Welltower Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2021 World Tower Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask your question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Matt McQueen, General Counsel. Please go ahead.

Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. And with that, I'll hand the call over to Sean for his remarks.

Thank you, Matt, and good morning, everyone. I hope that all of you and your families are safe and healthy. I'll walk you through our high-level business trends and capital allocation priorities. John Barkhard, our COO, will walk you through the details operating environment in show and MOBs. Tim will walk you through the triple net businesses, earnings, guidance, and capitalization. This is John's first call as he's beginning to dig into the business, so please go easy on him. Despite mediocre bottom line results, we cannot be happier with the overall results of the quarter. Just six months ago, many industry participants and observers were questioning if the COVID pandemic would result in a permanent impairment of demand for senior housing. And even most people who believed that the demand would come back were worried that with every surge of the virus, the business would take a significant step back. As it has been our experience that these surges drive revenue down, cost up, resulting in a significant hit to the bottom line. For the first time since the beginning of pandemic, we backed this trend. And despite witnessing a significant surge of the Delta variant after we spoke three months ago, we still posted the strongest sequential revenue growth in the company's history. Occupancy went up 210 basis points in the quarter relative to our guidance of 190 basis points pre-Delta, and rate growth accelerated, resulting in a 3.5% sequential increase in top-line revenue across our same-store shop portfolio. Importantly, year-over-year revenue growth inflected positively in the U.S. and U.K. portfolio for the first time since the beginning of pandemic. This trend accelerated into September when we observed a year-over-year revenue increase for the entire show portfolio led by U.S. and U.K., which reported a year-over-year revenue growth over 2%. This is particularly impressive in context of a massive Delta surge. Let's reflect on why that might be the case. With nearly all residents vaccinated and staff vaccination rates approaching 90%, which is substantially higher than general population, prospective residents and their families recognized that our communities are much safer environments than alternative settings. You can see that in our data. In the U.S., despite a tenfold increase in the daily case counts across U.S. in July and August, the number of cases within our show portfolio was just 10% of peak levels observed during the prior COVID surges. A similar trend was experienced across our Canadian and UK portfolios over the same time. This helped us build significant top-line momentum in our business as we received the dual benefit of occupancy and rate growth, which we believe will continue into next year. In fact, I believe this trend will meaningfully accelerate into next year as we feel significant momentum in the rate environment. Despite this great top-line performance, our bottom-line performance was mediocre and impacted by a perfect storm across the expense stack. We had a confluence of extraordinary costs, including agency labor as COVID surged, heightened R&M, insurance costs, utility costs, and other sun-dry costs all hitting at the same time. There was also an extra day in the quarter, which resulted in a mismatch of revenue and expenses, as majority of our operators charge rent on a monthly basis. Additionally, we saw a meaningful rise in paid time off as many employees took advantage of the easing travel restriction during the summer. The rise of COVID also resulted additional call offs from our team members at the last minute, which drove a significant spike in the use of agency labor, which cost two to three X. This situation was far more complicated by the vaccination mandate which the system is currently working through. The only good news on the expense overall is that we began to see this situation normalize in October. While it is too early to comment on exactly how long it will take for this situation to fully normalize, we need to unpack what logically will stay with us in the medium to long term and what will dissipate. In our opinion, base wage increases are sticky and they will likely to be here as unit cost of labor. We firmly believe Welltower's operating partners will be able to overcome this hurdle through rent increases as they offer a premium product within a premium micro market. The alternative of one-on-one care just got significantly more expensive. We are beginning to see the green shoots emerge as operating partners have seen expansion of labor pool with supplement and unemployment benefits rolling off and children having gone back to school. John will provide more details on this topic, but we believe the usage of agency labor will dissipate going forward. Our guidance for Q4 will suggest that we do not expect this situation to completely reverse, primarily because of three factors. One, we have a mismatch of revenue growth and expense growth as a significant portion of our annual increases happen on Jan 1. Two, after you hire people, it takes an extended period of time to go through pre-employment and training process before new employees can hit the floor. And three, delta wave, which peaked in late September, is still with us even in November. However, none of this has changed my view. that wealth hour stabilized shock margin post-COVID will be higher than that of pre-COVID margins. Even on a near-term basis, I do not believe the earnings power of this portfolio's 2022 exit run rate or 2023 run rate has changed. I want to repeat that one more time. Even on near-term basis, I don't believe the earnings power of this portfolio's 2022 exit run rate or 2023 run rate has changed. The best operators will rise from these difficult times stronger with significant higher market share while many others will find this business too hard to figure out. We're engaged in, frankly, starkly different conversation with the management teams of operators in this industry more broadly. While everyone is fatigued from the events of the past 18 months, many of our partners are working with John to rethink how technology, operational excellence, Revenue optimization and data analytics can fundamentally change this business. Think of some very basic questions. Unit labor is going up, but how many units do we need? Price needs to go up, but how do you differentiate price on units with a view of Central Park versus a brick wall? Many operators within the industry are hoping things will get better on their own. Unfortunately, hope is not a great strategy. Our intense operational focus translates directly into our capital allocation strategy. Let me restate what that is. We want to own the right asset in the right micro market with the right operator focused on right acuity and price point. And we want to own that asset at the right basis. Either we'll buy at a discount or replacement cost or we'll build at an extremely targeted way at replacement cost. While bidding trends are pretty thin, primarily with few first-time or relatively new capital, we remain extraordinarily active in off-market, privately negotiated transactions where we bring unmatched certainty to close with operator and cash capital. As most of this situation is debt maturity driven, nothing is more important to the seller than the certainty of close with a firm handshake. And as you know, our reputation is we don't negotiate and we don't retrade after we have a firm handshake. This approach has resulted in one of the most active quarters in the history of our company. We closed $2 billion of investments at a significant discount of replacement costs with expected IRRs in the high single digit to low double digit. We continued our momentum subsequent to the end of third quarter with Another $1.3 billion transaction that we have signed the purchase and sell agreement and that we have described in our press release. While they are all very important transactions, let me highlight three different flavors of the deal. We are excited about a $580 million transaction to buy eight rental and six entrance fee communities in great macro markets. We would recall that we bought a handful of Sunrise CCRCs from S&H in 2018. This transaction is very similar in asset quality and location standpoint, but at a materially better price. And the previous owner has spent significant amount of capital, over $50 million in the last five years. We should be able to achieve a high single-digit, unlevered IRR as our operating partner watermark leases of the communities. We think we can push this return into double-digit unlevered RR category as we execute a higher and better use strategy similar to what we have, where we're embarking on our 85-atria portfolio, 85-property atria portfolio. For example, there is an extraordinary piece of land in a highly desirable residential corridor of Bellevue, Washington, that is entitled for high-density residential as of right. We can build a great vertical campus of senior or wellness living there or sell it to a multi-family developer. For many of these communities, there is excess land where we intend to build additional cottage-style units which are already sold out in this location. You get the flavor. In a separate transaction, we bought five classes in the housing communities in southeastern and mid-Atlantic region with an extraordinary partner with an extraordinary operator and development group for $172 million. The average age of this community is three years, and we expect to generate a high single-digit unlevered IRR. We also negotiated a long-term exclusive development contract with this team. I cannot wait to disclose the details of this group and our growth plan with them on the next call. But here's the teaser. This team has executed flawlessly even during this pandemic. challenging Q3 without any agency labor. That gives you a sense of their operating prowess. In a similar vein to new buildings, we bought three brand-new communities in the Midwest from a multifamily developer with new perspective, our existing operator. On average, these buildings are two years old. We feel our future pipeline is robust as we are on a two-year line with several other granular transactions. We are also building significant momentum around redevelopment and real estate value add as John Barthard has executed strategy at Essex for over two decades. My team historically has focused on operator-oriented value add as we frankly didn't have the right experience after somewhat underwhelming experience from our vintage transaction many years ago. Now with John and Mike Ferry, our global head of development in one team, Redevelopment and real estate value add will be another avenue for growth going forward. Stay tuned for more. On the relationship side, I cannot be more pleased to announce that we started two new development projects with Kisco, the second phase of Cardinal and Carnegie. Kisco is one of our best operators in the portfolio, occupancy incredibly bouncing already back to high 90s. I cannot be more proud to be partnering with Andy Kohlberg and his team to find a few more A++ micromarkets where a cardinal model will be fantastically successful. We signed a long-term exclusive development contract with Kisco and look forward to grow this partnership over the next decade. From the success of this wonderful new addition to the exclusive pipeline agreements quarter after quarter, I hope that you, as our investors, now share the same belief that we truly have built a deep and wide moat around the real estate business through predictive analytics platform that is unique and unprecedented in the real estate industry. With that, I'll pass it on to John for a deep dive in operational trends. John? Thank you, Shok.