sales? It seems like you have another billion, and I believe Tim mentioned some of that was the LTAC portfolio. What else is in there, and did you recently put those in there and have you identified buyers for those properties?

Of the incremental addition to guidance, it is primarily the Benchmarks. I mentioned that $300 million of the 1.7-plus of proceeds from Benchmark was already in held for sale, so the $1.7 million increase in dispositions, 1.4-plus is Benchmark and all of the remaining is that LTAC portfolio I spoke of.

Just to make sure of one thing, Mike, to get to the heart of your question, we don’t put something in held for sale or talk about selling a property or changing or guidance unless we have a handshake on a transaction, so of course we have identified the buyer, we have negotiated the price, we have agreed on what the structure should look like, and that’s why the disposition guidance has gone up. Now, if we’re loosely thinking about should we sell an asset, obviously we don’t change disposition guidance on that. I just want you to understand the process. For an example, let’s take the other side of that. When I talked about the 3 million square feet of medical office portfolio--not one portfolio, several medical office transactions, that’s not what we are--you know, that’s not the pipeline we are discussing with different sellers, do you want to see, does it work. That’s not the characteristic of the pipeline. We talked about 3 million square feet because we have agreed on the price, we have agreed on the structure, now we’re exchanging documentation, we’re going through the PSA, going through all the legal, etc. So both acquisitions and dispositions, when we talk about pipeline and we talk about disposition guidance, you should assume the economics and the structures have been set and hands have been shaken.

Great, appreciate it.

Your final question comes from the line of Rich Anderson with SMBC.

Sorry for keeping you so long. I was just curious, Tim - I appreciated the color on the make-up of the same store pool. I’m curious, what amount of assets are not in there now? I think it was 48 transitioned and then I know the held for sale, I’m fine with those being out of there, but then there was the Brookdale transitions from a while back. I’m wondering when the same store pool will be fully loaded with all the transitioned assets, and at what point do you make the decision to add them back subsequent to these transitions?

Yes, so we did not--there are not 48 assets that went to transitions. Tim specifically mentioned 16 were removed for transition, the rest obviously we sold Benchmark, which is 48 assets. To answer your question specifically, only when there’s a change of operator, it moves from same store. If there’s just a change of construct, it does not change the same store, so it’s very easy to understand. The operating performance of a building doesn’t change necessarily because fundamentally behind your systems, you have a triple-net construct or a ridia construct. When it does, when the management’s changing, the flags are changing, it’s massively disruptive for those properties. That’s the source of our same store policy. When do they come back is the question you asked. When we own the properties at least for five quarters, so that you are not lapping easy comps. That does not create same store, so we’ve got to own the properties for five quarters in the new construct, with the new operator for it to come back to the same store. That is true for our new acquisitions and for development that needs to be opened for X-amount of time, or they need to be stabilized for them to get to the same store. The idea behind all of those is same store is supposed to give you a sense of how an average portfolio on a stabilized basis is doing. All these changes, including that if you move the assets out when you are not doing well, then you put the asset back in, obviously presumably when you stabilize it, that does not give you a sense of same store, hence the five quarters. Hopefully that answers your question.

That’s perfect. Second question for anyone in the room, Ventas put out their five-year outlook on SHOP. I suspect you look at that and think you can beat it, but maybe a different angle to the question is, is there an implied ceiling on your ability to move rate up simply because you’re dealing with the elderly population and to milk every last penny from that perspective is somewhat politically incorrect, or something like that, so I’m just wondering if there is some sort of ceiling to same store growth just because of the nature of the business that you’re in. Thanks.

I’m going to try to answer that question. We’re not going to specifically get into a five-year outlook by another participant in the overall space. We gave you our own five-year outlook that explains our view of what we think the portfolio is going to be. You probably have noticed that the demand drivers are very easy to get your head wrapped around, right, and we think the same presentation you talked about has done a fantastic job of doing that, but you’ll never hear us talk about a five-year outlook on a generic basis beyond what we know in our portfolio. Tim talked about on investor day of five-year outlook of our portfolio and how the lease-ups and all the construction in progress and everything flows together for a cash flow construct. Why that is the case despite the fact we have so many people whose sold job at Welltower is to do predictive analytics. Why we don’t that, because we don’t know the supply response. The demand side is relatively--not easy, but you can wrap your head around it. I can’t tell you sitting here what the supply is going to look like five years from now. I will point out to you, not talking about any specific company, if you look at the history you will see the Welltower portfolio has outperformed in general the broad industry, as well as all other participants in the industry who own diversified portfolios. There is no reason that I would think that the future will be much different, especially in light of how we curated this portfolio in the last four years.

Let me just speak to your point about affordability. This is a business that is very high human touch, and that’s why I made the comment about the hundreds of thousands of people that work in this industry. It is a very labor intensive business, and that explains the cost side of it and why the prices are high. I think the only way we’re going to reduce the cost of a high touch, high labor component business is through technology, and that’s something we’re looking at. We don’t think that broadly you can continue to charge a price that will compensate you for the high costs of delivering this product. You can in certain markets, and that comes back to our micro market approach because like there are people who will always want luxury products, there’s always going to be a market of people that want--that demand that high service model, that’s where we can deliver that. But I think more broadly, Rich, I think we need to be thinking about how we can lower the cost side of this so the cost to the consumer can be lower, because a lot more people are going to need this service in the future.

All right, great question. Thanks Tom and everybody.

Your next question comes from the line of Nicholas Joseph with Citi.

Hey, it’s Michael Bilerman here with Nick. Tom, I just wanted to ask you about the succession planning and how you and the board are sort of approaching it. I remember when you stepped in for George, at the time you talked about how that was a process that the board endorsed and that was how things had gone. I’m just curious what is the tenor today about should you--I don’t know whether you’re deciding or not, I recognize you probably still have a long runway, but how is the board approaching succession planning? Would it be another board member, would it be someone internal, would you seek to look external? How should we think about the framework that you’re [indiscernible]?

Great question, Mike, and it’s something we talk about with the board a lot. I think the best answer I have for you is we have over the last five years brought in a next-generation management team at this company. Sometimes we get criticized for changing seats in management roles. I think we’re a company, and with the support of our board we’re constantly evaluating what are the skill sets that will be needed to run a business that would be different five years from now than it is today. So being able to recruit a very high caliber junior team of professionals all the way up to the NEO level is how you ensure good succession planning in a company. You’ve also seen us move people into different jobs here, and I think that’s another key piece. I just talked about this last week at our board meeting. The idea that you always--when you change a job, you need to get a new title, really doesn’t work. It works in some cases, but that should not be--that should be an exception versus a rule, and we’re really looking at lateral promotions. You saw someone like a Justin Skiver who was a senior vice president of investments has been moved to London, moved his family to London and he’s had a tremendous experience He’s going to come back to the U.S., but this has really made him a more viable leader in the company because he’s had diversity of experience, and that’s something - and we’re happy to talk to you more in depth about this because it’s something that we’re proud of - we’re really moving people around the organization and cross-training people, and that’s the best way I know to create a viable succession plan for a company.

So it sounds like a number one choice would be use your internal talent, give them the right skills, different skills, move them around so that you have a roster of people that you can choose from internally, that would be choice number one.

Yes.

Choice number two and three, well, it sounds like a board choice, like when you came on, would probably be lower than getting someone from the outside. Is that fair?

Yes. I mean, I’d say that we are very focused on having a deep bench here, so when there is a need for succession, that there’s a deep pool to select from and which is as least disruptive, I think, for shareholders as possible. Understand, when I stepped into the role, the board did not have the confidence that there existed that deep pool inside the company at that time. If you spoke to our board today, they have a very different view of the pool that exists inside the company than they did five years ago.

Makes sense. I appreciate the color, Tom.

Thanks for the question, Mike. Thank you.

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