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spk15: Thank you for standing by. My name is Brianna and I will be your conference operator today. At this time, I'd like to welcome everyone to the Well Tower third quarter 2024 earnings conference call. Please note that this call is being recorded. At this time, all participants are in a listen only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star 1 a second time. I will now turn the conference over to Matt McQueen, General Counsel. Please go ahead, sir.
spk00: 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.
spk18: Thank you, Matt. Good morning, everyone. I'll review third quarter business trends and our capital allocation priorities. John will provide an update on operational performance for our senior housing and medical office portfolios. Nikhil will give you an update on the investment landscape, and Tim will walk you through our triple net businesses, balance sheet highlights, and guidance updates. I'm once again pleased to report another very strong quarter across the board at World Tower. From operations to capital deployment, a further strengthening of our balance sheet, continued progress on our operating platform rollout. The result was a 21% increase in FFO per share and our fourth guidance raise for the year, this time by 13 cents per share, reflecting the extraordinary strength of our platform. This quarter also marks the first time in our company's history in which our quarterly revenue exceeded $2 billion. In terms of the senior housing operating portfolio, results continue to surpass our already high expectations. Year over year, same-store NY growth came in at 23%, eighth consecutive quarter in which the growth exceeded 20%. And despite macroeconomic uncertainty and heightened geopolitical tensions, top-line growth on a same-store basis remained resilient at 9%, driven by another quarter of outside occupancy growth of 310 basis points, coupled with strong rate growth. Particularly noteworthy is the 160 basis points of sequential spot-to-spot occupancy growth that we experienced a reflection of both strong tailwinds of our business and especially our operating platform initiative, which will continue to bear fruit in the coming quarters and years. Not only were placed with the sequential growth, but the occupancy run rate exiting the quarter solidly exceeded the prior year and early fourth quarter results have been positive as well. Additionally, I would be remiss not to mention that the spread between report or unit revenue and export or unit expense remains at historically wide level. This trend resulted in another 300 basis points of year-over-year margin expansion of our shop portfolio. As we have discussed in the past, we remain focused on the delta between report and export, not the absolute levels. Overall, we are delighted with our results and believe that we're carrying significant momentum into 2025 as tailwinds which we have lifted our business over the past couple of years continue to strengthen. As I have described in a recent call, the backdrop of our senior housing business is only getting better as the growth of 80 plus population picks up from here. Starting next year, 5,000 Americans will turn 80 every day. And remember that we are only at the front end of this trend with the crest of the silver tsunami not being seen until well into the future. And what is also irrefutable is the favorable supply outlook. Construction starts continue to drop, and in the third quarter reached the second lowest level on record after the second quarter of 2009. Banks continue to wind down their senior housing loan exposure and have been reluctant to put new capital to work. And given the extended timeline to build a new senior living community in our market, which we detailed on slide 19 of our business update, we may not face the impact of new supply in our markets for years. Frankly, in today's construction cost and financing cost environment, it makes no economic sense to build. We have had a couple of years of solid growth, but we believe that we are still in the very early stages of an extended period of extraordinary growth for the senior housing sector. And without stealing John's thunder, this end market demand growth will be amplified by the rollout of our operating platform. I'm delighted to report that during the quarter, we went live with our tech platform at our first set of properties, along with preparing to broaden and accelerate the rollout in the near term. Beyond the technology rollout, we expect our broader operating platform initiatives, including our hands-on asset management, to have a compounding effect on our portfolio's outperformance. Shifting to capital deployment, The only change we have observed since our last call is that the opportunity set has expanded further. We announced another $1.2 billion of transaction completed or under contract since our last quarterly update, bringing our total year-to-date investment activity to over $6 billion. Nikhil will provide you more details, but as with the past few quarters, most of our investments have been bolt-on acquisitions within senior housing sector, improving and benefiting from our already established regional density. Our goal remains to go deep in our markets, not broad. While 2024 is shaping up to be a record year for World Tower in terms of capital deployment, we continue to unearth compelling opportunities across all property types, geographies, and capital structure, and expect a busy Q4 and a Q1. I will quickly reiterate that through the exceptional cash flow growth we have achieved this year and prudent funding of our investment activity, our balance sheet has strengthened meaningfully. With leverage at 3.7 times and nearly $10 billion of liquidity, we remain well positioned to address all near-term obligations and capitalize attractive investment opportunities. and as we have created flexibility to lean in to the balance sheet to drive further growth at opportune time. To sum it up, we're starting to see the Lollapalooza effect of cyclical, secular, and structural growth driven by our operating platform, which will be further enhanced by bolt-on acquisitions and balance sheet optimization to drive meaningful partial growth. We are singularly focused on this long-term compounding of our partial earnings growth for existing owners, our true North Star. We cannot be distracted, discouraged, or dissuaded. With that, I will turn the call over to John.
spk02: Thank you, Shanti, and good morning, everyone. At the risk of sounding like a broken record, we posted another order of fantastic results with no let-up and momentum, which continues to build across the business. Before getting into the details, I'll echo Sean's sentiment that we're looking forward to closing out the year on a strong note and excited for another period of solid growth in 2025 and beyond. During the quarter, total portfolio same-store NOI increased 12.6% versus the year-ago period, once again led by our senior housing operating portfolio. First, I'll provide an update on our outpatient medical business, which posted year-over-year same-store NOI growth of 2.2%. The consistency of the business remains evident, with healthy leasing activity during the period and another quarter of strong tenant retention. Same store occupancy remains stable at an industry-leading 94.5%. As for the senior housing business, the business continues to deliver exceptional results. Demand for needs-based product is clearly on the rise, and our proactive asset management initiatives which I'll get into shortly, are unquestionably delivering alpha. In the third quarter, the portfolio achieved year-over-year same-store NOI growth of 23%, once again exceeding our expectations and allowing us to yet again raise our full-year outlook, which Tim will describe shortly. The strength in our senior housing business was broad based with solid occupancy gains experienced across all our geographies and property types. It's worth repeating that while the summer months typically represent the most active period of leasing during the year, our sequential same store occupancy gain of 120 basis points and spot to spot gain of 160 basis points are well above typical seasonal trends. In fact, This quarter tied a record for sequential same-store occupancy growth when excluding the second half of 2021 as we were coming out of COVID. On a year-over-year basis, same-store occupancy increased 310 basis points, also amongst the highest levels ever achieved in our history. Rate growth across the portfolio also remained strong, with same-store REV4 growth increasing 4.9% year-over-year. While our budgeting process for next year is just starting, we believe that rate growth should once again remain favorable as portfolio vacancies decline further and our pricing initiatives begin to bear fruit. More to come in the coming months. In terms of expenses, we continue to be encouraged by trends within the labor market and further moderation of broader inflationary pressures. Ex-for, or extents for occupied rooms, increased just 0.7% year-over-year, second lowest level in our history. Most importantly, though, as Shank mentioned, the spread between REV4 and X4 growth remains historically wide, contributing to another quarter of substantial operating margin expansion. At 26.5%, the NOI margin for our same-store portfolio remains below pre-COVID levels, but we expect continued improvement going forward as the operating leverage inherent in the business is recognized. The other big driver of future margin expansion will be our operating platform. Our operating platform includes a technology platform, another site-level technology, an internal capital team, which I referenced last quarter, our data science capabilities, and more. I continue to recruit top talent and build out various capabilities that we leverage with our operators and our asset management team across our portfolio to deliver alpha. During our last call, I mentioned that we would soon be going live with our first technology platform in Q3, launching an end-to-end tech platform with our first operator. I'm pleased to report that through the dedicated efforts of the Welltower team and our operator, it has been very successful for all stakeholders. The customer experience is a modern digital experience substantially simplifying and shortening the move-in process for the family and the residents by eliminating paperwork. The employee experience has improved dramatically as we have simplified and or automated the processes as well as providing employees with important real-time data ensuring top care for our customers. As a result of the technology platform, the executive directors are saving five hours per move-in and enabling them more time for leadership and to focus on our customers. Additionally, potential errors are being avoided due to the singular database for the various modules, meaning that data is only input once, so there are no inconsistencies in the spelling of a customer's name or other critical care information. And finally, we deliver the technology platform at a lower cost than the combined disparate systems being replaced. At this point, we're preparing to roll out the tech platform to additional operators in the near term. While we have a long way to go, we're excited by our initial success, which would not have been possible without the hard work and buy-in from our best-in-class operating partners and the many Welltower team members who are working tirelessly on this effort. To sum it up, it was another strong quarter for Welltower between solid operating performance and our accomplishments on various operations and asset management initiatives. While it's too early to speak to the outlook for 2025 with any detail, we remain as optimistic as ever on the growth prospects of our business as the demand supply backdrop for senior housing is only strengthening and the benefits of the operating platform begin to be realized in a more meaningful way. We continue to execute on our mission to improve the experience of senior housing residents and employees. With that, I'll turn it over to Nikhil.
spk19: Thanks, John, and good morning, everyone. I am pleased to report that our investment activity and pipeline remain incredibly robust, visible and actionable. Over the past three months since our last call, we have either acquired or entered into agreements to acquire an additional $1.2 billion of assets. This is a fraction of the 15 plus billion of opportunities that be considered during this time frame. These incremental transactions bring our year-to-date investment activity to a record-setting $6.1 billion. This growth underscores the strength of our market positions and the abundance of opportunities we're pursuing. As always, our focus and excitement are driven by the expected, attractive risk-adjusted returns of our transaction activity rather than the deal volume. Acquiring quality assets at a reasonable basis with significant cash flow growth prospects remains at the core of our investment strategy. In the third quarter, we closed down 2.15 billion of transactions. Our activity remains granular, with Q3 closings spanning 15 different transactions across 13 different operating partners and a median transaction size of 56 million. Our Q3 transactions were heavily focused on our seniors and wellness housing businesses, where we added 40 properties and more than 5,200 units. We acquired these assets, which have an average age of just over five years, at $244,000 per unit at a significant discount through replacement costs. We expect our transactions that close this quarter to stabilize in the mid to high sevens yield and generate an unlevered IRR in excess of 10%. Our team's reputation, expertise, and network continue to drive our success. An impressive 94% of our investment volume by dollars this quarter was acquired through off-market transactions. This approach has allowed us to source opportunities from a diverse range of sellers, including six transactions from developers facing maturing construction loans, three from foreign counterparties, including two from Asia and one from continental Europe, four transactions with repeat counterparties, highlighting our reputation as a fair and reliable partner. I'd like to quickly reflect on the macroeconomic trends we have witnessed recently. Despite the 50 basis point rate cut by the Fed, the 10-year Treasury yield has increased by over 60 basis points since the announced cut as market participants are now wrestling with the likelihood of long rates staying higher for longer. We laid the case out for this scenario in detail on our last call. The impact of the rate cut to borrowers with floating rate debt is de minimis as they still face debt maturity challenges as bank lenders continue to reduce their senior housing exposure. 3Q earnings results for many banks that have historically been active in the senior space focused on highlighting their desire to continue to reduce their exposure to our sector. Agency financing also remains challenging due to limited stable product and elevated DSCR requirements and higher long-term rates. It's not surprising that with this backdrop, Fannie Mae and Freddie Mac's origination volumes are down 91 and 71% respectively versus their pre-pandemic peaks. This constrained lending environment continues to create attractive investment opportunities for us. On the back of this environment, we are engaged in direct bilateral conversations with eight of our highly respective private peers to evaluate significant portions of their portfolios for potential acquisitions. We are also seeing an increase in interest from sellers requesting to take WealthHour OP units in transaction consideration in lieu of cash. This allows those exiting their asset level positions to have a mechanism for continuing to participate in the strong tailwind of our industry, but in a manner not constrained by an unforgiving capital structure and with our best in business operating partners backed by WealthHour's operating platform. This proactive and collaborative approach underscores our commitment to continuing to unlock interesting opportunities while conducting business in a first-class and mutually beneficial manner. In conclusion, in this volatile capital markets environment, we remain focused on leveraging our expertise and data science platform with our operating partners and peer relationships to capitalize on attractive opportunities to create long-term value for our shareholders. Thank you for your continued support and confidence in our team. I'll now hand the call over to Tim to walk through our financial results.
spk21: Thank you, Nikhil. My comments today will focus on our third quarter results, performance of our triple net investment segments, our capital activity, a balance sheet liquidity update, and finally, an update to our full year 2024 outlook. Welltower reported third quarter net income attributable to common stockholders of 73 cents per diluted share and normalized funds from operations of $1.11 per diluted share. representing 20.7% year-over-year growth. We also reported year-over-year total portfolio same-store NOI growth of 12.6%. Now turning to the performance of our triple net properties in the quarter. As a reminder, our triple net lease portfolio coverage stats are reported at quarter in arrears, so these statistics reflect the trailing 12 months ending 6-30-2024. In our senior housing triple net portfolio, same-store NOI increased 5.8% year-over-year, and trailing 12-month EBITDA coverage was 1.09 times, marking a new post-COVID high in coverage. Coverage in this portfolio continues to improve above pre-pandemic levels, and greater-than-expected growth in this portfolio is being driven mainly by improving underlying fundamentals in leases currently on a cash basis. Next, same-store NOI in our long-term post-Q portfolio grew 3% year-over-year, and trailing 12-month EBITDA coverage was 1.74 times. Moving on to capital activity. In July, we issued a $1.035 billion convertible note due in 2029. We intend to use the proceeds from the note to address our 2025 unsecured maturities coming due in the second quarter of next year. We continue to equity finance our investment activity in the quarter, raising $1.2 billion in gross proceeds and average price of $122 per share. This allowed us to fund $2 billion in net investment activity and end the quarter with $3.8 billion of cash and restricted cash in the balance sheet. Staying with the balance sheet, we ended this quarter with 3.73 times net debt to adjusted EBITDA. And even after completing a billion and a half incremental net investment activity, we expect to end the year at below four times net debt to EBITDA, which would represent over a one-turn improvement relative to the end of 2023. This level of deleveraging is being achieved despite deploying a record amount of capital. Our capital capitalization of acquisitions and the significant increase in our cash flow generation It's allowed us to build powerful assets that will allow us to prudently fund future investments and enhance our go-forward cash flow for share growth. To illustrate the substantial increase in balance of capacity, as Sean mentioned earlier, our annualized revenue is $8.2 billion per quarter. This signifies a $3.2 billion increase compared to the end of 2019, while our net debt has decreased by $2.7 billion during that same period. reflecting a 20% decrease from COVID levels, concurrent with a 60% revenue increase over that same period. It is noteworthy that our current debt stack includes $2.1 billion in convertible notes that are in the money. This deleveraging should be amplified through the embedded upside within our senior housing operating portfolio, further bolstering balance sheet capacity and providing for increased flexibility and optionality. Lastly, as I turn to our updated 2024 guidance, I want to remind you that we have not included any investment activity or outlook beyond the $6.1 billion to date that has been closed or publicly announced. Last night, we updated our full-year 2024 outlook for net income attributable to common stockholders to $1.75 to $1.81 per diluted share, and normalized as a FOE to $4.27 to $4.33 per diluted share, or $4.30 at the midpoint. Our updated normalized FFO guidance represents a 13 cents per share increase in the midpoint from our previously issued guidance. This increase is composed of six cents from an improved NOI outlook and our senior housing operating portfolio, one and a half cents from taxes and FX, one cent from performance in our triple net and OM segments, and four and a half cents from accretive capital activity. Underlying this increased FFO per share guidance is an increase in estimated total portfolio year-over-year same-store growth to 11.5% to 13%, driven by sub-segment growth of outpatient medicals, 2% to 3%, long-term post-acute, 2% to 3%, senior housing triple net, 4% to 5%, and finally, increased senior housing operating growth of 22% to 24%. This is driven by the following midpoints of the respective ranges. Revenue growth of 9.2%, made up of report growth of 5.25%, and year-over-year occupancy growth of 300 basis points, and expense growth of 5%. And with that, we'll hand the call back over to Shankar.
spk18: Thank you, Tim. As many of you, my fellow shareholders know, that my team and I are true believers that compounding is the only way to create substantial long-term value. Compounding, not just in the context of middle school math, but in everything in life. We define compounding as dogged, incremental, and continuous progress over a very long period of time. And for this team, it has been close to a decade since we took our predecessor company down to its start by turning over roughly 60% of the portfolio, changing out 95% of our human capital in middle management and up, evolving our operating partners while creating greater alignment through win-win structures and so on. More importantly, we changed this company's culture as we built what you know as Welta today, brick by brick. We founded a culture of owners, not managers with agency problems. A culture of shared value with our operating partners to deliver real value to our customers and site-level employees, shoulder to shoulder, no matter what. A culture of resilience having endured four different crises over the past decade. Crises included oversupply, a crippling pandemic, labor shortage, and the worst inflation in 40 years. A culture of extreme excellence to build and create true residual alpha for our owners, not defined by Wall Street's view of real estate industry, which has a checkered history of creating value. We're focused on creating alpha, not levered beta, for existing owners. Over the past decade, we have built a unique data science platform, the first of its kind in real estate industry, powered initially by machine learning, then deep learning, and finally by AI, well before many of these terms got into the folklore. And finally, with chutzpah and perhaps naivete, we launched an operating platform initiative by attracting John and hundreds of our new colleagues who followed him from adjacent industries of higher standards during a pandemic, no less, when we didn't even know if the business would survive. I sat down this past weekend to reflect on our Q3 results, and for the first time since I arrived at World Tower, I felt a sense of satisfaction in that the compounding of our efforts over the course of many years is beginning to pay off, not because of the strong results we posted in the quarter, but because of a feeling that our audacious dream of transforming this industry is finally coming together and what that may potent for next few years. Having said that, this feeling lasted for about five minutes as my usual healthy paranoia set in. We have a long journey ahead and frankly that our pursuit of dogged, incremental and continuous progress will never be over. Mediocrity and complacency have no place in our culture. Like Navy SEALs, we believe the only easy day was yesterday. Well, occasionally, in moments like this, looking at the scoreboard may not be so bad. We're in this game because of a love for the game. And with that, we'll be back to the game. Operator, please open the call up for questions.
spk15: Thank you. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, please press star one a second time. If you have dialed in and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We ask that you please limit yourselves to one question and re-queue with any additional or follow-up questions. Our first question comes from the line of Jonathan Hughes with Raymond James. Please go ahead.
spk09: Hi there. Thank you for the time and great to see the strong results. Hoping you could talk more about the historically wide gap between unit revenue and unit expense and margins and specifically trying to understand the incremental margin at today's 86% occupancy and where that incremental margin goes once occupancy surpasses 90% or even higher since variable costs at that point are minimal. Thank you.
spk21: Thanks, Jonathan. You're right in highlighting that the way that that kind of rep or export math is expressed through our financials is in that flow-through margin. So last quarter we noted that flow-through margins had gone above 60% for the first time since the kind of post-COVID recovery. Again, this quarter we were in the low 60s from a flow-through. Important to note in that that we had one operator making up about 1% of our same store pool that through some kind of changes to their operating model are implementing of higher expenses right now than we'd expect. So ex-set operator flow-through margins would have been closer to 67%. So consistent with what we've said in the past, you should see flow-through margins kind of move into the mid-60s and approach 70% as we start to re-approach kind of pre-COVID levels of occupancy of 88%, and then from there on improve.
spk15: Our next question comes from Michael Griffin with Citi. Please go ahead.
spk11: Thanks. Nick Joseph here with Michael. Shank, you had made the comment that it makes no economic sense to build, and I know it's hard to generalize, and obviously it's regional, but I'm just trying to get a sense of kind of how far off we are before it does make economic sense, either from a rent growth perspective or costs coming down, you know, just trying to quantify that a bit. Thank you.
spk18: Nick, a really good question. It's hard to say in a general matter because cost is a function of local situations, labor, et cetera. We haven't seen construction costs come down. You have seen some material costs have come down, which has been surpassed, obviously taken up more by insurance than labor costs. So if you just want to sort of have a general rule of thumb, remember rent growth will not get you there. rent growth relative to labor cost, operating labor cost growth will get you there, right? So you need, in markets, 25%, 30% increase of REV4 minus export, where construction will start to make sense. I always believe people will do what makes economic sense. And we have tried to make it work in the best location where pricing is not a question, and we were struggling with that. That's the best location, such as Palm Beach and Cupertino's of the world. Imagine your question is an average of the industry where this makes no economic sense whatsoever.
spk15: Our next question comes from Ronald Camden with Morgan Stanley. Please go ahead.
spk08: Hey, just a quick one for me. So I've been sort of reflecting over this top line growth of 8% where you got over 300 basis points occupancy gain, but you know, 5% sort of pricing growth, which is, basically the fastest out of any rates that we cover. And I think we're all trying to figure out what that number is going to look like in 2025. So I guess my question would be, as you sort of reflect on that number, maybe a little bit more color of what drives that. Is there anything sort of one-timey and not putting words in your mouth, but is there a reason that we should expect that to decelerate as we flip the calendar? Thanks.
spk18: Ron, very good question. We're not going to sit here and try to speculate what 2025 will look like. I'm going to point out a couple of things. John made a specific comment in his prepared remarks about how he's feeling about pricing. We'll see what the market gives us. I will tell you that we would get, we would have market share increase, but at the end of the day, everybody's subject to market. We are focused on REPPOR minus export, not REPPOR. Having said that, you can focus on what John said in his prepared remarks. I will remind you from an occupancy standpoint. Remember, revenue is a function of pricing and occupancy. I'm going to refocus you on what I said on the last call. And I said occupancy can, not necessarily saying it will, but can get growth, can get better next year. And hopefully after this record, sequential occupancy change in third quarter of this year, that probably gives more credence to the comment I made. I'm willing to say about that much. Hopefully that's helpful, but just understand it's too early to say. We'll see what market gives us.
spk15: Our next question comes from Nick Ulico with Scotiabank. Please go ahead.
spk05: Thanks. Yeah, just following up on the topic of occupancy, maybe Shankar, John, Can you just talk a little bit about what you saw in the quarter in terms of traffic trends, maybe year over year sequentially, and also if you feel like you're getting an even bigger benefit right now from lower turnover in the portfolio?
spk02: Yeah, I'll jump in. Traffic is up. Additionally, what we saw is higher closing ratios. In other words, our execution is improving, which is important as a function of the operating platform there. As it relates to turnover, that's been consistent, no issues there. But the bigger issue is we're executing and taking market share.
spk15: Our next question comes from Austin Werschmitt with KeyBank Capital Markets. Please go ahead.
spk04: Great. Thanks, Shank. You highlighted that you're carrying significant momentum in the 25 and kind of the tailwinds in the business continue to strengthen. zoom speaking kind of the demographics. But at the same time, I think absorption has been stable in recent quarters across the sector. So just curious if you think we're at the cusp of absorption reaccelerating and that being kind of the kind of going back to your comment about occupancy growth potentially getting better next year.
spk18: Yeah, I'll say I'm not going to comment on what may or may not happen in the macro. Absorption is a macro industry wide phenomena. As John just mentioned, that we're focused on market share. you can see what our sequential occupancy growth is relative to the industry. You will see that we're entirely focused on using our operating platform and our best-in-class operators hard work to get market share. If we can get improvement in absorption, that'll be a gravy. That's just not something we can control. That's not something we're focused on.
spk15: Our next question comes from Vikram Malhotra with Mizuho. Please go ahead.
spk16: Hey, this is Georgian for Vikram. So you have highlighted an expanded visible acquisition pipeline. Can you just provide more color on how much of the flow is non-US? And then as a follow-up, what percentage of the deal flow do you pass and say no to? And has that percentage changed recently?
spk19: Georgie, you know, on the second question, in my prepared remarks, I talked about how of the billion two of incremental activity we announced this quarter, The universe of opportunities we looked at was 15 billion. So from the 15, we acquired 1.2. The number fluctuates up or down every quarter, depending on what we look at. But generally speaking, it's roughly a 10% hit rate. And then your second question about geographically, I think Sean said it in his remarks, but we've got active transactions. We're looking at it on 300s.
spk15: Our next question comes from John Polosky with Green Street Steward. Please go ahead.
spk10: Great. Thanks for the time. Question on CapEx for the senior housing business. It's been running, you know, 30% to 45% of NOI over the last year and change. Just curious, over the next two to three years, I know there's kind of unstabilized NOI in that denominator, but over the next two to three years, where do you expect CapEx as a percentage of NOI for the senior housing business to start to stabilize at?
spk02: Yes, I'll step in. John, the question is, let me give you a broader answer here. So as I mentioned last time, we've created an internal team. We're executing at amazing levels where we're both reducing the cost by 20% to 50% on, say, a unit basis and speeding up the timelines. We're also changing the fundamental way we do things. Historically, this business is Really, the operators function kind of like on the PE model, where it's very short-time decisions. So, for example, you might have an asset that has three buildings, and they'll do one roof, and then the next year, a following roof, and the following year, a following roof. What that's doing is driving up costs dramatically because of smaller projects, because of three mobilizations, and then you have all kinds of other stuff flowing through, like the roof leaks impacting the customer experience and all the issues along those lines. So what's happening right now is we're doing things correctly. with the long-term lifecycle costs in mind, lowering the long-term run rate. So that means we're pulling some things forward, and it won't change the – it will lower the long-term run rate, but right now there's some stuff that's elevated because in that example, we'd be doing all three roofs, avoiding the future roof leaks, and getting the project behind us and moving forward. So there's a little noise that's going on right now. But it's all for the efforts to lower the long-term run rate, and the unit costs are dramatically lower. So it's just absolute execution, great execution by the team.
spk15: Our next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.
spk17: Yeah, thanks. Can you guys provide some color on the tech platform rollout that you mentioned? And I know that you have other initiatives that you're working on. But how does this work out financially? I'm assuming Welltower's made the initial investment to build out these platforms. I mean, are your operators paying a recurring fee for this, or just does it get reflected into significantly better financial results for you as these get rolled out to your operating partners?
spk21: Sam, the goal is clearly the latter part of your question, so significantly better financial results. How I would describe kind of the flow of the cost is you're right. The initial investment is coming through Welltower. There's a bit of duplicative cost up front because we kind of transition into this. You have a legacy technology systems of operators moving over to our own. In the end, this isn't intended to be a cost savings exercise, but it'll be the tech stack will be less expensive. It'll be scaled across our entire operating platform rather than subscale across all of our operators. and that'll come through overtime. But at the initial beyond the investment, the initial thought should be there shouldn't be enough ticking costs.
spk18: Like this, remember one of the things we have to think through just in addition to what Tim said, that software cost is already part of the shop margins, right? So there is cost flowing through our P&L and it's duplicative in nature today because obviously you have to make a lot of initial or upfront costs. But just as a run rate cost, Remember that technology cost is part of the shop expense tax.
spk15: Our next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.
spk13: Hi. Thank you. Maybe a question for Nikhil. You mentioned talking to eight private peers. Just hoping you can maybe add a little color on that. Is that larger scale transactions or more of the singles and doubles you've been doing to date?
spk19: Yeah, Juan, you know, as you would imagine, right, when you're talking to eight different groups, from some of those, you might not, you know, look to buy any assets. Either you don't like the asset quality or the valuation, and with some, you might see eye to eye on a lot, right? So it's hard to generalize, but just given the numbers we're talking about, the different range of outcomes is everyone we're speaking with.
spk15: Our next question comes from Joshua Dennerlein with Bank of America. Please go ahead.
spk14: Hey, everyone. Thanks for the time. I guess I was looking at your business presentation update, the path to recovery slide on page 21. The bridge assumes you go back to pre-COVID occupancy and margin at today's rate. It seems like it's a little kind of unrealistic, just given the forward-looking backdrop. I guess, how should we think about what else gets layered in beyond this to kind of get to a bridge? And then maybe tying that into the tech cost you flagged as being part of the shop expenses, like how should we think about that influencing this bridge?
spk18: Yeah, Josh, it's a good catch that if you just look at the page of what we're trying to give you a sense of what occupancy growth, how that impacts obviously our NOI, embedded NOI growth. Going back to pre-COVID, I've said this before, If we only go back to pre-COVID, at least John and I are stepping down. We consider that a complete failure. So we expect that occupancy growth, occupancy will go substantially higher than where the pre-COVID is. However, the most important point is what you made is at today's rate. Remember what should be added if we are just trying to understand what the normalized earnings for this company, what you should add, not just whatever you think is the frictional vacancy of our portfolio should be. That's obviously one add. You have to decide how long it takes to obviously get to that frictional vacancy. And meanwhile, in those years, what's your REV4 minus export? Because our rates are growing faster than our expense growth, right? That adds to that. And just also point out that we will see that our first set of numbers we gave you a few years ago when we started giving you the disclosure, That pool of assets, our NOI, is actually $33 million higher than pre-COVID. Occupancy is significantly lower, yet it is $33 million higher. You'll see that in, I believe, the fourth bar on that page. And that's because rates are much higher, right? So you have REV4 minus export got you to that higher NOI despite lower occupancy. And that same thing follows through as you are thinking about whatever to whatever your definition of frictional vacancy is. And that's how you sort of get to the number. We're not going to sit here and try to quantify what technology costs may or may not come down. That's not the focus. We think we're after the big ball, which is revenue. There is a lot of opportunity on the expense side. As we implement systems and processes and have site-level employees focus on why to what they have signed up to do, which is providing care. That's a compassionate care is why they have signed up to be in this industry. So we want to try to make people's life easier. As John pointed out, just for one example, our tech suite rollout, it's saving about five hours of effort, far more than from an executive director's perspective, right? So that she can focus on what she signed up to do, which is leading people and providing care to families, care to residents and focusing on the residents and the families. So you think about it, this is not just a question of cost. When we talk about margins, I don't want you to think about cost. I want you to think about how we improve overall resident and employee experience and what that means for residents' willingness and ability to pay. Thank you very much for the question.
spk15: Our next question comes from John Kilchowski with Wells Fargo. Please go ahead.
spk01: Hi, thank you. Just one on the transaction market. It feels like you're competing on your own with some of these deals. Could you talk about what you're seeing in the way of capital flows and when you expect competition to start to pick up? Just trying to understand the likelihood of you being able to maintain this sort of cadence on investment activity.
spk18: Let me start and kill you jump in. First, we're not trying to maintain the level of activity. I have said this before. Our company is not designed to buy stuff. We're not a bunch of deal junkies. We're trying to invest capital to further strengthening our market position and drive part share earnings and cash flow growth. So if the market opportunity is there, we'll do it. If the market opportunity is not there, we'll not do it. If we believe the market prices have gone to a level where somebody is willing to pay more for assets than what we are willing to pay for, we'll sell. Like you have seen pre-COVID, we have sold $15 billion of assets. The focus is on value creation on a partial basis for existing shareholders. Having said that, if you have 94%, for example, in this quarter, and numbers stay around that, up or down, couple points every quarter, 94% of what you buy is in a privately negotiated bilateral transaction. So you have to compete with one person in that situation, that is yourself, if it gets in your head what your cost of capital is. Our cost of capital is much higher than you guys believe, purely because we believe our normalized earnings is much higher. So we are not trying to do a cost of capital game on a spot basis. We're trying to think what a long-term return from our individual stock is for existing owners and trying to make a decision by expanding the partnership, which is buying something. Are we increasing the growth rate and terminal value for existing owners who are our investment partners today? That's how we make capital allocation decisions.
spk15: Our next question comes from Richard Anderson with Wedbush. Please go ahead.
spk12: Thanks, that's a perfect segue to my question. So you you so far this year, you've grown the plot the portfolio by 7% 6 billion to 90 billion of an enterprise value, you've grown FFO guidance by 7%. That's probably coincidence. But I but I, I noticed that four and a half cents of the 13 cents this quarter was attributable to external investing. So of that, How much of that was driven by this sort of spread investing phenomenon of a seven yield and your low cost of capital? How much of that was previous year outperforming, to your point, better growth profile of the company? You did 5.9 billion last year at a 7.1 yield. I imagine that's a higher yield today. So is the 4.5 cents purely from activity this year or outperformance from previous years? Thanks.
spk21: Thanks, Rich. I would just note that 4.5 cents is capital activity, right? So that's how we're financing things, and that's also what we're acquiring. And the bucketing is representative of incremental changes in guidance. So that is all from incremental capital activity since we last provided guidance. The move in our kind of senior housing or outpatient or triple net, that'll be the fundamental performance. And so things we acquired last year, outperforming underwriting. are showing up in kind of fundamentals, whereas when I give the guide and talk about capital activity, it's really just incremental from last time we updated you, what's being driven by the new acquisition, the timing of acquisitions, and the way we finance.
spk18: It's an extraordinary question, Rich, because if you think about the activity, which is obviously what we talk about quarter to quarter, but what impacts your number is when you close, and majority of the closings are obviously happening in Q3 and Q4. So the impact of that closing, you're not going to entirely feel this year that you're going to feel it next year, especially with a focus on growth. We are growth investors. We're not, I've seen enough companies have been destroyed by chasing yields. You can be assured that that's not what you're doing. So A, you have a timing issue of obviously how that flows to the number and B, assuming that we are actually buying what we're telling you buying, which is growth, your impact and a move forward basis will be higher. So it's a really, really good question.
spk15: Our next question comes from Wes Galladay with Baird. Please go ahead.
spk06: Hey, good morning, everyone. Can you answer what segments are driving the occupancy gains? Is it active adult, independent, assisted living, and any potential mixed headwind on rate next year and potential export benefits?
spk18: It's been across the board given the wellness housing portfolio is extremely highly occupied. You should assume that that's a drag on growth and majority of the growth that's flowing through our number overall is coming from assisted living and independent living.
spk15: Our next question comes from James.
spk18: Sorry, on the export question, let me finish the question. And on the export side, go back to and focus on what John said. on his prepared remarks, you know, seems like labor cost is moving in that direction. We have no sense of we can't give you right now what that may or may not be for next year, but directionally, it's moving in that direction. Thank you.
spk15: Our next question comes from James Kamert with Evercore. Please go ahead.
spk03: Good morning. Thank you. Looking at the shop portfolio, obviously the same store portfolio exhibits a little bit higher occupancy and margin versus the total. implying obviously non-same store, a little lower. Is there a reasonable expectation on cadence as to how fast the total portfolio sort of catches up to same store, if you will, in terms of margin? Is it two to three quarters as you apply your operating platform? Or is that too short, too soon?
spk18: Let me take the first part. Tim, you can provide some guidance on how sort of non-same store flows into same store. But frankly speaking, Jim, we don't really care about same store, non-same store. All we care about is bottom line FFO growth. But there is no question that the non-fame store, given its lower occupancy, will be growing faster. And that's a function of, remember what I said on last call, that we're buying assets, and I think Nikhil mentioned this as well, that are lower than market occupancy, right? We're buying, I think I gave a bunch of examples last quarter, but Nikhil is buying assets that are 40%, 50%, 60% occupied, right? That's a drag to our earnings today. But that gets you to a higher earnings tomorrow and gets you a better growth.
spk21: Yeah, it is, Jim. So that portfolio, I think that total portfolio is probably the biggest difference is you've got deliveries on the development side. So you have pre-opening costs plus just general network capital drags and anything delivered. And we're in a bit of a heavy period of delivery. So that causes some change. Generally, though, you think about kind of the difference between the same store and the total portfolio, the mix is relatively similar. So over time, you should see those margins converge.
spk15: Our next question comes from Mike Mueller with JP Morgan. Please go ahead.
spk20: Yeah, hi. In terms of the tech rollout, can you give us a sense as to what you think the annualized margin improvement could be? at the property level based on what you've rolled out so far?
spk18: Mike, we're not going to get on a call and try to speculate what our margin improvement will be. We will tell you that focusing on what we said before, which is we believe that we're going to get this platform at a higher level margins than pre-COVID, and that is due to a function of where we think operating platform is taking us, where we think the property platform initiative will take the occupancy to, It's just an inappropriate, you know, sort of a venue to try to speculate what will happen in the future. But we're optimistic we'll get to a better place in the future than it was in the past.
spk15: Our next question comes from Omotayo Okusanya with Deutsche Bank. Please go ahead.
spk07: Yes, good morning, everyone. Good quarter, great outlook. In regards to the SHOP portfolio, and again, you know, of late you have been converting some portfolios from Chippenet to SHOP. Obviously, it is kind of improving or increasing the overall growth profile of the company as you kind of get more exposure to SHOP. I guess ultimately, just kind of given what you were seeing in regards to demand-supply fundamentals and how you expect senior housing can evolve over time. Should we still be expecting that the shop portfolio could be an even bigger percentage of your NOI going forward? Or at a certain point, do you start thinking of, again, well, the downside when you do have supply or when fundamentals get softer suggests that maybe the optimal exposure is some percentage of NOI to shop?
spk18: Very good question. Tayo, I'll point out to you, Let me answer the easiest question you asked, which is, will SHOP continue to grow as a percent of the overall portfolio? The answer is a resounding yes. As you see that our SHOP portfolio is obviously low occupied. Majority of the margin flow through is just starting to come. If you just think through what that means, even if we don't buy another asset, you will get to a much higher place than where you are today. So just think through that from a portfolio composition for what exists today. and obviously you can see that's what we are buying mostly. The second question is even a more important one as we think about long-term portfolio management. I would recommend that you go back and read the letter to future shareholders that I wrote a few years ago. It's on the investor section of our website where we focused really on this topic, on what our true belief, that is, volatility is not risk. You're talking about, okay, what happens in a year or two or whenever you might get a downside volatility of owning equity versus debt. That's where your question is. I'm okay with that. That's what we have a balance sheet for to adjust for that risk. Just remember, volatility in our opinion is not risk. The probability of losing permanent capital in our opinion is risk. So you are asking a question that is near and dear to my heart. I wrote a lot about this topic. I think you will get a kick out of reading the end section of the letter just focusing on this topic. Thank you.
spk15: We have no further questions at this time. This will conclude today's conference call. Thank you all for your participation. You may now disconnect.
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