HCN
#Thank you, Mercedes and good morning, everyone
I will now review our quarterly results with an emphasis in our senior housing business and focus on some geographic detail that many of you have recently asked about
Our overall same-store NOI increased 2.1% year-over-year
The triple net portfolio continues to produce stable and reliable performance
Our senior housing triple net segment grew 3.2% and the long-term post-acute portfolio grew 3.4%
Growth remains healthy and payments remain secured
Same-store NOI for outpatient medical portfolio grew 2.4%; all three of this business segments are in line with our expectations that we describe to you in the year end call in February
As a reminder, we don't include fee-related income in our same-store metrics
We think this provides more accurate picture of underlying performance
Our senior housing operating segment reported growth of 0.9% above our initial budget for the quarter
The headline results are partly lower due to leap year effect, sales in 2016 which benefited those operators that bill residents on a part DM basis adjusting for one extra days of NOI in Q1 of 2016; on a comparable basis, Q1 '17 shows same-store NOI grew 1.9% despite a 90 basis points decline in sure occupancy, revenue increased by 2.3% due to a 4.1% increase in RevPAR on a leap year adjusted basis
Strong pricing power is the hallmark of Class A real estate and long-term value preservation
Operating expenses increased 3% for shop; adjusting for the leap year, same-store expenses were up 3.5%
Labor expense remains elevated but the growth rate is down from recent highs
2016 UK living wage growth is still impacting Q1 numbers but we expect overall operating expense to moderate in rest of the year in UK
Overall, senior housing demand supply remains largely healthy with the pockets of imbalance due to heightened deliveries in certain markets
We have seen overall industry occupancy drop as new deliveries lease up
It is important to understand that move outs in the quarter was elevated due to a heightened and prolonged flu season
Much has been written about this topic with a focus on overall population data from CDC
If you look at 65 plus segment of the population as we do; outpatient visits due to flu increased 70% from last year and was 35.5% higher than the epic 2017 flu season
The hospitalization rate in this segment almost quadrupled from last year but was 50% lower than 2015. While debt due to flu is almost up 4x over last year, it is a lot lower than 2015. How do the stats translate into our business; quality operators learned valuable lesson in 2015 and were much better prepared to deal with a bad flu season this year
These precautions have led to many more temporary resident bans to protect our resident population
Say for example, what we observe in the New York metro region
While we saw strong demand that manifested in 5% plus RevPAR growth in New York MSA, admissions banned in a handful of our communities contributed to an occupancy decline of 2,280 basis points resulting at flattish NOI growth in this market which usually ranks amongst our top markets quarter-after-quarter in NOI growth
We think this admissions bans will prove beneficial to rest of the year's results as they have held to protect our resident population, providing us a base to build upon as we enter the traditional moving season in late Q2 into Q3. These markets ---+ in markets where we did not experience this occupancy headwinds, we continue ---+ our continued strong pricing power manifested into strong NOI growth in markets like D
, Southern California, Toronto and London
Our core market versus non-core market performance spread narrowed this quarter relative to last year
Other markets remain relatively flat but core market growth has receded from mid-single digit growth due to flu situations in New York and New England
We expect core market growth to pick up in the second half as we build back occupancy
It is important to note that we also observed an interesting divergence in our IL versus AL performance from last year
While same-store NOI growth in our IL communities was higher than that of AL communities primarily due to lower expense growth in IL we observed higher occupancy decline in IL versus AL
While one quarter does not make a trend, we will continue to keep close eye on this topic
In conclusion, our operating metrics were as expected in Q1 with the exception of [indiscernible] portfolio which outperforms our initial expectations
We're excited about the year and at the prospect of our operating performance
We believe our operating portfolio provides significant total return or unlevered IRR opportunity driven by three levers; occupancy upside, rate growth and normalized expense trends
We believe our sustained rate growth in the face of new supply exhibits not only the quality of real estate that we own but also the value propositions senior living provides for its growing need based resident population
While regency [ph] buyers may dominate the mindshare in very short-term, we are confident our assets class in general and Welltower in particular offers a unique opportunity to medium and long-term investors
This is particularly interesting as investors think about comparing our portfolio to many core group asset class with mid-90% occupancy level at the time when the economy is essentially at full employment
We hope as our growth rate starts to reaccelerate in the second half of the year relative to the first half and shows resilient growth in next couple of years; the public markets will share the enthusiasm that we encounter every day from world's most astute private investors
With that, I'll pass it over to <UNK> <UNK>, our CFO
<UNK>?
It's <UNK>, I will just add that if you look at ---+ you know, if your question is specifically about we filling the void for the construction lending, as you know we're not a lender, we have no ambition to be a lender but we do think that finally the construction cost are going us
As Mercedes said, with LIBOR also on the spread; so that's something very interesting, we observe the cost are going up, recently we heard from a big bang that one of the constructional loans which was priced at LIBOR plus 300, they could not syndicate it
So we're pretty excited about what is ---+ the industry is going, you know, there probably have been too much development that should not have happened but were they excited where the industry is going and we will find opportunities like we have seen in New York where its core development and we'll continue to pursue those
<UNK>, it's <UNK>
So if you think about expenses, roughly half of the expenses are fixed and half of the expenses are floating, right
So only that portion of the expenses which you have floating labor cost and others are food, that will only be impacted but if you have a fixed expense category, that will not be impacted
On the revenue basis obviously, we're only ---+ remember, we're only looking at the 29th day of February last year, and if you charge on a per DM basis, you have a revenue
So if you charge on a monthly basis, you have no difference
So it is only impacted some operators that charge on a per DM basis on the revenue side and on the expense side it's only impact the cost of the expense category
Yes, because where do you see the most impact at higher there as to entry market like Boston and New York, that's why the rates are much higher
So when you get that operator in those ---+ in New England and New York market, where you have one higher extra grade, that impacts the overall report than if you just compare to our overall portfolio, it's not just those markets
For example, I told you ---+ New York report was 5%
So you have one day of change in New York where you have an operator who charges on a per DM basis you have a much bigger impact
Yes, it's a market mix issue
<UNK>, that's a very good question
So as we mentioned Genesys had some purchase options and is that to echo as [indiscernible] from our portfolio that expired on March 31 and we're pretty excited because their purchase options were priced at a certain cap rate and the cap rates on those assets have come down significantly from there when we exercised those when we struck that deal
So what happened because of this Genesys credit as you know has significantly improved in last nine months, so ---+ and that happened obviously a month ago, we are currently negotiating three term sheets with various buyers, so we're hopeful that you will see further reduction in Genesys concentration as we go to through this year but more to come on that, stay tuned
It's in the negotiation phase, too early to comment but definitely as I said, stay tuned, there will be more to come on this topic
Rich, that's a very good question
So if you think about when we said last year, last call about flattish occupancy, we talked about the entire year, not Q1. So Q1 ---+ if you think about, as I mentioned in my prepared remarks; Q1 same-store NOI growth for the shop portfolio is actually higher, not lower
So what is the difference? First thing is the revenue growth ---+ it is underwhelming as you said for sure but if you look at the revenue growth, it's actually higher than most peers I believe
So we've got slightly lower occupancy but we got much better rates, and we are ---+ we have no desire to decrease same-store idea guidance for the year, we do not change the guidance quarter to quarter on different segments but I think we're trying to tell you we are more excited, not less, about that particular business and as we throw ---+ think about the entire year
Vikram, I think that's a great question
As I said, one quarter does not make a trend, I will tell you that not only the occupancy was better in AL but also the revenue growth was better in AL
So do we have ---+ does that mean that we have a better preference for AL versus IL today? The answer is no
We have preference for best quality real estate in the best market run by best operator, and that wherever we find that opportunity, whether it's IL versus AL, we do not think about that any differently; it depends on that particular asset in the particular sub-market run by the particular operator and we think about a lot of ---+ sort of supply ways coming
As you know, as marked into [indiscernible] as we have for IL today, and we love independent living as a business, absolutely love it
It is a relatively more cyclical business and we have to think about that as we ---+ you know, in particular time in the economy which is essentially at full employment, so we do think about that
And the other point I would tell you is, despite all of the talk of the supply, our AL portfolio is in very, very good markets and they are need-based products; so obviously the care component of it, we cannot overemphasize that what's the importance of operators in this business
So we're seeing some ---+ starting to see some differentiation but it's too early to comment
Tayo, it's <UNK>
Your definition of soon may not exactly match with our definition of soon you talked about
We talked about you know emphasize on medium to long-term, that's questions number one
But I will give you some numbers where I want you to focus on ---+ focus on not the whole industry, but our portfolio
So, if you go back and calculate quarter-after-quarter, we give you a three-mile, five-mile sort of radius and how it impacts our portfolio right? Let's just talk about a broader picture 5-mile
In Q3 of 2015, our total NOI that was impacted by supply was $83 million
That was the total
It peaked in Q2 of 2016 at about $90 million and today that is $73 million
So, I'm talking about just our portfolio
You saw a spike up and now it's coming down
So, you know we can sit here and talk about the NIC data and how that all relates to the whole industry
Obviously, you know we share enthusiasm for our sector, but we are particularly talking about how our portfolio which we think will do better
And I thought we have always been very selective
So, we're not ---+ you know particularly selective now
We have always been selective and that's not changed
So, Chad I think you have two question, one is not ---+ quarter OpEx was actually pretty favorable
It's pretty inline to what we expected
So, I'm not sure you know what are you thinking behind that question
It's pretty inline what would be expected is the same issues we have faced
Labor remains and issue, however we expect as we said, we're seeing it moderating and U.K
has an impact as John Goodey talked about
So that sort of one thing
I yelled, there was no specific, we saw a favorable revenue trend in AL versus IAL, but we saw a favorable expense trend in IAL versus AL and that's what drove the NOI difference in those two property types
You will see improvement in shop as we sort of discussed here
Outpatient medical has been relatively very steady performer
It continues to produce a very favorable and predicable growth for us
I mean quarter-to-quarter things change, but we don't see massive change in that portfolio
<UNK>, its <UNK>
So, as you know we do not update our guidance on a quarterly basis for different segments of the business, but you heard me right, that 0.9% which we reported as the growth is comparable to 1.5% to 3%
So, Tim, I think cleared that and we are more excited about that segment of the business because of the first quarter beat that we had relative to our expectations
And it's driven by Tim Lordan said, it's driven by what we see in the rate trend as well as the expense trends
It was, if you think about on a country basis, it was largely in line with our expectations and we expect U.S
to perform as we look through rest of the year
Again, I would recommend to you one thing obviously we're excited about our U.S
portfolio, we think that performance will get better, but as we want you to think about our whole portfolio, not just parts of the portfolio because different parts of our portfolio came together purely because our strategic allocation, capital allocation decision is right
So different points in the cycle, you will see different countries will react differently
IL and AL will react differently, but that's how we think about our capital allocation as a portfolio rather than one particular product type or one particular country
That's right <UNK>
