Welltower Inc.

Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Welltower second quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star then the number one on your telephone keypad. and if you'd like to withdraw your question, again press star one. Thank you. I would now like to turn the conference over to Matt McQueen, Chief Legal Officer and General Counsel. Matt, please go ahead.

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

Thank you, Matt, and good morning, everyone. I'll review business trends and our capital allocation priorities, and the team will follow the usual cadence. I'm pleased to report a record quarter for our company as the end market demand for our needs-based senior housing business remains resilient despite continued macroeconomic and geopolitical uncertainty. The uncorrelated nature of demand growth combined with the mixed shift of our portfolio resulted in 25% year over year increase in partial FFO growth, one of the highest levels achieved in our history. As Tim would describe shortly, our strong start to 2026 and increased confidence in the back half of the year enabled us to increase the midpoint of our full year FFO guidance by 12 cents and many more. and incurring near-term dilution from 3.6 billions of disposition completed year-to-date is a trade-off we will gladly make. Remember, every decision we make is evaluated obsessively through an opportunity cost lens to extend the duration of our growth curve. And the trade-offs we made last year vis-a-vis the sale of our outpatient medical portfolio and concurrent redeployment of proceeds are clearly being reflected across our P&L. This includes revenue and adjusted EBITDA growth this quarter, which increased 39% and 36%, respectively. At the same time, we maintained an underlevered balance sheet and continue to invest heavily in operations and technology side of the house. Turning to operating results, we're pleased with our second quarter performance, particularly when weighed against an economic backdrop fraught with uncertainty. Organic revenue growth of 9.2% was driven by another quarter of strong occupancy gains and healthy pricing power. Same store occupancy increased 330 basis points year over year, which follows a 420 basis point increase in the second quarter of last year. and our sequential spot occupancy growth in the quarter was 100 basis points reflecting a strong start of the summer leasing season versus 80 basis points in Q2 of last year. We also continue to be pleased with the pricing power that our operating partners are achieving with rep pour or unit revenue increasing 5.2% during the quarter relative to 4.9% achieved in Q2 of last year. We believe this reflects two powerful dynamics. First, capacity in the system continues to shrink with strong percent of our portfolio rapidly crossing 90 and 95% occupancy thresholds creating additional pricing power. This is not solely a supply demand story though. We serve the wealthiest of age cohorts in history with a significant concentration of wealth held by baby boomer generation. This cohort increasingly prioritizes exceptional experiences and high quality amenities and service, particularly later in life. This is also a highly discerning customer base that expects the best and willing to pay for it. Our operators and their onsite teams work relentlessly every day to deliver that exceptional and differentiated experience. Ultimately, we believe the combination of supply constraint and a highly affluent need-based customer will continue to support healthy rate growth for many quarters and years to come. It is also worth highlighting that red poor growth continues to meaningfully outpace the growth of export or unit expenses, which resulted in another strong quarter of operating margin expansion of 300 basis points to over 32%, surpassing pre-COVID levels. And we believe that meaningful margin upside remains for the portfolio driven by operating leverage inherent in our High fixed cost business coupled with structural changes being effectuated by world tar business system. Turning to capital allocation. Transaction activity across seniors' housing space has picked up in recent quarters, but our ability to execute on highly attractive investments in U.S., U.K., and Canada has not diminished. In fact, the pace of activity has picked up meaningfully as a result of geopolitical uncertainty coupled with a spike in interest rate. Thank you very much. and our ability to provide certainty at a lightning speed and close quickly as depicted on slide 15 of our business update presentation. This is particularly important given the recent rise in interest rate and growing uncertainty with respect to the direction of the economy. Our investment teams remain busy as ever, and I suspect that will be the case in fall and into the year end. Not only does our investment pipeline remains robust, visible and actionable, but our conviction in deploying capital is enhanced by our ability to meaningfully increase cash flow post acquisition through transitioning assets to one of our best in class operators and implementation of WBS. Despite this confidence, make no mistake that we remain exceptionally disciplined in deploying our shareholders' precious capital. We will not compromise our standards for asset quality, management contract structure, or host of other criteria which are embedded in our investment process in pursuit of near-term accretion or overall size. Our goal is simply and only partial growth. and while we almost invariably remain the first call from sellers, we have passed on tens of billions of dollars of transactions this year alone, which did not meet our stringent criteria for quality, price, equity, future growth and contract structure. At the risk of sounding like a broken record, this is not a spread investing business, at least not for a product obsessed operating powerhouse like us. I can't speak for the shadow banks in our space who only understand the spread investing language and are perhaps particularly impressionable by silver-tongued investment bankers. Lastly, we're delighted to have announced an increase in our quarterly dividend by 15% to 85 cents per share. This marks the third consecutive year in which the Board has elected to raise our dividend and marks a step function higher from the previous increases. This increased size of the dividend reflects Board's continued confidence in the growth trajectory of the business and health of our balance sheet. At the same time, our free cash flow generation continue to grow rapidly, providing us with greater flexibility to allocate capital in ways to maximize shareholder value and extend the duration of our partial growth. With that, I will pass it over to John. Thank you and good morning.

The second quarter not only marks another period of substantial growth for the business, but also continued progress on well-towered business system initiatives, which I'll get into shortly. As Shankh mentioned, we reported another quarter of stellar results with the company firing on all cylinders. Total portfolio same store NOI increased 15.5% year over year, marking the second highest level in our company's recorded history. As we discussed last quarter, the portfolio is growing at a meaningfully faster pace. driven primarily by the continued mixed shift towards senior housing operating portfolio, which now contributes approximately 70% of total NOI. Importantly, seniors' housing remains largely insulated from the various cyclical and secular pressures affecting many sectors across corporate America. The business continues to perform at a high level, resulting in our 15th consecutive quarter in which NOI growth exceeded 20%. Topline growth remains strong, supported by another quarter of 330 basis points of occupancy growth and 5.2% REVPOR growth. were pleased to report that expense pressures remain subdued with year over year growth in X4 or unit expense of just 0.7%. This is largely A function of scaling benefits received from the rapid increase in occupancy across the portfolio. And with the properties fully staffed and with continued normalization of wages, comp pour or compensation per occupied room came in at just at 0.8%, one of the lowest levels in our recorded history. As a result, we achieved flow through margins of 65%, a continued improvement from prior years. The combination of healthy REVPOR growth and constrained export growth drove another 300 basis points of year-over-year margin expansion during the quarter. And as Shankh mentioned, we believe that significant margin upside remains given the inherent operating leverage in our business combined with the competitive advantages we are building through the WellTower business system. One of the most important ways in which we're expanding our moat is by attracting exceptional talent. from a broad range of industries highlighted on slide 13 of our business update presentation. The tech squad represents an expansion of the tech quad we introduced last year, tasked with accelerating the re-imagination of our technology ecosystem, including all initiatives related to data science, information, technology, and innovation. Their objectives feed into our broader company-wide mission, to dramatically improve the customer and employee experience and provide a fantastic value proposition for our residents and their families. In this light, our goal has been to attract the highest caliber professionals with tech or tech adjacent backgrounds to execute on this vision. We will continue to allocate significant resources and talent as we continue to deploy WBS across our portfolio. We've already seen encouraging early results Thank you for watching. Overall, WBS is beginning to result in meaningful improvements in cash flow, and we believe that expanding the platform across the portfolio will further extend the duration of our growth. To sum it up, it was another strong quarter for the company, but as you know, we take nothing for granted and remain relentlessly focused on every operational detail. Thank you for joining us. the Well Tower team, our exceptional operating partners, and the dedicated, caring community employees for their tireless efforts and for embracing this journey alongside us. Their dedication is what makes these results possible. With that, I'll pass it to Nikhil.

Thanks, John, and good morning, everyone. Since our last call, the macroeconomic and geopolitical environment has remained highly fluid. The Middle East war has seemingly been both on and off, and markets have repeatedly moved between expectations of escalation and de-escalation. and others. In an environment like this, the margin for error narrows. Thank you very much. Thank you very much. Thank you very much. The remaining $6 billion of announced activity consists primarily of newer vintage senior housing assets across 26 transactions in the United States, Canada, and the United Kingdom. These assets have an average age of six years and in-place occupancy of roughly 75%, providing us with attractive physical plants and meaningful embedded opportunities to improve operating performance. These assets were acquired at a circa 20% discount to replacement cost. Thank you very much. We operate as one team, developing relationships, identifying opportunities, and improving the business together. These network effects strengthen our platform and make the entire ecosystem more valuable. The flywheel is humming. Our confidence in these investments is grounded in what we are already seeing across our portfolio. As the Well Tower business system continues to mature, our ability to increase cash flow following an acquisition has become both more significant and more repeatable. That distinction matters. Spread investing and cost of capital arbitrage are not value creation, nor are they durable investment strategies. Thank you very much. A deal is announced, the champagne is popped, victory is declared, and attention quickly turns to the next opportunity. We see it differently. Closing an acquisition is not the culmination of the work. It is the moment the work begins. There is nothing inherently worthy of celebration about winning an auction or signing a purchase agreement. After all, any fool can write a check. The more difficult task is determining whether the prospective returns adequately compensate our owners for the risks being assumed and having the discipline to walk away when they do not. At times, that means watching others claim victory in processes in which we chose not to participate. We are comfortable with that. To us, success is not simply buying something. Success is establishing a thoughtful business plan, executing against it, achieving the cash flows we underwrote and continuing to push for outcomes that exceed our original expectations. It means never becoming satisfied with current performance. It means improving the experience of residents, creating a better environment for employees, and generating durable value for our owners. The acquisition itself earns no credit. The results that follow are what matters. Thank you, Nikhil.

My comments today will focus on our second quarter 2026 results, the performance of our triple net investment segments, our capital activity, a balance sheet liquidity update, and finally, an update to our full year 2026 outlook. WellTower reported second quarter net income attributable to common stockholders of $0.61 per diluted share and normalized funds from operations of $1.60 per diluted share, representing approximately 25% year-over-year growth. We also reported year-over-year total portfolio same-store NOI growth of 15.5%, driven by 20.5% growth in our shop portfolio. Now turning to the performance of our triple-net properties in the quarter. In our senior housing triple-net portfolio, same-store NOI increased 5.2% year-over-year, and trailing 12-month EBITDA coverage was 1.23 times. Next. and our long-term post-acute portfolio grew 2.9% year-over-year and trailing 12-month EBITDA coverage was 1.3 times. Moving on to capital activity, during the second quarter, we raised $3.9 billion through share issuance, OP unit funding and capital recycling. which when combined with internally generated cash flow allowed us to repay nearly $1 billion of senior unsecured notes and fund $6.3 billion of gross investment activity while ending the quarter with net debt to adjusted EBITDA of 2.99 times in line with a year ago. During the quarter, S&P revised their outlook on our A minus credit rating to positive following Moody's decision earlier this year to revise the outlook on our A3 rating to positive. Together, these actions further validate what we believe has become one of Welltower's growing strategic advantages, differentiated access to capital supported by an exceptional all-weather balance sheet. We ended the second quarter with $2.1 billion of cash on hand, which together with recent capital activity and $1.1 billion of incremental dispositions position us to fund approximately $6 billion of incremental investment activity, the majority of which we expect to close later in the year. Subsequent to quarter end, we successfully returned the Canadian unsecured debt market for the first time since 2019, issuing $1.15 billion of senior unsecured notes across two tranches at a blended coupon of 3.95%, extending the duration of our liability profile and attractive pricing. Taken together, this net investment activity and continued cash flow growth from in-place portfolio are expected to result in year-end net debt to adjusted EBITDA of approximately three times, in line with our prior expectations. Before turning to our guidance, I want to come back to a point I highlighted last quarter around how the vertical integration of our model and the portfolio transformation underpinning Wealth Tower 3.0 is creating a powerful compounding network effect Thank you for joining us today. Our shop portfolio generated flow-through margins in the mid-60% range. As occupancy continues to trend higher, union economics should improve further as a higher proportion of incremental revenue is translated to bottom-line net operating income. This fundamental strength is reflected in our guidance. We began the year with an outlook that already reflected a substantial amount of visible year-over-year earnings growth. driven by the continued evolution of our portfolio toward higher growth senior housing operating assets. Two quarters later, we're raising that outlook for the second consecutive quarter, reinforcing both the strength of our underlying portfolio and the continued momentum of the business. Moving on to guidance. Last night, we updated our full year 2026 outlook for net income attributable to common stockholders to $3.11 to $3.19 per diluted share and normalized FFO to $6.36 to $6.44 per diluted share or $6.40 at the midpoint. Our normalized FFO guidance represents a 12 cent increase at the midpoint from our prior normalized FFO range. This increase is composed of a three cent increase from our senior housing operating NOI, An 8-cent increase from investment and financing activity. And a 1-cent increase from better-than-expected income tax and other. Our updated outlook assumes total portfolio year-over-year same-store NOI growth of 13.75% to 16%. Driven by sub-segment growth of outpatient medical, 2-3%. Long-term post-acute, 2-3%. Senior housing triple net, 3.5% to 4.5%. and finally, senior housing operating 18.5% to 21.5%, which is driven by the following midpoints of their respective ranges. Revenue growth of 9.3%, comprised of rev pour growth of 5.1% and year-over-year occupancy growth of 350 basis points and expense growth of 5%, equating the export growth of approximately 1%. And with that, I'll hand the call back over to Shankh.

Thanks, Tim.

I want to make two general observations before opening the call up for questions. First, exactly two years ago on a July 2024 earnings call, we laid out our macro view of the world, suggesting that the powerful secular tailwinds experienced over the last 40 years, which resulted in subdued levels of inflation and a historic bond world market could diminish or yet turn into headwinds. This includes shifting from a period of globalization to de-globalization from an abundant labor force driven by baby boomers in their prime working years to a scarcity of labor due to a rapidly aging population. We reflected on increased deficit spending across the world and growing international conflicts after a period of relative peace and cooperation. and we specifically called out structural changes in Japan, the global anchor of low interest rates, which has been experiencing the highest level of inflation in decades. While the 10-year treasury has increased over 100 basis points in past two years, we believe we're still in the early innings of the structural forces playing out. How has this been reflected at our company? through both transformation of capital and resource allocation. First, we executed a massive portfolio rotation from bond proxies such as out portion medical into higher growth senior living communities where we believe we can meaningfully outperform inflation and where we can effectuate positive divergences in outcomes through our competitive advantages. and second, through a substantial resource reallocation to increase talent density in operations and technology. Over the past few years, we have recruited incredibly high caliber technology and operating talent from some of the most sophisticated and innovative firms in corporate America. The acceleration of this trend during past six months can be seen on page 13 of our business update presentation. This is a testament to our transformation from WealthTower 2.0, a capital allocator with strong asset management expertise to WealthTower 3.0, a customer obsessed operations and technology first company with a complimentary disciplined capital allocation function. As a result, we do not receive returns like spread investing shadow banks whose currency is either interest rate compression or leverage. Instead, we create returns through driving cash flow the old fashioned way in our pursuit of dogged, incremental and continuous progress over a long arc of time. Finally, I want to provide an update on an important topic that I had anticipated eventually discussing after we established the RIDEA 6-0 construct nine months ago, although I certainly didn't expect it to become relevant this soon. As you might recall, many of our growth operating partners have elected to take their multi-year promoted interest in World Tower stock. The ultimate value of the wealth they create will not only be a function of their own achieved results, but also perhaps turbocharged by their peers in other parts of the country or different countries. As I've sat down with many of these operating partners during the summer, I have heard, unprompted, more about the cooperation they're receiving from other WellTower operating partners than ever before. Imagine, historically, for example, Cozier and WellTower would be working on culinary initiative, or StoryPoint and WellTower would be working together on a digital marketing priority. Now you have other operators such as QSL, Amica, Care UK are jumping in at the same time as a team and amplifying the outcome regardless of who started the project. Organizations spent an inordinate amount of time and resources to deconstruct intricate complexities. However, together as partners, we are maniacally focused on capturing unrecognized simplicities that are hiding in plain sight, quickly resolving pain points for both customers and employees to consistently deliver a better experience. What started as a shared incentive is now turning into a shared dream and shared sacrifice. I have never seen and felt this level of deserved trust amongst the ecosystem with true unity of purpose and mirrored reciprocation. I want to thank my operating partners who are pushing us and pushing each other every day to get better. As the old adage says, if you want to go fast, go alone. If you want to go far, go together. Life is more fruitful and fulfilling if we focus on growing the size of the pie versus the share of the pie. This unprecedented level of cooperation is reflective of a win-win additive sum mentality as opposed to a narrow zero-sum mentality which is prevalent in our industry. I am confident that we are gathering tremendous momentum at the beginning of a leaping emerging effect that will shape our shared future together and transform this industry. With that, I'll open the call up for questions.

Thank you. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star one. We also ask that you limit yourself to one question. For any additional questions, please re-queue. And your first question comes from Ronald Camden with Morgan Stanley. Please go ahead.

Great. Good morning, everyone. You mentioned the term shadow banks twice in your opening comments. We're just wondering if you could elaborate on fundamental differences between how you view your business and those players. And if I could ask a second part or just a quick update on the 95% plus. of your portfolio that you gave last quarter. Wondering how they're doing this quarter. Thanks.

Thank you, Ron. So if you think about what a bank does, it takes deposit, it has a cost of funds, and it lends money on a spread on that cost of fund. If you look at healthcare REIT industry, which is where this industry started, they're all in triple nets, and that's all they did. Thank you very much. Thank you very much. whose entire focus is to enhance resident and customer experience to create value with a complimentary capital allocation side. We're not saying that's not what we do. We're saying our first, every day we wake up to think about how to create value by enhancing what we own, which is to increase customer and resident experience. That's the key difference, right? Hence the question of what Nikhil sort of talked about, we define our success differently. and that's the difference, right? Second, and that's just percolates through our culture, percolates through our entire ecosystem. So that sort of is a different mentality on how we think about the business and how we allocate both capital and resources, right? Very, very important part. The second question, the 95% plus of the portfolio had obviously higher report growth, six plus percent and it also a higher NY growth of 20 plus percent. Hope that answers your question.

Your next question comes from the line of John Kilachowski with Wells Fargo. Please go ahead.

Good morning. Nikhil, you made some very helpful comments in the opening remarks in regards to the composition of sellers. And I was hoping you could dig in there a little bit and talk about what constitutes the rest of that pie of sellers and also what's driving this acceleration and transaction activity. As you put it, any fool can write a check, and Welltower has always prided itself on offering a fair price for assets. So what do you think is the driving factor or factors that are, one, bringing sellers to market in the best senior housing operating market, and two, to Welltower when there may be a higher bidder?

I think, John, I think first and foremost, if you look at how many transactions we did and how I quantified that practically 96% of those transactions are off-market, The model has been changed, right? I mean, sitting here backed by all the tools that our data science team has provided to us, we have a very granular view of all the assets that are out there, who owns them, and what the expected performance of those assets is. And so then we turn the model around and go pursue those assets rather than wait for those assets to come to our desk, right? So in some cases, these are family businesses. where the one generation that created the business is not looking to hand it off to the next generation as they have other priorities. And so we go unlock those opportunities. And at times those conversations take years to eventually come together. and then there's local owners who own a handful of assets where we get together with our operating partners and say, who has the best relationship? Who has the ability to go unlock these opportunities? And it's just old school classic business development to go pursue specific assets, specific portfolios that we've been tracking and have a strong view of what the performance can be. So that's how we go pursue these opportunities.

I just cannot overemphasize what Nikhil says, the first one, which is there's a tremendous amount of generational transfer is happening. It is happening across our society with many, many businesses are changing hands, and you will see a lot of write-ups on this over the years. But we're seeing that in our industry. It has been particularly tough last five years, six years in this industry. And finally, cash flow has sort of come back to pre-COVID levels. And a lot of the owners are ready to move on into their retirement or in other pursuit and enjoy their life. And that's sort of what we are seeing driving across all three countries.

Your next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.

Thanks so much for the question. Maybe, I guess, Shankh, you know, sort of thinking about durability and longer-term cash flow from the perspective of your operators, I'm wondering if you can give a bit more color. You've sort of alluded to maybe consolidating a bit going forward and sort of the operators that got you here today versus the operators that will get you to where you want to be in five years, particularly as you referenced that 95 plus percent is still growing 20%. And so the operators that can get you that high occupied pool to compound in that range or maybe a plus minus. I'm just wondering if you can give us a sense of where are we in that evolution of operators and what we maybe see that allows you to keep that durability on.

Thank you, Vikram. First, I want to be very clear that Ron asked the question I answered the question, the goal is not same-store NY growth of any number. That is not our goal. Our goal is partial earnings growth and cash flow growth. Very, very important you understand that. And that's not a function of a myopic view of occupancy growth, rate growth, expense growth, NY growth. It is a pure function of what we are focused on. is what is the ultimate par share cash flow growth and par share earnings growth. That's what shareholders need. Everything else is irrelevant, just an input to the ultimate system, not anything else. And I've talked about this very specifically in our annual letter recently. That how makeshift impacts and also very importantly, how as free cash flow generation goes up in the system, how that impacts and all of those things. So there's multiple input to that. Now, going back to your question very specifically, performance and a pursuit of excellence that you are alluding to in that question is extraordinarily important. But what is more important is the culture. at this operating level, whether they're aligned with us, they see the world the way we see it. Nobody's saying we're right or some of our growth operators are correct in every pursuit of everything. But do they have the mentality, the culture to have a long-term view of taking care of the resident, taking care of the customer, have an obsessive view, a maniacal focus on increasing the standards every day? and see the world in a win-win way, like the way we see it. Not saying that if you don't subscribe to that view, Vikram, you or anybody else is correct or incorrect, but that's just our view. That's how we live and run this business 24-7. This is a very, very hard business. and because this is a very hard business, you gotta be somewhat stoic about how you see the good days and the bad days and there's been plenty of both, particularly the bad ones in last 10 years, 11 years that I've been doing this. So we are looking for a particular group of people who share that view of the world, was that long-term focused and had the similar culture of shared sacrifice, shared dreams, and we'll see where we get to. But there is no question that we're increasingly concentrating our portfolio with people who have that mentality of an additive sum.

Your next question comes from the line of Anamoteo Askusi. Akusanya with Deutsche Bank. Please go ahead.

Yes. Good morning, everyone, and congrats on an excellent quarter. Shankh, in the business plan presentation, I think you make a very strong point around lack of supply and kind of all the different factors that probably lead to lack of supply for a while. But I, you know, I'm one of them to kind of be in higher construction costs, and it's really hard to kind of get really good returns. at this point. But I also do have a fair amount of development going on and almost a billion dollars of commitments on that side at pretty attractive yields of over 10%. So I'm just trying to understand how you are finding these opportunities at really good returns when it just kind of feels generally the industry should be struggling with development at attractive yields.

Understand. Majority of this that you see is the increase has come with the first three buckets. Some are organic expansion opportunities in our own portfolio. But majority of them has come with either Amica or Barchester acquisitions. If you think about it, what we discussed during Amica, that team has worked relentlessly eight, 10 years to assemble these lands in places that there is no land, right? One house at a time, you know, two house at a time and 10 years working with that to create land. Thank you very much. If it is an exceptional product in exceptional location, we will do it. For example, I've talked about Brookline development. It's a truly replaceable community. You cannot build it. You cannot buy it. We did it during COVID at the height of COVID. I've said it many times. Do I want to do Cupertino? will do Cupertino, right? Palm Beach, we'll do Palm Beach, places like that. At the same time, Tayo, you can see this quarter, I believe we mentioned this in our earnings release or one of those documents, that we have taken impairments and given up pursuit of several lands that we have been working on 10 years, including, I believe, a big one in Wellesley, After working years on it, right? So it's just a question of economics. If the economics works out, we will engage in an economic activity. We have no bias against it or for it. The point we're trying to make in the segment that we operate, which is luxury senior housing, cost has become so prohibitive that it's very difficult to make returns work. And we think about returns. It's very simply untrended versus untrended returns relative to untrended construction costs. And as you know, that you have to have that view in a world where construction costs is rising rapidly. You can just think about what will be the yield seven years from now if you keep trending your rent. You have to have that view. And that's how development should be done. And very few things work out in that world.

Your next question comes from the line of Nick Ulico with Scotiabank. Please go ahead.

Oh, thanks. I want to ask about the non-same-store pool within the senior housing operating segment. So about 30% of that segment NOI is non-same-store. It looks like it has lower occupancy, lower margin. So if you could just talk about how the assets have been performing and how we should think about Growth there over the next year versus the same-star pool, since it looks like there is more occupancy upside and more margin upside in those non-same-star assets. Thanks.

Let me start and Tim, you jump in. If you think about the volume of acquisition in last 12, 15 months, that should be the case, right? It takes some time to season. They will come in same store after five quarters as it always has. But the acquisition volume in last few quarters would suggest that would be the case. You make a very good observation. Thank you very much. You know, these close to $6 billion of senior living assets we bought at 75% occupancy. As you know, Nick, at 75% occupancy, you know, these communities are not making much money. It's really you start to make money after 80 and your margin really goes up. after high 80s, low 90s, right? So there is tremendous opportunity. Clearly, they're moving really, really well from an NOI standpoint as they're going through our platform, new operators, WBS initiatives and everything. So that sort of, I would not say sort of, you know, low hanging fruit. Occupancy is never a low hanging fruit, but there's occupancy upset. Having said that, you will expect they will transition into same store They will get to a higher level of occupancy and then pricing power will kick in. So this is sort of think of this as a more of a manufacturing process, if you will. You have same store where the handover from occupancy to rate has happened or is sort of happening right now. Non-same store is more still an occupancy story, not a rate story. That's why sort of cash flow is moving and it will happen as we go forward.

Yeah, and I would just add to that, Nick, that so think about our overall, our same store portfolio approaching 89.5% occupancy. That non-same store portfolio is about 550 basis points lower than that on occupancy. To Sean's point, this has kind of been the consistent strategy. We gave some color around Our current pipeline is 75% occupied, so what we expect to close in the back half. So consistency on that kind of manufacturing line analogy of continuing to bring in assets. And as we build out WBS and implement, Nikhil is keeping us very busy with the additional assets. And I think about it in terms of kind of like TAM that we continue to see really good results in what we're bringing on board as far as the more mature portfolio. and we continue to bring a larger opportunity set.

Your next question comes from the line of James Kammer with Evercore. Please go ahead.

Good morning. Thank you. Obviously, Welltower has an extensive and fertile plate of shop opportunities, but I was just curious, what is your thinking at present regarding the, I guess the TAM, to use Tim's word recently there, and or the financial opportunity, if you will, for Welltower and active adult businesses?

Jim, Active Adult is a space we like. Our wellness housing portfolio has compounded very strongly, high single digit, low double digit for a very long period of time. Imagine, just think about this, that going back to 2018 when it's the first time we did it, our first transaction into the space to today, you had COVID, you had massive spike in inflation, interest rate to all of these It has compounded that meaningfully, which is obviously what we like. And we think there is a tremendous sort of position in our portfolio. But it's a very small sort of an industry where the largest owner in the industry. We continue to be active, but it's not a scaled opportunity. We like a specific price point in that particular asset class. and we continue to grow and we'll continue to do that. But we like that cash flow compounder that that industry is or that those assets are. But it is highly unlikely a skilled opportunity. I don't know what else you want me to add to that.

Here, our next question comes from the line of Farrell Grinness with Bank of America. Please go ahead.

Good morning. I wanted to touch on your comments about diversified, especially source capital. You know, recently we've seen some unique JV structures that have been announced with other peer companies, especially partners with private equity in order to source capital. And I'm curious about your appetite for doing that on the go forward, especially as you consider this investment opportunity.

Farrell, I'm pretty rusty in this area. We have explored doing that with sort of the one of the largest or probably the first one who came up with that idea a few years ago. So maybe the structures have changed, evolved. So I'm not the right person to comment on it. But if I remember that and I'm personally engaged, Thank you very much. So obviously, we would not engage in some sort of that kind of structures. We understand some people raise debt where they probably don't have better access to capital. It makes sense, right? But I don't know how the structures have evolved. I'm not the right person to comment on it. But when I did engage, My understanding is unequivocally it's a debt structure and the JV structure and sort of the that I understood it to be that the asset values of those are sort of a marker that doesn't drive obviously the return of the debt. and it is sort of an interesting piece of debt that is both secured and unsecured. First, your first round of defense is the assets and then second round of defense is the sponsor. So that's sort of my understanding what was, what has become. I have no idea. I don't comment on things I don't understand.

Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead.

Good morning. Thanks a lot for taking my question. In your June 1st press release, you noted that unlevered returns on acquisitions that are comparable are slightly higher than returns achieved on acquisitions made in prior years by leveraging WBS. Can you help us reconcile that statement with the acquisition yields in the quarter of 6%? Thanks.

Yeah, I mean, you know, the yields are going in numbers, and that is, at that time, just a seller's cash flow. So now what has changed is with WBS, we have more and more confidence on what the end state is. And so that's part of the underwriting, right? So you've got going in and then what is the stabilized trended cash flow and going from the starting point to the ending point is what creates the total IRR. So the point is that the terminal yields are much greater than what they used to be given how we're improving cash flow.

Michael, if those yields were zero or negative, which we buy, you know, we continue to buy four or five years later, I would be equally pleased. All we care about was the end state looks like, not the beginning state looks like. As I said, you buy 75% occupied assets, your yields would be substantially lower than 6%. And we're completely fine with that. We're total return investors and we're not yield-driven spirit investors to my earlier point.

Your next question comes from the line of Michael Stroyek with Green Street. Please go ahead.

Thanks, and good morning. Can you just talk a bit about pricing power in the UK relative to the US? I mean, rent for growth has decelerated a bit over the past couple quarters, at least in the same store pool. Just what's driving that recent deceleration, and how do you view the long-term rent growth potential of that market versus the US?

Michael, if you look at it, it's a lot of change of asset pools. I understand that we have bought a lot of assets in the UK in the last two years. So quarter-to-quarter chains are driven by a lot of pool chains, this, that, and others. But generally speaking, if you just think about it, Thank you very much. which is where higher occupancy drives higher report growth and where occupancy is lower, the focus is on bringing occupancy up but you get a lower report growth and that sort of is the fine tuning of the model. I would not worry too much about quarter to quarter as you know that we have a historic and a very long-term unchanged consistent policy of bringing in assets after five quarters in the same store and a lot of assets are coming in. So that's sort of it. Don't worry about sort of the optical nature of this basis point, that basis point from this quarter to that quarter, but generally your observation is correct and that's because the occupancy is lower.

Your next question comes from the line of Juan Sanabria with BMO. Please go ahead.

Good morning. Thanks for the time. Shankh, at the beginning of the call, you made comments around the aging of the workforce and kind of alluded to Japan. I'm just curious on how you expect for the trend, particularly as we've seen maybe a decrease in the immigration Thank you. Thank you. Thank you.

as or diminishing labor force and sort of family caregiver and all of those things that we have talked about for a long period of time. There's a reason one that we specifically focused on the highest end of the senior living. And, you know, things are good now. It's a cyclical turnaround. Everything is everybody's dancing. I see it. No problems. We are very, very focused on a price point and a product combination. I've always said this is an optimization game of product, price point, and service level. And that at the highest price point level, at the higher equity level, where we think we understand the business, and we believe that there the pricing would be, you know, pricing power would negate the increase, long-term increase of labor cost, right? That's what we believe. You are not seeing that cyclically, I would say, right now labor is going the other way, right? You know, labor cost is rolling over. You are seeing that right now but from a long-term standpoint, availability of labor is something that I worry about just purely from numbers standpoint. And that's why we want increasingly we have focused and narrowed our focus on a specific product price point range where customers are willing to pay and they understand they don't want their providers to cut services and they're willing to pay for that services and where the pricing could negate the increase of inflation in labor. And that's why we do what we do.

Your next question comes from the line of Seth Berge with Civi. Please go ahead.

Thanks for taking my question. Shankh, you gave some comments about kind of the collaboration with the operators and the focus on capturing unrecognized simplicities. Just curious, what does the operator performance gap look like between your strongest and weakest operators running on both our business systems? And how much does that gap narrow when a new operator comes onto the platform?

So if you're talking about, you know, sort of what's the operation sort of results spread of best performing operators to weakest performing operators, I will tell you, this is the conversation. There's no beta in this business. You got... Thank you very much. We managed the volatility and some days better than others, but that's what you don't see. Now, focus on what our business system has been primarily, not necessarily to just reduce that volatility. There are certain things that are uncontrollable in life that you just have to live with, right? There's a fundamental misunderstanding of Thank you very much. Every interaction between residents, their caregivers, their families, and in a timely basis, that's the key. In human intensive systems, what happens is cumbersome technology and workflow do more than waste time. They reduce quality, completeness, and timeliness of that information as details are omitted, delayed, or inconsistent recorded. What happens is because of that, as a consequence, it's not just lower productivity, but less accurate understanding of the business. That's what we are trying to do throughout our business system, helping our operators. This world, our business system is built with the operators for the operators. And that's what we are doing. We have a long ways to go, but that's the key is we're trying to bring in a level of efficacy in this business. Thank you very much.

Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Thanks. Sean, can you give us an update on the fund business that Welltower is currently pursuing? I mean, how much of Seniors Housing Fund 1 has been deployed at this point, and where does the Seniors Housing Debt Fund 1 stand right now?

Mike, I gave a pretty extensive update last quarter. but the senior housing equity fund was fully deployed or fully committed, I should say, as of last quarter. And on the debt fund, we raised a pretty small discrete debt fund, very targeted, about 750 million bucks. And that is also practically fully deployed.

Your next question comes from the line of Richard Anderson with Cantor Fitzgerald. Please go ahead.

Hey, thanks. Good morning, everyone. So I wanted to talk a little maybe more finer point on the future tale of the opportunity set from a demand point of view. And specifically, when you think of like the silent generation, 18 million people, baby boomer, about 67 million sort of, I mean, still alive today. What percentage of those two groups do you think can afford your product? And second, you know, what do you think the timeline is for this So very, very good question. I would like to point out

Thank you very much. If you look at the baby boomer generation, you can see sort of not only the growth of that generation as they come of age to become our customer, but all you can see, it is the wealthiest generation of all time, right? Roughly controlling about $100 trillion of assets. and that is also equivalently true for Canada and UK. And that generation wants to spend money on themselves, but they're extraordinarily discerning customer that they will only spend money where they perceive value. And so the point that you are making Thank you very much. and it shows you how affordability actually has meaningfully improved. So look at the right side of the page, slide 27 in our deck, and you will see that what happened, the rise of the net worth has meaningfully outpaced rent growth in the sector. So I'm actually very optimistic on this particular topic, which I'm not a very optimistic person to begin with, but on this particular topic, at least for next 20 years.

Your next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.

Yeah, hi. For the portfolio that you own today, how long should we think about a timeframe to fully implement WPS?

So you're saying just the portfolio we own today? Because the portfolio is expanding, right? So you sort of think about, you know, we own today, what, 2,500 assets, give or take? So if you think about last year, we did 240, 250 assets. I think Tim said 600 to 700 this year. That's the right cadence. So I'll call it another three years after that.

Your next question comes from the line of Austin Werschmitt with KeyBank Capital Markets. Please go ahead.

Just, Shankh, going back to your comments about labor and just tying in kind of the focus on resident employee experience. Through WBS and some of the operational efficiencies you're achieving, or at least have line of sight to, are you getting to a point where the FTE needs or even labor hour needs are less at certain occupancy bands or maybe even on a stabilized occupancy basis?

I will frame that in a different way that John did. If you just think about there are several positions in a community that you have to have, whether that's you have one resident or 100 residents. So there is a tremendous amount of fixed cost associated with the business. And as occupancy sort of expands, you see more incremental sort of flow through to the bottom line because it's a fixed cost nature of the business. And that way of saying, you know, WBS, as I've gone through, I don't want to repeat what I said earlier, we're very focused on decreasing the friction points. and many more. Thank you. whether we can some administrative function can be more sort of automatized or systematized probably that's the right word we shall see that's our hope and as I've said in the last earnings call that we should not expect as analysts and investors including us our entire life's work and net worth is in this company to come back to investors I wrote about this topic several times that we see this as a scaled economy shared, but shared with who? Investors, operators, but also the customers. So we think about what if we are successful in systematizing part of the workflow, you would expect that we'll contribute that back, some of that back into the communities for improving resident experience. And part of that, obviously, will enhance margin, and that's how we're thinking about the business. It's sort of a, if you go and read the trade-off section of my annual letter, there's long conversations about this topic. But very, very good question. Thank you.

Your next question comes from the line of Rick Hightower with Barclays. Please go ahead.

Hi, good morning, everybody. Thanks for taking the question here. I had a question on the under contract pipeline and sort of, you know, you've had a stable 75% kind of going and occupancy figure for that for a while. Is there something structural about those assets where occupancy is just, you know, materially lower than what we see maybe elsewhere around the industry, especially given that it's presumably, you know, the highest quality stuff available? Is there something that we should understand about that dynamic?

No, Rich, it's just the average, right?

So the average is made up of a bunch of assets that are, you know, call it 90% occupied and a bunch of assets that are newly delivered that are 10, 20, 30% occupied. So the average, again, average age is six. The median age is four, right? So half of these assets are below the age of four. And so obviously there's newer assets at least.

A couple of other points, Rich, that that number was not stuck at 75% some quarter. Nikhil said it's 80%, low 80%. I think I heard the 75% after actually a long period of time.

Yeah, it's been a really long time.

That caught my attention. But what you're alluding to, which is if there are some structural issues with these occupancies, if that was the case, overall portfolio occupancy wouldn't be where it is because all these assets were bought at a much lower level. More importantly, power, share, cash flow growth wouldn't be mid-20%. that sort of you can think through from overall operating metric level. You can also think through from a partial impact of cash flow level, and you'll come to the conclusion from a basic understanding of numbers, the impacts have been exact reverse.

Your next question comes from the line of Wes Galladay with Baird. Please go ahead.

Hey, good morning, everyone. Going back to the comment about the wealthiest cohort, looking for a more discerning customer experience, Are you seeing that same dynamic in the UK and Canada?

100%. The same, you know, it's an extraordinarily, if you think about what happened in these three countries post-World War II, the wealth creation, and whether it's stock market, it's housing markets, no matter how you look at it, this is the generation that controls majority of the wealth. If you just look at how small baby boomer generation is as a percent of the overall US population, for example, It controls more than half of the overall consumer wealth in the United States. And they're very similar in UK and very similar in Canada. And they are very similarly discerning. These people are anything but idiots. They're very discerning customers. They understand what they want. They are willing to pay for it only if they perceive value. So this is much more than just a question of demand supply. It's also a question of are we providing the best of experience and services to this customer? If not, no matter what the demand supply is, will be a giant failure.

Here our next question comes from the line of Dave Rogers with Raymond James. Please go ahead.

Good morning. You guys have framed the path to the mid-30s margins kind of on a pre-COVID flow-through, getting occupancy back to historical levels, but you seem to be clearly ahead of that path right now. So a couple of questions on that. One is, is there additional details you can give us around flow-through at different points in the portfolio that would kind of shine a little bit more light on kind of where all that's coming from? Are there components that are performing much better than you had anticipated that are getting you higher? And do you have a new kind of I don't want to say target, but a new thought in mind of where you can get margins to given where you are today.

Let me try and Tim, you jump in as I invariably will miss part of the question. Tim said flow through margins is mid 60s. If you look at 95%, you should be in sort of 70 plus. That's sort of the markers we're willing to give you. We have never put a marker on overall portfolio margin neither we will it is a journey for us not a destination I have said on the call today that we believe that there is a significant margin upside remains. Why is it outperforming our expectation? Nothing ever outperforms my expectation. I just have too high of an expectation from everything in life. Why is this happening? This is what we do. This is what the whole idea of WBS was that we have been on this journey for a very long period of time as you can imagine. at least at this point. And John, when did you start? Five plus years ago, right at this point. That was the change of this company when we changed our view from what we wanted to be when we grew up, which was to be a centralized capital allocation and decentralized execution. That was our view going back 10 years ago, call it, to a centralized capital allocation, decentralized execution, but in a whole network of platform technologies That was the initiative we started five years ago and completely changed this company. Good, bad, ugly does not matter in that direction, right? That's what we do. That's what we are seeing. But nothing is ever done well or fast enough as far as I'm concerned. So it has not exceeded my expectation. I'm very encouraged by all the things we have seen on the 250 communities that are on WBS. But we're working with our operating partners as we have talked about. Just in the last 90 days, our operating partners have come up with ideas that, frankly speaking, I absolutely have not thought about and I don't think they have thought about. This is what happens when collaborations come together and we're trying to solve problems. So there is a lot of long ways to go. We'll see where we end up.

And ladies and gentlemen, that does conclude our question and answer session. And that does conclude today's conference call. Thank you all for your participation and you may now disconnect.