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spk17: Council to begin the call. Matt, over to you.
spk13: 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 Welltire 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 turn the call over to Sean.
spk16: Thank you, Matt, and good morning, everyone. I'll review our third quarter results and capital allocation activities. John will provide an update on performance of our senior housing operating and outpatient medical portfolios, and Tim will walk you through our triple net businesses, balance sheet highlights, and revised guidance. Nikhil will also participate in the Q&A section of the call. Against a backdrop of increasingly uncertain macroeconomic outlook, I'm pleased to report another strong operating results which continue to exceed our expectations. Our senior housing portfolio posted another quarter of exceptional revenue growth, which continues to approximate double-digit levels, driven by both strong pricing power and occupancy build. We're delighted to report that occupancy growth not only accelerated through Q3, but also that September occupancy gains marked the highest level we have seen over the last two years. From a pricing standpoint, we continue to achieve outsized rate increases as reflected by nearly 7% growth in rep or unit revenue. As you may recall, we previously mentioned that last year, one of our largest operators pulled forward its typical January increase to September 2022. This year, the same operator elected to maintain its historical cadence of rate increases and will therefore wait until January of 2024 to push through rate increases. As a result, reported pricing of Q3 this year may appear lower than what we're experiencing in the business and it bears repeating that our operators pricing power remains strong. The story on the expense side is similar to that of our top line and result continues to outperform our elevated expectations. We reported 2.4% expense per occupied room growth or unit expense growth, the lowest reported export growth in the company's recorded history. This is largely driven by a 2.7% increase in compensation per occupied room, which represents a substantial step down in recent quarters. This combination of strong revenue and controlled expense growth has generated 333 basis points of same store margin expansion, yet another record for the company, as it marks the highest level of quarterly margin improvement in our recorded history. And our sharp NOI margin of 25.6% is the highest level of profitability we achieved since pre-COVID. NOI growth for the quarter came in 26.1%, our fourth consecutive quarter of 20 plus percent NOI growth, and the second highest level of growth in the company's recorded history. While we are pleased that margins are moving in the right direction, we're also mindful that profitability remains significantly below pro-COVID levels and below where we believe the industry can attract external capital investment on a long-term basis. Our managers strive to deliver superior product, experience, and provide valuable choices for our retired seniors. Our product remains highly affordable at the high end where we operate in the U.S. and the U.K., and they should continue to focus on highly differentiated services, even if that means rate increases need to remain at the elevated levels. As I've said many times, cutting corners is not in our DNA. We recommend that our operating partners serve fewer residents well than serve more of them poorly. As a result, one of our key items to focus is to work with the right operator to improve the customer and the employee experience. We believe that doing so will improve the experience of all of our stakeholders. Conversely, we'll be very disappointed if our operators take the path of least resistance, which ultimately will impact resident and employee satisfaction. We continue to focus on the delta of bread pour minus export as the single most important operating metric to optimize. While it is too early to comment on anything specific related to 2024, As I sit here today, I believe that the delta of reform minus export can expand, which we need to get to a sustainable level of margin. From a product standpoint, AL continues to outperform IL, and from a geographic standpoint, Canada finally caught up to the level of growth that U.S. and U.K. were experiencing. We have further retailing to do in our Canadian business with our new operating platform being launched in the next few weeks. And going forward, we believe both of our international businesses will be significant contributors to our earnings growth in 24 and 25. From a capital allocation standpoint, we have never been busier. Last quarter, we spoke about a pipeline of $2.3 billion. We closed $1.4 billion in Q3 and roughly another $900 million in October. Additionally, we have another billion dollars of deals just about to cross the finish line. Beyond these billion dollars of investments under contract, our pipeline remains large and near-term actionable, but the execution of these deals will depend on our access to capital. The extremely challenged debt and equity markets in this higher-for-longer rate environment suggest that this trend will continue and perhaps will get better in 2024. We'll continue to see credit evaporate from our investment universe and are selectively pursuing great opportunities in both whole stack and med stack levels with highly favorable last dollar exposure. These opportunities have potential to achieve equity returns with basis and credit downside protection typically seen in low leverage transactions. We're seeing opportunities across product types and geographies with equity investments in U.S. senior housing and credit investment on the SNF side, making up the large worth of opportunities that we're constantly being pinged on. I want to remind you that we have a three-dimensional lens through which we measure investment opportunities, risk, reward, and duration. Given the substantial rise of real rates over the last 90 days, we have recalibrated these thresholds of these three thresholds higher. In other words, for the same risk, we need higher returns today than we did 90 days ago, or we can do deals with a similar return profile but with a much lower risk and so forth. We're students of history and markets and cannot find many times when a lot of good has come out of a period of sharply higher real rates. If real rates continue to grind higher, we'll continue to calibrate our three guideposts higher. So far, we have no problem achieving these recalibrations. As sellers understand, the markets have changed, and we remain the best, and many times, the only hope for liquidity. From a balance sheet perspective, amidst the growing macroeconomic, fiscal, and geopolitical uncertainty, we're pleased to have reduced our net debt to adjusted EBITDA to one of the lowest levels in our recorded history, which also represents nearly a two-turn decline from just 12 months ago. Our balance sheet strength and flexibility gives us opportunity to remain on offense or provide shelter if the economic environment meaningfully worsens next week. We don't have a clue which direction the wind will blow, but I'm delighted that we don't need fair weather to meet our obligations or grow. As you all know, a wall of debt maturity in the commercial real estate sector is coming exactly at a time when debt capital is evaporating from the market. We will not be surprised if significant dilutive capital is raised or otherwise a lot of keys will need to be returned to the lenders. I am certainly grateful to Tim and our best-in-class capital markets team for keeping us ahead of the cadence that Nikhil and I can spend on as we look to capitalize on the best environment for investments that we have ever seen. ERN is shaping up to be extremely busy, and Q1 also looks promising if we continue to have access to growth capital. At the risk of sounding like a broken record, I want to reiterate that we'll only grow externally if and only if we can grow value accretively on a partial basis for existing shareholders. I hope that you, as our shareholders, are as excited as I am about our operating results and capital allocation activities. But interestingly, those are not the most exciting areas inside World Tower today. What truly galvanizes us are the exciting prospects of John's operating platform and especially the digital transformation of senior housing industry. As we have discussed ad nauseum, we refuse to accept the lack of 21st century business process and technology infrastructure of this primarily people-driven business where individual communities are on their own island. We have made tremendous strides in the last 90 days on the technology backbone of what World Tower 3.0 may look like and how far we can raise the bar for resident and employee experience. World Tower's engine room is buzzing with pilots and scaling around traditional technology solutions like from ERP and CRM, to advance technology solutions around robotics and artificial intelligence. Our goal is to elevate the community experience by delighting the customer and their families and simplify and enhance the employee experience, all of which should lead to occupancy and online growth. Then, and only then, do we have perhaps a shot at earning a long-term sustainable return for our owners which has been less than satisfactory over the last decade. My partners and I are truly inspired and are hopeful that we're turning the corner to achieve multi-year double-digit compounding growth rate. While supply and demand backdrop is squarely in our favor, we're far more focused on the value-add alpha from our platform, which you, as our fellow owners, have funded to build with our blood, sweat, and tears. And with that, I'll pass the call over to Sean.
spk06: Thank you, Sean. I know that it sounds like a broken record, but again, another great quarter. Our total portfolio generated 14.1% same-store NOI growth over the prior year's quarter, led by the senior housing operating portfolio with 26.1% year-over-year growth. We are methodically moving forward, focused on the customer and employee experience, and that is driving results. We started with brute force, effectively relying on our raw labor to identify issues and opportunities. We continue to improve the systems and processes and organize the data to make data-driven decisions to improve the business, and we're just at the beginning. The medical office portfolio's third quarter same-store NOI growth was 3.4% over the prior year's quarter. Same-store occupancy was 95%, while retention remained extremely strong across the portfolio at nearly 93%. The 26.1% third quarter year-over-year NOI increase in our same-store senior housing operating portfolio was a function of 9.8% revenue growth driven by the combination of 6.9% REVPOR growth, 220 basis points of average occupancy gain, and moderating expense growth. Expenses remain in control, coming in at 5.1% for the quarter over the prior year's quarter. The strong revenue growth and expense growth led to substantial margin expansion of 330 basis points. As Shank has mentioned many times, the marginal increase in expenses as occupancy continues to grow over 80% is relatively low for obvious reasons. Many of the expenses are fixed. Each property has an executive director, head chef, maintenance director, regardless of the occupancy level. The bulk of maintenance, utility, and many other costs are largely factored in at 80% occupancy. As a result, our expense per occupied room continues to remain low, enabling the business to improve the margins. As Shank mentioned, our export growth for the quarter was 2.4%, the lowest in our recorded history. All three of our regions continue to show strong same-store revenue growth, starting with the U.S. at 9.6% and Canada and the U.K. growing at 9.7% and 12.9% respectively. The strong revenue growth in each region combined with the expense controls have led to fantastic NOI growth in the US, Canada, and the UK of 25.4, 27.1, and 37% respectively. The management transitions continue to perform above expectations. We are grateful to our operating partners who are working so hard to ensure that we achieve the improved operations that we set out to accomplish in our journey to operational excellence. Our operators continue to do an amazing job of managing through the complexities of the business to provide a superior customer and employee experience. Many of our senior customers were born in the 1930s, the Depression. They have worked hard and sacrificed all their life, and now they deserve to enjoy the fruits of their labor. The product and services remain very affordable to a large segment of the population who have purchased and paid off their homes years ago and are now at a point where they can sell their home, live off their assets, enjoying a good quality of life during their golden years, which they deserve. Our focus with our operating partners on improving the customer and employee experience benefits all stakeholders. For example, our focus on materially reducing agency labor improves both the customer and employee experience as both are benefited by permanent high-quality employees compared to the random agency employees lacking relationships with our customers and knowledge of the community systems and processes. Additionally, eliminating the agency or middlemen enables us to ensure the hardworking people at our communities receive a fair compensation package with vacation and benefits as well as competitive pay, and our shareholders benefit from the reduced leakage to the agency company owners. Care is the essence of the service provided, and ensuring employees can deliver outstanding care is one of our top priorities. Our operating platform efficiencies will increase the time available for care and reduce the stress on our employees. For example, at one site, one of my team members worked at, The executive director spends over three hours per move-in inputting the documents into the antiquated systems. The CRM, RAT role, and CARE modules are disparate systems. Our platform has all the documents in e-form, and the modules are fully integrated, reducing the potential for errors and saving time, which enables the site leader to focus on the customers and employees, not paperwork. We continue to make substantial progress on our platform, and the related rollout. I'm grateful for the engagement and participation by the leadership of our operators who are actively working with us to ensure the success of the platform. More to come in 2024. I will now turn the call over to Tim.
spk04: Thank you, John. My comments today will focus on our third quarter 2023 results, the performance of our triple net investment segments of the quarter, our capital activity, a balance sheet and liquidity update, and finally, our updated full year 2023 outlook. Welltower reported third quarter net income attributable to common stockholders of $0.24 per diluted share and normalized funds from operations of $0.92 per diluted share, representing 10.4% year-over-year growth or 16.5% growth after adjusting for HHS and the year-over-year impact from changes in FX rates and higher base rates and floating rate debt. We also reported total portfolio same-store and OI growth of 14.1% year-over-year. Now turning to the performance of our triple net properties in the quarter. As a reminder, our TripleNet Lease portfolio coverage and occupancy stats reported a quarter in arrears, so these statistics reflect the trailing 12 months ending 6-30-2023. In our Senior Housing TripleNet portfolio, same-store NOI increased 3.9% year-over-year and trailing 12-month EBITDA coverage was 0.93 times. In the quarter, we agreed to convert 11 StoryPoint assets from TripleNet Lease to Rodeo, which will bring the regionally-focused managed portfolio up to 55 Midwestern properties in the fourth quarter. Next, same-store NOI in our long-term post-skewed portfolio grew 5.3% year-over-year, and trailing 12-month EBITDA coverage was 1.44 times. Turn to capital activity. We closed on $1.4 billion of acquisitions and loans in the quarter, led by $618 million of senior housing operating investments. As a reminder, the Rivera PSP joint venture unwind that was announced last quarter will close by geography in three distinct phases. The UK portion closed in 2Q, and the U.S. portion closed this quarter, resulting in $75 million of net investment, and the Canadian portion is expected to close by year-end. In the quarter, we continue to issue through our ATM to fund ongoing investment spend and position the balance sheet for future opportunities. We raised gross proceeds of $1.9 billion, an average price of approximately $81 per share, allowing us to fully fund user-date investment activity and also extinguish $290 million of debt in the quarter. This capital activity, along with continued growth across our business segments, including the continued post-COVID recovery within our senior housing operating business, helped drive net debt to adjusted EBITDA to 5.14 times at quarter end, which represents 1.8 turns of deleveraging versus one year ago. We expect net debt to adjusted EBITDA to settle in the mid-fives in a pro forma basis post-near-term investment activity and to continue to trend downward in future quarters, as a recovery in our senior housing operating portfolio continues to drive organic cash flow higher. Additionally, following this intra- and post-quarter capital activity, including $900 million of gross investments closed to date in October, we have a current cash and cash equivalence balance of $2 billion, along with full capacity on our $4 billion revolving line of credit and $624 million in remaining expected proceeds from near-term dispositions and loan paydowns. representing approximately $6.6 billion in near-term available liquidity. Lastly, moving to our full-year guidance. Last night we updated our previously issued full-year 2023 outlook for net income attributable to common stockholders to a range of $0.91 to $0.95 per diluted share, and normalized FFO of $3.59 to $3.63 per diluted share, or $3.61 per share at the midpoint. Our normalized, updated normalized FFO per share guidance represents a five and a half cent increase at the midpoint for our previously updated guidance. This increase in guidance is reflective of a three cent increase from higher expected full year senior housing operating NOI, a three and a half cent increase from capital allocation activity, which assumes no further investment in the year beyond what is closed to date. And these increases are partially offset by a combined penny drag, an increase in expected full-year G&A, and stronger dollar. Underlying this FFO guidance is an increased estimate of total portfolio year-over-year same-store and OI growth of 11.5% to 13.5%, driven by sub-segment growth of outpatient medical, 2.5% to 3%, long-term post-acute, 4% to 5%, senior housing triple net, 1.5% to 2.5%, and finally, increased senior housing operating growth of 23% to 26%, the midpoint of which is driven by continued better-than-expected expense trends, along with revenue growth of approximately 9.8% year-over-year. Underlying this revenue growth is an expectation of approximately 240 basis points of year-over-year average occupancy increase and rent growth of approximately 6.7%. And with that, I'll hand the call back over to Shank.
spk16: Thank you, Tim. I want to conclude by turning your attention to three items. that may not seem as important or exciting for our near-term results. On a combined basis, they may actually serve as a drag on our Q4, but nonetheless, it's extremely important to underscore as far as our stabilized or run rate earnings is concerned. First, we have convinced our partners at StoryPoint to convert 11 properties from TripleNet to our IDEA structure. Nine of these properties were in a historic lease structure with other operators, and two of them are recent acquisitions. StoryPoint is one of our best operators, and the current RIDEA operator has cleaned up these buildings, improved staffing, service quality, and invested significant capital. These properties have gained 500 basis points of occupancy since beginning of the year, to 70% in September. Report is up 15% since they took over. Report of the new movements in 2023 is up another 12% from the average of 2023 numbers. This is setting up the stage for significant cash flow growth in 24 and beyond. Debt to equity conversion at the bottom of the cycle, perhaps the most value accretive transaction we can complete today. As we have experienced in our recent legend conversion, we can expect to break even in 12 to 15 months relative to our previous contractual rent, and then our shareholders will get all the upside afterwards. This obviously will work only if you have great assets run by great managers and who are right about the trajectory of the cash flow. And that is the bet I'm willing to take at this point in the recovery cycle. We continue to seek additional opportunities to achieve similar outcomes when they check the boxes of great assets and operator quality and when we can expand the pie with our partner so that we can attain a win-win solution and outcome for a long-term basis. second kisco one of our strongest operating partner measured by margin occupancy and other operating metrics recently marched with another one of our operators balfour balfour now a case affiliate of kisco maintains a dominant position in the denver metro area also has trophy buildings near incompletions in brookline in boston msa and georgetown in dc both both properties opening in 2024. we thank Michael Schoenberg and Susan Giroux for their partnership at Balfour, and wish them all the best for the next phase of their lives, and welcome Andy Kohlberg and his team to take over the stewardship and growth of this community. Like StoryPoint communities above, this transaction will be significantly accretive to our stabilized earnings and cash flow growth. Last but not least, when the final stages of Project Transformer, the transaction which I described to you last quarter, with our teams working really hard with Matthew and Frederick at Cogier. Our brand launch is coming up in the next few weeks, and people on both sides are working at a frenetic pace to achieve seamless transition. This is yet another transaction like the others above, which we'll look back at in 24 and 25 and feel really proud to have completed. As they have added to our earnings and cash flow growth, despite some near-term friction and the tremendous workload for the combined team. Speaking of earnings and cash flow growth, I would like you to provide a report card on the previous large transactions to Avery and Oakmont from Signature and Sunrise that we discussed with you in Q2. Both Avery and Oakmont have grown occupancy of approximately 300 basis points since transitions have began. We at Welltower remain focused on the long-term price of getting this business to an elevated level of customer and employee experience and generating earnings per share that is substantially higher than where we came from. To sum it up, the powerful recovery in senior housing operating business, the rollout of our operating platform, and the significantly accretive capital deployment are all setting us up for an accelerating earnings and cash flow trajectory for 24 and 25. With that, I'll open the call up for questions.
spk17: At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll ask that you limit yourself to one question, please. We'll pause for just a moment to compile any questions.
spk18: Again, if you'd like to ask a question, please press star one on your telephone keypad now.
spk17: Our first question comes from the line of Vikram Malhotra from Mizuho. Please go ahead.
spk19: Good morning. Thanks for taking the question. I guess the sort of great opportunity on the external growth front Yesterday we saw two of your peers merge, and I was hoping you could sort of give us a sense of, as that process was explored, is that something that's been of interest to you or could be of interest to you? And can you compare and contrast that line sort of entity deal with your sort of more granular approach going forward?
spk16: So Vikram, I don't comment on other people's deals. Seems like it's a great outcome for both of them. We were not engaged and we will not be engaged in that process, just to be specific. As we said many times, what works for us is one asset at a time transactions. Even if we do, when we do portfolios, Nikhil is finishing up a portfolio transaction right now of 10 assets. that we have gotten, we have picked from a collection of 80, 90 plus assets. So it's sort of, we're very, very focused on going deep than going broad in our markets. And we genuinely believe in small transactions with one asset at a time. I believe that median size of assets transactions that we have done in last three years, which constitute this $12 billion or so of assets we bought is like $30 million. That's what we like, that works for us, and that's what will continue. We have no dark of opportunities. I mean, it's what we see today, the market is, I will not be surprised. You guys recall that we had talked about a few years ago, there will be potentially 30 billion also opportunities. As we see here today, we can say the TAM is actually bigger than that, given how much, you know, loans that are coming to you, how much of floating red debts are rolling over. So we have no problem growing the company as long as we have access to capital and we can do it on a partial basis. But large M&A is something that I've never liked. I'm not saying I'll never do it, but frankly speaking, it's just not of much interest to us. And specifically answer to your question, we're not engaged and will not engage in the process that you mentioned.
spk17: Our next question comes from the line of Connor Seversky with Wells Fargo. Please go ahead.
spk02: Good morning out there. Thanks for taking the questions. I've got a three part one for you guys here, but on the Cozier transaction, can you offer a sense as to what occupancy levels look like in the properties earmarked to be managed by the operator in the future? And then is there a way to quantify the NOI upside potential from this transaction and ultimately the transition of those properties? And finally, is that Regency case study outlined in the deck a good example to gauge what that NOI potential could look like for the broader Cozier portfolio?
spk16: Connor, you were talking about, if I understand your question correctly, the Cozier transaction, if you're talking about the properties that Cozier is taking over from Rivera, the property occupancy is roughly around 80%. And we think that, as you know, Cogere obviously runs their properties well north of 90% occupancy and 40% margin, and I think we'll get there. What was the other part of the question? Sorry, I missed that.
spk02: So you outlined that Regency case study in the deck for those, I think they were in British Columbia or near Alberta. Is that a good example to use as a gauge for the NOI potential of the broader COGIER portfolio?
spk16: Yeah, I think you will see in this particular portfolio that we're talking about, the transition portfolio, Regency portfolio, Regency was a very well-run portfolio. This COGIER still has been able to get that margins, I believe, from around, call it circa 40% to about 50%. In this particular case, I believe that the improvement will be better. And we'll go from margins, we'll go from college sick up 20% to 40%. So I think we should see better enhancement in this particular case than the Regency example.
spk02: Great. Thank you.
spk17: Our next question comes from the line of Juan Sanbria with BMO Capital Markets. Please go ahead.
spk07: Hi. Good morning. Thank you. Impressive occupancy acceleration into September. Just curious what the early indications are for revenue increases to existing customers. I'm assuming some of the late rate letters, apologies, have gone out already. So just curious how that year-over-year delta is looking for rent increases to existing customers. Thanks.
spk16: So one, as you know, we're sort of finalizing that as we speak. Right? That's the discussion we're in. As I've mentioned in my prepared remarks, we expect that to be very strong, like last couple of years. And that's where we are. We're not there yet from a purely finalization standpoint, but I continue to believe that we'll achieve a customer's expected and elevated level of service. Costs are not coming down anyplace. The business overall for the industry, not just for us, remain at a sub-optimal level of margins where you can attract capital to the business. So all these things putting together, I think you will see strong rate growth. What exactly that is, is too early to say, but I continue to expect that will be very strong.
spk17: Our next question comes from the line of Jonathan Hughes with Raymond James. Please go ahead.
spk10: Hi, good morning. Thanks for the time. Sean, could you just clarify the ending comments you gave in your prepared remarks where you said that the Kisco-Balfour merger might be a drag on the fourth quarter? I didn't quite understand why that might be the case. And then maybe one more, if I could sink it in. The show portfolio outperformed that typical seasonality in the third quarter. I think that's expected to continue into year end. Is that driven more so by the U.K.? ? you know, related changing same store pool, something else, just an additional quarter there would be great. Thanks.
spk16: Let me try the first one. So I did not say that specific transaction might be a drag on the fourth quarter. I said the three things that I described together could be a drag on the fourth quarter. But combined, all of them should be a significant driver of growth for 25 or just call it stabilized earnings. That's the point I was trying to drive, not specifically about Kisco and Balfour.
spk04: And on your question on the seasonality in the business, you're correct. We continue to outperform the historical seasonality, and we are not seeing major differences between our transition portfolio. As Shaq mentioned, we've actually seen very strong occupancy gains in the transition portfolio, probably greater than what we've seen in the core portfolio.
spk16: Jonathan, just the core portfolio, as you know, sequential occupancy growth, was around 150 basis points. And the transition portfolio, the two I talked about, was the majority of the transition we did in Q2. The occupancy growth from Signature to Avery and Sunrise to Oakmont, both portfolios achieved a sequential occupancy growth of roughly 300 basis points. So almost double of what the same store did.
spk18: Scotia Bank, please go ahead.
spk11: Thanks. Yeah, I was hoping to get maybe a little bit of a preview about, you know, how G&A could trend over the next year. And, you know, I know this year, you know, there was the build out of John's group and just trying to understand, you know, like how far along that is and, you know, how that could affect, you know, G&A growth over the next year.
spk16: Nick, as I mentioned early in the year, I think if you go back to fourth quarter call, we have at least another year of elevated G&A increase as a build-out of the platform. So you should, we have come long, but we have a long ways to go. So G&A versus NOI, just a geography of where you see occupancy versus revenue. So we do believe that the platform build-out is paying off, has started to pay off in spades. But from a purely, just looking purely at G&L item, we would expect that another year of build-out.
spk18: at least another year of build-out.
spk17: Our next question comes from the line of Michael Griffin with Citi. Please go ahead.
spk08: Thanks. It's actually Nick Joseph here with Michael. Shank, I recognize you said you're not engaged, you won't be engaged. But last year, you reportedly got involved in a similar public-to-public M&A situation within the medical office space. You know, you talked in the past a lot about being an IR buyer and cost-based focused and that you look at everything. So just curious in this situation, you know, or more broadly, is it kind of the current valuation and underwritten returns aren't sufficient against the other opportunities that you're seeing? Is it something about medical office that's keeping you on the sidelines here?
spk16: So first thing, I mentioned that I don't comment on other people's deals, so I have nothing underwritten, so I can't even comment on what the underwritten returns looks like. But specifically to medical office, I think I provided some color last quarter that we're unsure at this point where the long-term inflation lands. And because we're unsure, we are unsure of at this point to make a huge bet on an asset class that we don't know what the growth profile versus the long-term inflation looks like, right? So that's a very important point. We're finding opportunities where we think we can, small opportunities where we can do value add, we're buying assets at 70, 80% occupancy and leasing up and so that we can see the growth rate higher, but from a stabilized 95% call it, you know, occupied medical office with a 2.5% increase or whatever it is, a traditional medical office which provides a good long-term stable growth for institutional investors is not interesting for us for that one reason. And the second reason is it's always relative opportunities is the question, right? If that's the only thing that was available to us, it would be a different conversation. We're easily picking off you know, low double-digit plus unlevered RR opportunities in the senior living side, assuming that we don't add much value. And I'm pretty positive we'll add value. So it's just a question of relative opportunities of where we see the world today. And that's why we have no interest. By no means that suggests that we don't think it's a good deal or not a good deal. I have no idea what the deal is because I'm not engaged in it. As I specifically mentioned, will not because of the reasons I just pointed out to you.
spk17: Our next question comes from the line of Josh Dennerlin with Bank of America. Please go ahead.
spk14: Hey, guys. I have a question on the transitions. Sean, you mentioned you've been very active in terms of proactive portfolio management and you've achieved a lot of early success recently with Avery and Oakmont. How have these operators driven such strong results so quickly? And just how would you encourage us to think about future transitions in the portfolio?
spk16: Yeah, I'm not going to answer the first question, Josh, obviously on a public call. I mean, there are things called trade secrets that you don't want us to divulge on a public company call. But we'll say that this doesn't happen, like, automatically. As I've said before, we have learned, we have done a lot of transitions over the last, call it, five, seven years that I've been doing this, and we have learned our lessons from, frankly, old, you know, old school way of losing money. We have learned what we have done wrong, we have gotten better, then sort of we've learned how to stop bleeding, and then finally we have got another side of, you know, how do we, how we can make an impact, what the prep work you need to do on systems and processes, and And frankly, that's what John taught us, right? So it's an evolution. It's a process that we have gotten over the last few years. And I'm very, very happy that we're there. Now, from the point of view of transitions, is it the last transition? Would we do 1,000 more transitions? It just depends on the performance. We're trying to optimize our performance. I have said it many, many times that this is a business in our opinion. In our humble opinion, it's a business of optimizing location, product, price point, and operator. So we'll keep optimizing it until we think that we're done. And that's kind of where we are. It's a journey. It's a journey I've written about that I'm willing to do even if we take short-term hits. And it appears at least from near-term results, no guarantee of the future, that we have achieved how to even mitigate that short-term hit.
spk17: Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead.
spk12: Hey, good morning, everyone. So I want to talk and perhaps to John on the rate number that you mentioned, the rev pour number of 7%, and specifically the sustainability of that type of growth. It's always been my view that there was some sort of implied ceiling of of growing rents for people that are 85 years old. And that at some point along the way that there's just a way of doing business. Now, I don't know that there's a real ceiling of some sort, but it always seemed to me that was the case. Correct me if I'm wrong. Number two, though, maybe it involves unpacking the rent. Maybe it's rent between rent and care. And so that kind of muddies the conversation. But I wonder if you could comment at any level about how rate might grow in the future, considering what I would think would be some pushback for the reasons I just described.
spk16: Rich, let me try to start that. And John, you sort of finished anything that I haven't added. So I think your conversation that you have is reasonable. If you think about long-term tenants, in the middle of the market, right? So you have to think about the customer you're talking about. Our rate increases because we have sold majority of our mid-market product. Our UK and US portfolio is primarily focused on very high-end customer, very wealthy customer, and the product remains incredibly affordable to them. And at that level, we haven't seen any pushback. The second point you have to consider, Rich, is you we have never raised rates like you have seen in other asset classes multi-family storage others 20 25 you know we have never raised that right so just sort of rates remains high single digit you know whatever like eight nine ten percent is sort of what we have done so it's much more sustainable than you you think but put that aside just understand put all of those comments in the context of average length of stay you're talking about an average length of stay of 20 months So we might be here talking a lot for the third year of increase of X percent, but just understand the person who got the first year of increase, he or she is gone, right? She's no longer in the community. So if you put all of those together, you will see that if you provide the very important point, if you provide the differentiated services at the highest level, your customer is willing to pay you. Now, we are, as I've said many, many times, we're not focused on an individual number called a rep or a rate, right? We're focused on very much of a delta between rep or an export, and that's what we are focused on. I've said that last year and the year before, and we shall see what the market gives us, right? I have no idea what the market will give us. If there's a pushback, we will adjust, but we haven't seen any yet.
spk06: Yeah, no, I fully agree. It's the difference between rev for and expense for. And I think you're probably, Rich, thinking about multifamily where people are there for years and years and years. And it's a very different situation here.
spk17: Our next question comes from James Kammer with Evercore ISI. Please go ahead.
spk05: Hi, good morning. Thank you. I certainly appreciate the operating leverage embedded in the shop portfolio. And I was just wondering if you could buy a little more color, sort of regarding labor trends for the general staffing there and what conviction you have and the ability to really continue to sustain pretty attractive or capitated growth of those expenses. I mean, are you getting a longer tenure, so it's lower turnover and lower recruitment costs or just a better labor talent pool? And again, I'm just thinking more beyond the chef and the general manager. What levers are contributing to a nice profile in terms of growth on the expenses for labor?
spk16: Jim, you are correct that we are seeing turnover is coming down significantly. We are seeing that overall availability of employees who wants to be part of our business and part of the community is increasing significantly. And we're seeing that our operating partners are getting better using technology and other resources to attract talent and keeping them in the business, right? So that's sort of it's whenever you get hit by a crisis, people figure out ways to do things better. Every crisis makes a business better if it survives, right? And that's what we are seeing. And what conviction do we have that, you know, that the report minus export journey can continue? very significantly for a specific line item on a specific things on a specific quarter. We have no idea. I said this million times. Our goal here is not to predict the future. Our goal is to see what market gives us and do better than market. We'll see what market gives us.
spk06: Yeah, I would just add, you know, in my comments, my focus is on productivity. So, you know, we want our employees to be paid well. We want to happy employees and happy customers. We also want to increase the productivity of the business so that we can manage to accomplish all of that. So that's really, I think, the take-home point.
spk17: Our next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.
spk15: Yeah, I'm curious. How are you thinking about, I guess, senior housing development today and how do you see starts potentially trending over the next couple of years?
spk16: Yeah, Mike, I'm just going to be repetitive here. I was asked this question at the conference about a week ago or 10 days ago, whenever that was. I'll repeat what I said on that panel. I think if you're a debt provider in senior housing today, you have a better life going to Vegas. And if you're an equity provider in senior housing development today, you have a better life buying lottery. I hope that tells you what my view of senior housing development is. I don't even understand why there is any start, any, like more than zero, because the economics doesn't make any sense given where construction cost is, where capital cost is, and where the margin of the business is. It should not have any starts, and it seems like it's going there. I think any starts that you are seeing, people are still playing with other people's money. And that's coming down, closing down pretty quickly. And I think you will continue to see it's moving there. Mike, did I miss any other part of your question?
spk15: No, that was it. Thank you. Thank you.
spk17: Our next question comes from the line of Michael Carroll with RBC. Please go ahead.
spk01: Yeah, thanks. Given the dislocation that we're seeing in the private market, is it harder for operators that are having liquidity issues to provide the same level of care versus your operators that presumably don't have these issues? I mean, are you seeing that in the marketplace at all right now? And if not, do you expect that this will become a bigger storyline over the next several quarters?
spk16: I can speak for other people, Mike. You know, I will tell you that our operating partners are doing extremely well, and we are getting hit left, right, and center with new operating partner who wants to be part of our story. So whether that's because they're inspired to do what John is doing, our data journey, or we're trying to professionalize the business on the data transformation journey, or they're having troubles on their own end, or both, I have no idea. But I could tell you that We have literally, I mean, we have seen really good investment opportunities, but we have never seen anything like what we are seeing today. Whether that's because of a pull or a push, I have no idea. And we're seeing operators from all parts of the country, in all three countries we do business with, is calling us to be part of this well-capitalized, extraordinarily well-capitalized platform. but also being part of John's platform.
spk17: Our next question comes from the line of Ron Camden with Morgan Stanley. Please go ahead.
spk00: Hey, great. Just a big picture one. So I was looking at the presentation, the NOI, the incremental NOI build. I noticed that you guys added a bar here. That looks like another $172 million. And, you know, I'm tying back to your comments about the focus on RAF port versus export. It's clearly a margin, a benefit here. So I was wondering if you could talk about that. You know, why add that to the deck? Are we supposed to read into it just more confidence in the ability to get back to pre-COVID margins is the question.
spk04: Yeah, Ron. So we added that to DAC through conversations with both investors and analysts alike. They were looking at it and interpreting kind of the stabilized point to be reflective of 88% occupancy and 31% margins. When in fact, with the rent growth we've seen since fourth quarter 19, basically we're ignoring that rent growth and with it, we're baking in around 29% margin. So what we wanted to do is just show Getting back to just the NOI level on today's rents means that you're getting to margins that are 200 basis points plus below where we were margin-wise in fourth quarter 19. And what that final bar does is just shows you getting back to 88% occupancy, 31% margins in pre-COVID levels at today's third quarter 23 realized rents where NOI would be.
spk16: And Ron, I've said this before. I'll repeat it again. If that's all we go back to, you know, Q4 of 19 level or pre-COVID level, I would be very, very disappointed. If you have done this in Q4 of 19, you would remember those were not the greatest days of this business, right? So we were getting hit for four plus years at this point and through a supply cycle. That is not a high point like a lot of other businesses are. And we're very disappointed that that's all we get back to.
spk17: Our next question comes from a line of Jamie Feldman with Wells Fargo. Please go ahead.
spk09: Great. Thanks for taking my question. I'm here with Connor. How should we think about funding assumptions for the next tranche of acquisitions? And then also, how does the quality of the assets you're looking at compare to the quality of your existing portfolio? Or put differently, how do you assure investors that you aren't moving up the risk curve to chase a return profile?
spk16: I don't want to assure investors of anything. I think investors are aware of our track record and you guys do a very good job of visiting our properties so you can see it. Chasing the risk curve to get investment might happen when things are really, really tight. It is an exactly opposite environment, Jamie. And when those environments have occurred in the past, we were massive sellers of assets. We don't chase risk curves to get return. That's just not what we do. Now, going back to your actual, the crux of your question is, frankly speaking, the initial part of COVID, what we're noticing was sort of a lot of broken cash flows, right? Assets were 60%, 70% occupied, you know, new development, brand new assets, three-year, four-year, you know, two-year-old assets. but a broken cash flow because that's normal for a business that breaks even at 60% occupancy and your marginal sort of return, if you will, or your marginal or incremental margin sort of go hockey stick. It's normal for that period of time, given how much occupancy we lost during COVID, to have those kind of assets, great assets, broken cash flow because of what the occupancy is and how margins work in this business. That was two years ago, three years ago. That's what sort of we were seeing. Today, we are seeing broken capital structure. Assets are generating the cash flow that it should be generating at 80% occupancy, 82% occupancy, where the industry is. Call it, you know, 6%, 6.5%, whatever it is, the cash flow yield, that's not the problem. The problem is the underlying leverage which is now so far plus 350, 400, is at 9%. That's the problem. And those loans are coming to you. You are upside down on a cash flow basis, and you're upside down on a leverage basis. And those are the ones that are transacting today. So frankly speaking, the number of trophy buildings, number of high-quality, high, high-quality buildings, which core investors own, you know, the core real estate owners own, that we have seen in last, call it six months, even last four months, I haven't seen the four years before that, right? And so the quality of opportunities are going up pretty significantly, but it is up to you to decide, you know, what is the quality of assets you are buying? And, you know, we give assets, you can go and visit them, and I think you will come to the same conclusion. Did I miss any part of the question?
spk04: Jamie, on your funding question, so in my prepared remarks, I spoke to kind of a liquidity build, and that's as of October 30th. So we talked about $900 million in investments, just quarter date, closed in October, billion-dollar pipeline ahead of us, spoke to $2 billion in cash and $6.6 billion of total available liquidity to fund that.
spk17: Our next question comes from Austin Werschmitt with KeyBank Capital Markets. Please go ahead.
spk03: great thanks um sean you were crystal clear with your thoughts on why development doesn't make sense broadly in senior housing today but you you did expand the development pipeline i think it was up 600 million this quarter roughly half of that was in senior housing and um clearly you know you have a cost of capital advantage today but i mean is that what gives you the comfort moving forward with these projects and i'm curious are developers coming to you to partner on on future projects that can't sort of access construction financing, and how does that opportunity set compare versus acquisitions?
spk16: I think if I understand correctly, and you can correct me if I'm wrong, all our development starts are either fully 100% leased medical office developments that we have long-term tail or long-term contracts with our existing clients, or they are wellness housing development. I do not believe that we have started any senior housing development. I don't remember when was the last time we actually started a senior housing development. So because they all reported on the same bucket, Austin, but they're not senior housing development. They are what we call wellness housing, which is age-restricted and age-targeted apartments.
spk17: Our next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.
spk07: Hi, it's Juan here with Juan Still. Just a quick question on the investment pipeline. Could you give a breakdown of kind of what you're looking at and where do you think you see or where are stabilized yields there for what you're targeting in the major food groups?
spk16: Yeah, so the pipeline today is, as I said, I don't know Nikhil, but it's like 80% plus would be senior housing. And mostly I would say equity in senior living and probably even 90%, but vast majority of senior living and core equity opportunities in senior living. Just because of the size, it's just a lot of it is in US and we just closed a large transaction in Canada. So if I think about, remember it correctly, It's almost entirely, not entirely, but majority is U.S. senior housing. And there are some credit opportunities in the skill side. I don't remember any transaction, a pipeline about any MOBs, but do you know anything?
spk21: Nothing meaningful.
spk16: Okay, and stabilized yields, I would say in the senior living today, we're targeting close to eight. on a stabilized basis and going in. I think I said last call, we're seeing sort of opportunities that starting at six, ending at eight, and given the rise of real rates, we're seeing better than that today. Frankly, we have ratcheted our return expectations higher. So that's sort of where we are transacting. But we're not a yield buyer. We're still happy to buy 1% yield if we think that's the right basis and the right assets, but generally speaking, those are the kind of opportunities we're seeing.
spk17: Our final question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.
spk19: Thanks for taking the follow-up. Nikhil or Shank, can you just update us on the Integra process? How are those assets performing and By extension, are there additional opportunities? I just asked that because you had earlier outlined upon stabilization, you might look to sell some of that. So it would just be helpful to get an update on Integra. Thanks.
spk21: Yeah, Vikram, so we're pleased with the performance that we're seeing. In the last quarter, I talked about the first 133 out of the 147 buildings that I transitioned. In the last quarter, those buildings produced roughly 70 million of positive EBITDARM compared to... negative 90 for the three months prior to the transition. Now, fast forward another quarter, those same buildings in the second quarter generated $127 million of EBITDA. So in the six months since transition, you're seeing a cash flow swing of $215 plus million. And obviously, every month continues to be better than the prior month. And so if you look at June and you annualize that, you're roughly $170 million which is north of the rent. So here we are six months in. When we had underwritten this, we thought it would take us much longer, 18 months, give or take, to get to this point. So we are incredibly pleased with the performance. But we think there are still a long ways to go. So your point about exiting upon stabilization, we're happy with the progress, but we're far from stabilization.
spk17: This concludes the Welltower third quarter conference call. Thank you for joining.
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