Welltower Inc.

ladies and gentlemen thank you for standing by my name is brent and i will be your conference operator today at this time i would like to welcome everyone to the welltower second quarter 2023 earnings call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question at that time simply press star followed by the number one on your telephone keypad if you would like to withdraw your question Again, press star 1. Thank you. It is now my pleasure to turn today's call 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 that differ materially from those in the forward-looking statements are detailed in the company's filings with the FCC. And with that, I'll hand the call over to Sean for his remarks.

Thank you, Matt, and good morning, everyone. I'll review our second quarter results and describe high-level business trends and our capital allocation activities. John will provide an update on the performance of our senior housing operating and outpatient medical portfolios. Tim will walk you through our triple net businesses, balance sheet highlights, and revised guidance. Nikhil is also on the call to answer questions. We are delighted to report results which exceeded our expectations in both our senior housing business as well as outpatient medical segment. Let me first dig into the senior housing segment. The key drivers of this business, occupancy, rate, and expenses, all came in better than expected this quarter. supported by accelerating demand of our product and plummeting new deliveries. From a top-line perspective, our senior housing operating portfolio achieved approximately 10% growth on a same-store basis and 17.8% growth on a total portfolio basis, driven by another solid quarter of year-over-year occupancy growth and significant pricing power. Last quarter, I discussed with you how the strong pricing trends, along with moderating expenses, are resulting in significant margin expansions that we have been all waiting for. I'm pleased to report to you that this trend intensified in the second quarter as we saw revenue per occupied room, or REPOR, growth of 7.3%, coupled with just 3.5% expense per occupied room, or EXPOR, growth, resulting in an approximate 25% operating margin, a level not seen since the onset of the pandemic. And while that still leaves significant upside before achieving our pre-COVID NOI margin of above 30%, we expect to meaningfully exceed our pre-COVID level of profitability over time through John's build out of the operating platform. All regions and product types contributed significantly this quarter, resulting in 24.2% NOI growth for our senior housing operating segment. While assisted living continues to outperform independent living, driving exceptionally strong results in the US and UK, Canada is also joining the party with 17.2% NOI growth. We firmly believe that our Canadian portfolio is finally in sustainable growth mode. In fact, we're in process of significantly optimizing our Canadian business and have recently allocated a meaningful amount of investment dollars to the region. I'll comment on both in a minute. It is also important to mention that our seniors apartment business continue to drive double-digit NOI growth despite the broader deceleration in the apartment industry. We have put significant effort in the last six years to build our wellness housing business, which now totals nearly 17,000 units, and we are pleased to see that our thesis is playing out. All in all, we have finally exceeded $1 billion of annualized net operating income in our senior housing segment for the first time since COVID and believe we have a ton of growth left in the tank. At the risk of sounding like a broken record, I want to reiterate our core belief on how to make risk-adjusted return in senior housing. Unlike a lot of empirical hearsay in the business, which either focuses on the location or the operators, we believe it is a four-dimensional optimization problem of location, product, price point, and operators. And we do this objectively through machine and statistical learning using our data science platform, Alpha. I am delighted to inform you that we made perhaps the most significant impact in this pursuit through a mutually beneficial restructuring of our joint venture with Rivera. Through a series of buy sales, we materially simplified our balance sheet and we matched specific products and locations with the right regional operators in order to achieve meaningful density in the local markets. In the UK, we took 100% ownership of 29 premier communities, many of which are located in the Greater London market and considered some of the best care homes in the country. We transitioned these care homes from Signature to Avery and believe we have a material upside in this virtually impossible to replicate portfolio, which was 72.8% occupied at the time of transition to Avery at the beginning of June. Though two months does not make a trend, I am delighted to inform you that these communities are showing positive trends right off the bat under Lorna's leadership, with current occupancy around 73.5%. In the U.S., We took 100% ownership of nine extremely well-located assets recently built by Sunrise in high barriers to entry sub-market in the West Coast, East Coast, and South Florida at a favorable basis and sold a minority interest in 12 other assets. We also moved management of 28 incredibly well-located California buildings to Oakmont. These California communities were 77% occupied when they were transitioned to Oakmont at the end of June. I fully expect this portfolio to be materially additive to our growth in 2024 under Courtney's leadership. As you can see in the case study on the page 32 of our business update highlighting previous Oakmont transitions in California, Courtney's team has taken occupancy from 64 to 90% in two years at these communities. Though this occupancy has far surpassed their previous high occupancy of 86% in 2016, I fully expect these communities will hit mid-90s occupancy in near future. All things being equal, the stabilization path should be faster for the most recent portfolio of 28 communities that they have assumed the management of. If not for the lessons learned previously, it will be for a higher starting point. And just after four weeks of operations under Oakmont, these properties are on a path to achieve approximately 100 basis points of occupancy growth in first month and are showing positive NOI traction in NOI out of the gate. And finally, Canada. Perhaps the most exciting part of this years-long effort to optimize our portfolio. Though there is a multidimensional value creation opportunity in this effort, I'm delighted to inform you that we're launching a new platform with our partner, Matthew DeGay, in English-speaking Canada. As you know, Crozier, under Matthew's leadership, is one of the best operators in the business, and we cannot be more excited about launching our first operating platform in a post-PLR world. We will double down on our investments in this community dramatically enhance resident experience and materially improve employee experience, resulting in exciting long-term career growth opportunity. I predict this operating JV will witness rapid growth in very near future. This series of steps, which is known as Project Transformer inside World Tower, is one of the most complex yet value-accurated transactions we have ever done. Under Eddie Chang's leadership in Canada and UK and Russ Simon's leadership in the US, this multidimensional project will truly transform our company in the next chapter of its evolution. This transaction marks the conclusion of our seven-year journey of contract modernization as virtually all of our contracts are now in RIDEA 3.0 and RIDEA 4.0 structures. I cannot emphasize enough how important this milestone is for our farm as we have now full alignment with all of our key senior housing operating partners. We think or swim together. To continue this theme of capital allocation, the favorable transaction environment that I described to you last quarter has resulted in an incredibly active summer for us. We currently have approximately $2.3 billion of deals under contract in 26 different off-market privately negotiated transactions. Opportunities within senior housing segments represents the bulk of these transactions, with approximately $2 billion of deals comprised of 8,900 units across all three regions. We estimate our investment in these deals to be very attractive, 30% to 40% discount of today's replacement costs, with accretive in-place cash flow and significant growth potential. While I don't like to get into individual transactions, I'd like to highlight a transaction in Canada with our partner, Cogier. We're recapping Cogier's existing institutional investor at PropCo in a highly desirable ZAS portfolio, and Matthew is reinvesting his equity going forward. This $935 Canadian dollar, million dollar transaction of both recently built and attractive stable assets are a testament to the power of our relationship in this industry. Eddie and his team has been working tirelessly over the past two years on this transaction, and we're delighted to inform you that we signed the definitive documents a few weeks ago. Additionally, following the completion of this deal and others recently under contract, we have achieved another company milestone, having closed or signed over $11 billion of transactions since our pivot to offense in fourth quarter of 2020. But we are busier than ever with a robust, visible, and actionable pipeline of opportunities that we're underwriting right now. Again, heavily senior housing, but we are also seeing some outpatient medical and skilled nursing opportunities up and down the capital stack, all of which we expect to keep us very busy for the rest of the year. Our deal teams didn't get much of a summer vacation and looks like they won't get much of a Christmas holiday either, as many of these deals will close in Q4. As I described last quarter, both debt and equity capital continue to rapidly evaporate from the commercial real estate space. We're getting hits left, right, and center from counterparties who truly appreciate our handshake approach to the business where we can bring both cash and operator to the closing tables. We're seeing that the banks are no longer willing to kick the can down the road and, in fact, are showing willingness to sell their loan books partially or completely. A handful of these transactions have taken place, and many more are brewing. The increased capital requirement directed from the regulators last week will only intensify this trend, and we're ready to help banks release their capital as they execute their other strategic priorities. Nikhil and Tim's cell phone number has been on full display in our full-page ad of the American Banker magazine since the summer of 2020. Please give them a call. I promise you they will respond within hours, not days, as it is customarily acceptable standard in senior housing industry. I predict WorldTower will play a meaningful role in helping to recapitalize distressed commercial real estate loan portfolios that fall within our circle of competence. And lastly, at the risk of stealing Tim's thunder, I would like to point out that our meaningful strengthening of our balance sheet over the last few quarter. Just in last one year, our leverage has fallen from high sixes to mid fives through a combination of outsized organic growth and prudent capital allocation activity. We're now armed with approximately $7.6 billion of near-term liquidity to address upcoming debt maturities and fund our various capital deployment opportunities. In summary, we have never been more delighted with our operating performance and have never been busier on the deal side and build out of our platform. While no one knows what future may hold, my partners and I remain as optimistic as ever on the future of our business. And with that, I'll hand the call over to Sean. Thank you, Sean.