Welltower Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Welltower 4th Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, I will now turn the call over to Matthew McQueen, General Counsel. You may begin your conference.

Speaker 1

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.

Speaker 2

Thank you, Matt, and good morning, everyone. I will review our Q4 and full year 2023 results and describe high level business trends and our capital allocation priorities. John will provide an update on the operational performance of our senior housing and outpatient medical portfolios and progress on our operating platform build out. Nikhil will give you an update on the investment landscape And Tim will walk you through our triple net businesses, balance sheet highlights and 2024 full year guidance. First, as I reflect back on 2023, it was a year of solid execution across the board with significant progress achieved in all aspects of the business.

Speaker 2

Operating performance far surpassed our initial expectations, we had a great year, A record setting year in terms of capital deployment and we meaningfully strengthened our balance sheet and liquidity profile. Just as importantly perhaps is the groundwork we laid to sustain this level of performance and continue to deliver outsized growth not only in 2024, but also well into the future. This includes the considerable progress John and his team have made on the build out of our operating platform, which we continue to believe will transform the industry. On top of that, as we have discussed in recent quarters, We have executed a number of operator transitions across all our geographies as well as converted a handful of properties from Triple Net to IDEA, All should bear fruit later this year and in 2025. We finished the year strong With significant momentum to set us up for another year of solid performance in 2024.

Speaker 2

In terms of our senior housing operating portfolio, I was particularly encouraged by the occupancy growth in 4th quarter, which is seasonally not the strongest period. The portfolio saw 110 basis points of sequential occupancy gains, which translate into 3 30 basis points year over year occupancy growth and the 3 30 basis points year over year occupancy growth is by far the highest level we have ever achieved in the Q4 of any year in our recorded history. Just as compelling is that looking at the intra quarter trends, year over year occupancy growth strengthened each month, which is unusual given the aforementioned seasonality of the business. We're also pleased with the rate growth achieved by our managers. During our last call, I described to you that one of our largest operators, Sunrise, pulled forward Jan 1, 2023 rate increases Into 4Q 2022, this year they have returned to their historical cadence of Jan 1 rate increases.

Speaker 2

While this distorts our show portfolios reported Q4 2023 RevPAR or the unit revenue, The rest of the portfolio delivered RevPAR growth of 6.8%, reflecting the underlying fundamental strength of the business. While our 2024 guidance assumes some diminution of RevPAR growth from full year of 2023 levels of 6.6%, We still expect another year of near double digit top line growth as occupancy continues to build at a solid pace. 4Q 2023, same store expore or expense per occupied room grew 1.7% year over year, The lowest level of growth in Wealth Hour's recorded history driven by 4Q 2023 same store compensation for occupied room growth, which grew 1.9% year over year, also the lowest growth in WealthApp's recorded history. While the normalization of agency labor is helping to dampen comp core growth. We are also seeing some good trends in the salary and the wages line.

Speaker 2

All of these trends are resulting in a favorable spread between RevPAR growth and export growth. The powerful combination of this revenue backdrop With continued margin expansion that should be expected due to the high operating leverage inherent in the business, leaves us feeling very strongly about our Tim will give you our detailed build up of our NOI guidance based on our current assumptions, Plus, please understand that we have no false pretense about perfectly knowing what the business will look like as we move through the years, particularly the all important summer months. But we are optimistic given the demand supply backdrop, which improves by the day and the rising system wide occupancy as well as the early success we have seen in John's operating platform build out. While 24.4 percent NOI growth last year for our SHOP portfolio alone was very encouraging, I'm extremely pleased with our capital allocation activities as well. In 2023 was the most active year in our history In terms of raising and deploying capital, we completed almost $6,000,000,000 of investments in the year, nearly half of which closed in Q4 alone.

Speaker 2

While I won't get into the specific transactions, I will mention that they share some common characteristics. 1st, We generally grew with our existing operating partners in their respective markets. 2nd, we acquired assets at a significant discount or replacement cost from core funds, PE funds, pension funds and financial institutions who are seeking liquidity. We also added a couple of new partners along the way who I envision us growing with in the near term. More to come on this topic as we progress through the year.

Speaker 2

The torrid pace of investment activity in Q4 has continued with 2024 starting off with a bang. In fact, I do not recall having ever been this busy in Q1 on the deal front. While we have pre negotiated documents and structure to leverage, it is great trust that we have built with our 2023 counterparties that will make follow on transaction easier to execute. These counterparties also experienced what our promise always is, that we honor our handshake irrespective of circumstances As evidenced by the continued our continued execution through this historic capital market volatility in the fall and winter of 2023, They know that we remain the clean shirt in an industry, while re trading counterparties is the norm. It is interesting and perhaps Coincidental that we're experiencing another bout of market volatility after a few weeks have come.

Speaker 2

Over the past few weeks, Another regional banking crisis driven by U. S. CRE debt appears to be rearing its ugly head from New York to Tokyo to Germany. We are currently staring at approximately $16,000,000,000 of senior housing loans maturing in next 24 months in the U. S, which dwarfs roughly about a couple of $1,000,000,000 of agency financing completed in 2023.

Speaker 2

This should generate Significant equity as well as private credit opportunity for us. Suffice to say, our near term capital deployment pipeline remains robust, Highly visible and actionable and squarely within our circle of competence, which where we can bet with house odds rather than gambler odds. Along with what we have already done in 2023, These acquisitions that carry an attractive basis, operational upside and significant value add from Walter's operating platform, We will have a meaningful impact on what remains our true North Star, long term compounding a partial value of our existing shortlist. With that, I will hand the call over to John. John?

Speaker 2

Thank you, Chuck.

Speaker 3

Although most of my time at Welltower has spent doing the Welltower hustle, getting up every day identifying Pursuing the opportunities that exist focused on improving the customer and employee experience. I want to take a moment and reflect on how proud I am of the Welltower team for its success in doing just that, improving the customer and employee experience, which in part is reflected by our performance. Focusing on senior housing for a moment, the Welltower team consists of our top operators and all of their employees, our key vendors as well as the Welltower employees. We have all worked together to improve the customer and employee experience, which has resulted in fantastic results. On top of the industry leading senior housing same store NOI growth for the full year of 2020 2, of 20.1%, our full year 2023 senior housing NOI growth was 24.4%.

Speaker 3

Often on earnings calls, you hear the words tough comps. That's certainly true here. Yet our guidance for 2024 same store senior housing NOI growth at the midpoint is 18%. Therefore, based on our 2 full years that are completed and in the record books, 2022 2023 At our guidance of 18% in 2024, that indicates that the 3 year compounded growth of our same store senior housing NOI in 2024 will be over 75%. That's something to reflect upon.

Speaker 3

Thank you, Welltower team. Now back to our business. Our portfolio generated 12.5% same store NOI growth over the prior year's quarter led by the senior housing operating portfolio with 23.7% year over year growth. The outpatient medical portfolio produced same store portfolio growth of 2.8% for the 4th quarter of 2023. This was driven by favorable operating expense management, increasing the operating margin by 220 basis points year over year to 71.4%.

Speaker 3

Notably, our proactive appeal process achieved favorable real estate tax reductions. The 23.7% 4th quarter year over year NOI increase in our same store housing operating portfolio was a function of 9.7 percent revenue growth driven by the combination of 5.5 percent RevPOR growth and 3 30 basis points of average occupancy gain and moderating expense growth. Expenses remain in control, primarily at 5.7% for the quarter over the prior year's quarter, the strong revenue growth and expense control led to continued margin expansion of 2.90 basis points. Again, our ex store growth for the quarter set a record for the lowest growth in our recorded history at 1.7%. All three regions continued to show strong same store revenue growth starting with the U.

Speaker 3

S. At 9.4%, Canada and the U. K. Growing at 9.7 and 14.1% respectively. The strong revenue growth in each region combined with the expense controls have led to fantastic NOI growth in the U.

Speaker 3

S, Canada and the U. K. Of 21.8%, 21.7% and 75.5%, respectively. We're flying along with our integrated platform initiative, which will start to go live at our first operator in the first half of this year. I will not go into all the details, but I will say that our focus on improving the customer and employee experience is coming together very well.

Speaker 3

The integrations of the various modules will simplify the customer experience and reduce the labor around basic tasks, enabling our site teams to focus on what they love, our customers. More to come in 2024. I will now turn the call over to Tim.

Speaker 2

I'll go next. Yes, thanks, John.

Speaker 3

On the transaction side, as John mentioned, 2023 marked the most active year in the history of the company. Our new investment activity of almost $6,000,000,000 spend more than 50 different transactions with a median transaction size of $54,000,000 in which we acquired 153 properties over the course of the year. I am sure you all have read about the confluence of a few factors that are creating the current investment backdrop, Namely, the great wall of CRE debt maturities, expiring sulfur caps, pressure on the regional bank balance sheets and the denominator effect. Welltower is uniquely positioned to capitalize on these trends and serve as a counterparty of choice for our private equity sponsors, large pension and asset managers and entrepreneurs that are impacted by these challenges. We are able to source these opportunities directly from sellers or through our operating partners, given our reputation of being a good partner and a reliable and credible counterparty.

Speaker 3

We are then able to analyze and underwrite quickly and in great detail, thanks to the combination of our data analytics platform, Alpha and our best in business investment team. Finally, and perhaps most importantly, we then execute on the business plan For each asset through our deep network of aligned operating partners backed by the operating platform that John is methodically building out. These factors drive our sustainable competitive advantage for creating shareholder value. Our 2023 investment activities was focused on granular off market high conviction transactions. A majority of the transactions were focused on our seniors and wellness housing businesses where we acquired additional assets in markets where we already have high performing assets.

Speaker 3

By acquiring these assets at an attractive basis and consolidating operations under the same operator, we are able to reap the operating benefits of regional density. In the Q4 alone, we closed on nearly $3,000,000,000 of investments, while remaining targeted and disciplined. We acquired 44 senior housing properties from 11 different sellers, growing our relationship with 7 existing operating partners. We acquired roughly 8,800 units with an average age of around 7 years at an average basis of $222,000 per unit at an approximately 40% discount to replacement cost. These transactions have a low 6s year 1 yield and are expected to generate unlevered IRRs north of 10%.

Speaker 3

I'm also excited to provide an update on the performance of our Integra portfolio, where we have continued to see a sequential improvement in performance. For the 140 buildings that first transitioned to regional operators, We have seen annualized EBITDARM improved by more than $300,000,000 from losing more than $85,000,000 in the 3 months prior to the transition to positive $228,000,000 in the Q3. While there continues to be meaningful remaining upside In performance beyond the current state, I am pleased to announce that EBITDARM coverage is now greater than 1.5 times. We also transitioned the last 7 remaining buildings earlier this month after getting the final set of regulatory approvals. On the back of our continued success turning around operations for our legacy Genesis and ProMedica skilled nursing portfolios, We were active in deploying capital in the skilled space as we partnered with regional operators to acquire under managed assets.

Speaker 3

Given the credit nature of our skilled nursing investments, we always strive to have meaningful downside protection through a combination of Right per bed basis in states with favorable reimbursement landscape and significant credit protection through personal and entity level guarantees. Looking ahead to 2024, we are off to an exciting start. We are delighted to announce our strategic partnership with Affinity Living Communities in which we are entering into a long term programmatic development relationship and acquiring the Affinity portfolio of 25 active adult properties With an average age of less than 8 years or $969,000,000 or $233,000 per unit after allocating the NPV of interest cost savings to the assumed below market debt. Darren, Scott, Charlie and John have built a fantastic business over the last decade as they have meticulously iterated and refined the Affinity prototype. Their vertically integrated platform An unwavering focus on efficiency has enabled them to grow their footprint in typically expensive Pacific Northwest markets At an attractive basis to provide moderately priced active adult housing at average rents of approximately $2,100 per month.

Speaker 3

We have been incredibly pleased with the operating performance of our moderately priced Active Atoll business over the last few years and are excited to partner with the Affinity team to further grow that business. Our investment team remains incredibly busy as we continue to be the steady hand and trusted counterparty in our business and remain well positioned to capitalize on capital structure issues across the industry. We are inundated with opportunities up and down the capital stack and continue to balance price discipline, operator selection and capital available to be thoughtful stewards of our shareholders' capital. I'll now hand over the call to Tim to walk through our financial results and 2024 guidance. Thank you, Nikhil.

Speaker 3

My comments today will focus on our Q4 and full year 2023 results, performance of our triple net investment segments, our capital activity, a balance sheet and liquidity update and finally the introduction of our full year 2024 outlook. Voltar reported 4th quarter net income attributable to common stockholders of $0.15 per diluted share and normalized funds from operations of $0.96 per diluted share, representing 15.7% year over year growth. We also reported total portfolio same store NOI growth of 12.5% year over year. Now turning to performance of our triple net properties in the quarter. As a reminder, our triple net lease portfolio coverage and occupancy stats reported a quarter in arrears.

Speaker 3

These statistics reflect the trailing 12 months ending ninethirtytwenty 23. In our senior housing triple net portfolio, Same store NOI increased 2.2% year over year and trailing 12 month EBITDAR coverage was 0.95 times. It is also worth noting that our 3 month coverage in this segment moved above 1 times for the first time since the pandemic. Next, same store NOI in our long term post acute portfolio group grew 5.2% year over year and trailing 12 month EBITDAR coverage was 1.36 times. Turning to capital activity.

Speaker 3

We invested $3,000,000,000 in acquisitions, loans and developments in the quarter, led by $2,100,000,000 of senior housing operating investments. In the quarter, we continue to fund investment activity via equity issuance, completing a bought equity deal in November, which along with regular way ATM activity resulted in $2,800,000,000 of gross proceeds in the quarter, at an average price of $86.20 per share. This equity issuance allowed us to fund investment activity along with the extinguishment of approximately $250,000,000 of debt in the quarter and end the year with a $2,100,000,000 cash balance. Staying with the balance sheet, as we finish 2023, I want to highlight the balance sheet transformation that has occurred over the last 24 months. When COVID hit in 2020, we acted quickly to protect the balance sheet by securing substantial incremental liquidity, in large part by reducing cash outlays and taking advantage of strong asset values by selling long lease duration assets into a 0 interest rate environment.

Speaker 3

These actions helped alleviate the impact of nearly 50% drawdown senior housing operating NOI that bottomed out in the Q1 of 2021, driving peak leverage to nearly 7.5 times ex HHS funds. After stabilizing the portfolio in the 7s in 2021, the combination of a strong recovery in senior housing performance and disciplined equalization of external growth over the last 2 years has allowed us to methodically lower leverage, finishing this year with 5.03x net debt to EBITDA. Consistent with past commentary around the balance sheet, want to underscore that despite the improvements in metrics, current leverage still does not reflect a full post COVID recovery in senior housing operating NOI, as our portfolio still sits meaningfully below pre COVID NOI levels. Our recovery back to these levels will drive leverage well below 5 times. In summary, in 2023, our post COVID balance sheet recovery transitioned into a strategic repositioning, ending the year with substantially upgraded metrics from prior to the pandemic, an expectation for further improvement as our senior housing operating portfolio continues to carry organic cash flow growth momentum into 2024.

Speaker 3

This positions us with substantial capacity to continue to make systematically opportunistic capital allocation decisions to drive long term shareholder returns in any market environment. Lastly, as I move on to the introduction of our full year 2024 guidance, want to remind you that we have not included any investment activity in our outlook beyond that which has already been announced publicly. Last night, we introduced an initial full year 2024 outlook for net income attributable to common stockholders of $1.21 to $1.37 per diluted share and normalized FFO of $3.94 to $4.10 per diluted share or $4.02 at the midpoint. As mentioned in our release last night, our 2024 guidance contemplates no HHS or other government grants. So after adjusting for $0.03 received in 2023, the midpoint of our initial guidance represents 11.5% year over year growth.

Speaker 3

This year over year increase in FFO per share is composed of a $0.33 increase from higher year over year senior housing operating NOI, $0.02 increase from higher NOI in our outpatient medical and triple net lease portfolios, a $0.04 headwind from higher year over year growth in G and A expenses tied mainly to continued build out of our operating platform and finally, a $0.10 increase from investment activity and financing activity. Underlying this FFO guidance is an estimate of total portfolio year over year same store NOI growth of 8.25 percent to 11.5%, driven by sub segment growth of outpatient medical 2% to 3% long term post acute 2% to 3% Senior Housing triple net 2.5% to 4% and finally, Senior Housing operating growth of 15% to 21%, the midpoint of which is driven by revenue growth of approximately 9.2%. Underlying this revenue growth is an expectation for RevPOR growth of approximately 5.25 an acceleration in year over year occupancy growth to 2.90 basis points. And with that, I will hand the call back over to Shankh.

Speaker 2

Thank you, Tim. I wanted to address a few important topics before I open the call up for questions. As you may know, on November 28, We lost my personal hero, mentor and friend, Charlie Munger. We're deeply saddened by his death and thank many of you for reaching out to my team and me during this time. Charlie was truly generous with his wisdom, continually guiding us not only on the importance of compounding, but also behaving like owners, not managers and deserving great partners by being 1 and taking far less crowded high road and acting with conviction when the conditions were right.

Speaker 2

We witness his wit, uncommon sense, simplicity, passion for multidisciplinary running an innate ability to cut through noise and arrived at the right decision. The influence he had on Welltower, its people and its culture is truly immeasurable. His serene guidance and sage principled advice has been invaluable to me in my life and my career. Charlie was also An instrumental influence on the members of our senior leadership team to whom he gave his greatest gift of all time, his time. We're grateful for the time we spent in his presence.

Speaker 2

I owe him a lifetime debt that cannot be repaid, But we will carry forward his teachings in how we deal with our owners, partners, residents, employees and others. His most profound impact on us is perhaps cemented in the ground rule document that he guided me to write that you can find out find on our website. Moving on to a less somber topic, I want to draw your attention to some of the partners which we forged new relationship with in 2023. Beyond what we have announced so far, I want to highlight Affinity as our new growth partner. Nikhil walked you through the investment rationale of Affinity, But I would also like to express how excited I am to work with Darren Davidson and his team there.

Speaker 2

As we have gotten to know Darren over last 5 years, He has proven to be a man of high integrity and thoughtfulness with a true compass on the future direction of how older Americans want to live. Despite adding a few handful of managers to our growth platform in 2023, our partner and geographic strategy remains to go deep instead of going broad and our consolidating roster of existing managers reflect that. In summary, I hope that the optimism conveyed by my partners today on growth prospect of our business has resonated with you. While we remain focused on the execution of our 2024 strategic and operational goals, I cannot help But draw your attention to the outsized multiyear growth trajectory in front of us, which is supported by 5 different growth pillars. Number 1, some of it is questionably is a function of favorable demand supply setup that I think you all understand.

Speaker 2

This should only get better as we look into 20252026. Number 2, a lot of my personal enthusiasm Same from the digital transformation and business process optimization that John is driving. We should start to see some fruits of his labor this year, but much more in 2025 and 2026. Number 3, overlay that with the impact of hundreds of properties that we have recently transitioned or agreed to transition to better operators. I am excited about the improving resident and employee experience that is currently underway with a financial impact following soon thereafter number 4, add our extremely targeted and disciplined growth, external growth opportunities And last but not least, number 5, our underlayered balance sheet that which Tim just described to you.

Speaker 2

We will continue to experience further organic deleveraging, which will either support an A rating or provide capacity for additional external growth. As we think about the next couple of years, we have never felt better about the growth prospects or accelerating growth prospects of our earnings and cash flow for our company on a part share basis. With that, I will open the call up for questions.

Operator

Your first question comes from Connor Seversky with Wells Fargo. Please go ahead.

Speaker 1

Good morning out there. Thank you for the time and appreciate the detail in your prepared remarks. So an observation, a couple short questions on wellness housing. The Affinity portfolio generating a 60% operating margin, not exactly comparable, but seems to be above the range that a traditional assisted living facility could achieve. So first question on this end, where does that 60% margin sit on the bell curve of wellness housing operating performance outcomes?

Speaker 1

2nd, with what looks like a very solid return profile, how much should we expect Welltower to lean into this segment in the years ahead? And finally, how has RevPOR and NOI growth in that trended over the last 2 to 3 years?

Speaker 2

You snuck in 3 questions. Let me see if I can understand or remember all of them. First is, We laid out our strategy of how we see investing in the senior living space, which is high price point, very micro market, high acuity product, if you will, where we provide a service that can be actually charge accordingly and hire people and pay them appropriately. So that's one strategy. On the other side of the barbell, We went from no acuity and build out a business over last 8, 6 years, 5, 6 years on this wellness housing side With much lower price point, but almost no services.

Speaker 2

So he's sort of from an acuity standpoint and that provides obviously much higher NOI margin. That's the 2 business segments that we know how to do well and make money And that's where we are. I'm not suggesting that anything in between is not something that is right or wrong or anything like that, but just not something that we're focused on. Now going back to your question, where that 60% or so margin sits in that Wellness Housing spectrum, I will say it sits Towards the upper end, probably the upper half, but no means an aberration, right? Sort of you think about I think about this business from Mostly a mid-50s to mid-sixty percent margin business.

Speaker 2

Your last question, how has the growth has been in the Wellness Housing? Historically, it has been growing, I would say, mid to high single digit. In 2023, the NOI growth for our Wellness housing portfolio on a same store basis has been 12.2 percent in 4th quarter alone that was 13.1%.

Operator

Your next question comes from Jeff Spector with Bank of America. Please go ahead.

Speaker 3

Great. Good morning and congratulations on a great year. Bart, bunch of questions, but I'll just focus on 1. After 3 years of very strong better than expected internal growth, The market appears to be pricing in approximately 700 to 800 basis points of deceleration. As we look ahead, does growth normalize from here or can the current growth trajectory continue?

Speaker 2

Thank you, Jeff, for the question. I'll start probably with one of my favorite mangaisms, which is knowing what you don't know is actually a lot more useful than being brilliant. So I want to make sure you understand that we have no hubris of what we don't know. So I'm frankly speaking, I'm pretty surprised for many months I've been reading about this in Research reports, talking to investors, that sort of this idea that if you had 3 2 good years of numbers, obviously, that has to go down pretty meaningfully. Frankly speaking, I don't personally understand that.

Speaker 2

I will tell you that we don't know how this year is going to completely play out. We gave you our best guess that Tim described to you. It is possible that we have another year of that growth rate that's sort of Similar to last 2 years, possible if we have a strong summer sort of leasing season, right? But I think we're going to have many great years in front of us with double digit NOI growth. Now with whether this year, Next year, this quarter, next quarter, I don't know where chips will fall.

Speaker 2

But as we think about taking this portfolio to where it should be leased, With our opinion, as we have told you, that we'll be very disappointed if we go back to pre COVID. There is no reason we can't even go back to where 2015 levels were because if you look forward next few years, you will see demand supply has been significantly better and our platform build out should help us get well past that. We should have double digit NOI growth for years to come. I hope that sort of answers your question. We have no hubris of Sort of knowing what we don't know, but we think is also this idea that Because our business has done so well for last 2 years, it has to go down, it has to meaningfully decelerate.

Speaker 2

It sort of reminds me that perhaps we should have more humility of what we don't know. We'll see how this plays out. We'll see what market gives us. Thank you.

Operator

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

Speaker 4

Morning. Thanks for taking the question. I guess I wanted to you have very strong outlook on SHOP. I wanted to dig into that a bit more just in 2 parts. One, can you talk about sort of at the high end of your guidance range, what you or maybe the low end, what you've baked in for Rev 4 growth?

Speaker 4

And then related to that, as you sort of trend towards 85% -ish, 86% occupancy, clearly there are benefits to the bottom line. But I wanted to understand, do you do the operators need to staff up or spend more marketing dollars? Is there Maybe some broad trends that you can share with us to achieve that 85% of the margin flow through.

Speaker 3

Yes, I will start with the RevPAR and then I'll hand over to John, for any comment on kind of the operating expense side. But thinking about the rent growth, thinking about kind of 5% to 5.5% being kind of the range that drives It kind of flashes from the bottom to the top of that range. Yes. On the How the numbers work, as Shankh and Tim have said for a long time, the flow through gets pretty fantastic as you get north of 80%. So when you talk about staffing up, you really have, I mentioned this on the last call, the positions are in place.

Speaker 3

You have your Head Chef, you have your Executive Director, etcetera, etcetera. So it's very incremental. So this part of the curve, there's a lot of money that to the bottom line as you increase occupancy. And additionally, as we've said, because of supply demand factors, That's just expected in the marketplace. We may or may not decide to spend more money on marketing to accelerate that, but The conditions are fantastic right now.

Operator

Your next question comes from Jonathan Hughes with Raymond James. Please go ahead.

Speaker 5

Hi, good morning. Thank you for the time. I wanted to ask about the trajectory of external growth. You lay out in the business update decks the opportunity to deploy In excess of $3,000,000,000 annually with your current stable of proprietary developers and operators. And on top of that are of course the opportunities Outside of those relationships that could be additive like Affinity, I know you don't provide guidance on investment activity, but Is it fair to assume $3,000,000,000 is kind of the low end?

Speaker 5

We can expect year in, year out given that these partners of yours, they want to grow their business and they can only grow with you due to the proprietary nature of your partnerships? Thanks.

Speaker 2

Jatin, let me see If I can answer that question, we will not give guidance. Our shop is not designed to buy stuff. We only grow if we think we can grow to add value on a partial basis for existing investors. So if that means It's $3,000,000,000 it's $3,000,000,000 that means it's $300,000,000 it's $300,000,000 And that means if it's $8,000,000,000 it's $8,000,000,000 That's sort of where we are. Having said that, if you look at the Page 7 of our slide deck, we see there's a massive amount of Loans in the senior housing space that's rolling, that's just a U.

Speaker 2

S. Number. We're also seeing opportunities in both UK and Canada, similar ideas. And there is not enough credit in the system to refi this. So we think the opportunity set obviously in front of us It's going to be very robust.

Speaker 2

Speaking of pipeline right now, I want to reiterate the comment that I have made in my prepared remarks. We have never been this busy in Q1. As you understand, there is a seasonality of the deal business as well, right? People worked really, really hard into the year end to close out the year. And Q1 is usually very sort of you don't see a lot of activity.

Speaker 2

Activity starts pick up obviously in Q2. So then that's obviously translated into heavy second half. And that normal seasonality, We haven't seen and perhaps because of the debt card that we're talking about, perhaps it's because of the another thing that Nikhil mentioned, which is the interest caps that are coming off. And regional banks were nowhere to be found, right? So in that context, I think we're going to have a record year again.

Speaker 2

But who knows, if we don't see the opportunities to invest, we won't, but the pipeline remains robust, it's visible, It's actionable and we can see massive amount of value creation coming through that.

Operator

Your next question comes from Tayo Okusanya with Deutsche Bank. Please go ahead.

Speaker 2

Tayo?

Speaker 4

Hello?

Speaker 2

Hello, we can hear you. Hello, Tayo, we can hear you.

Speaker 4

Perfect. So good morning and then congrats on a great quarter and a great outlook. On the regulatory front, again, in the past few weeks or so, there's been some discussion, the House just kind of Doing some hearings on senior housing and some concerns around maybe ultimately you also see some minimum staffing rules in senior housing. Just kind of curious what you're hearing on your end, how you kind of see that evolving over time and what that could mean for profitability for senior housing operators?

Speaker 3

Yes. Thanks, Tayo. Obviously, we We're very aware of the conversations taking place on the regulatory side. I think something that's consistent with how we talked about this in the past is This business, the senior housing side, we almost entirely play in a private pay business where The delivery of a high quality product and reputation in the market is the most important driver of your business on a go forward basis. And so, I think there's areas of the healthcare world where that's not the same and you've got more of a captive demand audience and there's more concern over how you may run a business.

Speaker 3

On the senior housing side, what we know very well, both the good and the bad is that the business is entirely driven by reputation. So it continues to be the focus of ours is that This is what is the staffing levels, the level of care, the quality of the employees, they are what drives the business day in, day out. And it's why we spend so much time focusing on creating these sustainable models at the property level.

Operator

Your next question comes from Jim Kammert with Evercore. Please go ahead.

Speaker 6

Good morning. Thank you. Just tying some of the previous questions together, if I could. Thinking about Affinity, those are pretty attractive margins And obviously they're very savvy operators and then you tie together the opportunity set in terms of maturity loans on Page 7 of your deck. Are there other wellness or active adult type opportunities within that the $16,000,000,000 or so debt maturities, about your overall margin implications for your portfolio, is it changes?

Speaker 2

That I believe that the senior housing loan situation we're Talking about is the traditional senior housing product. You can for some lender can sort of define this as multifamily, some can senior housing. So there's no way to We play into the mid market segment of that active adult, the wellness housing segment. You think about there are 4 large players in that space that we know of There are others, but the 4 major ones that we know of, Clover, Calimar, Sparrow and Affinity and all 4 of them are existing Welltower partners today. As I have mentioned before, I believe in going deep, not going broad.

Speaker 2

If we find more opportunities, we will obviously see how that stacks up against our growth potentials, etcetera, but we are definitely focused on growing our business. And I think you would say starting this business 6 years ago to About 25,000 units today, we have done a pretty good job of it. But growth for growth sake is something that I just can't get my head around. Our job is to create long term shareholder value compounding on a partial basis what we're after. So we'll see if we can do it.

Speaker 2

But I'll be optimistic that Wellness Housing over a period of time will become a very significant portion of all of our portfolio.

Operator

Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Speaker 3

Yes. Thank you. Shankh, just kind of touching again on the investment pipeline and all the factors you've laid out today of And previously as to why that opportunity continues to expand. I guess I'm curious how big the investment pipeline you see today is sort of fee simple real estate deals versus the credit opportunities and how much of that expansion that you've seen in the investment pipeline more recently is a function of the credit opportunity side versus the more traditional fee simple?

Speaker 2

Austin, I just want to make sure I understand your question. A lot of opportunity that we are seeing are driven by Current existing owner's credit situation, whether that's rate caps, whether that's LTV, whether that's DSCR, whether that's refi. So it's driven by credit situations on their end. How we execute that on our end could be credit Or it could be equity and vast majority of what we have done is equity opportunities. But we are interested in the private credit side As an equity owner, I've said this many, many times that we're just not lenders.

Speaker 2

We are owner of those properties At the last dollar basis where credit stands, right? So that's how we think about it. In other words, that we're very comfortable taking back The key is if the buyer decides to the owner decides to do so. However, vast majority of our execution on our end is on the equity side, though we remain very interested for the right opportunities on the in the to play in the credit stack. However, I will tell you, we never loan against assets at a last dollar value at a given location for a product that we do not want to own.

Speaker 2

That is not what we do. So that's something that's very interesting for you to sort of think through.

Operator

Your next question comes from Michael Griffin with Citigroup. Please go ahead.

Speaker 7

Thanks. It's Nick Joseph here with Michael. Shankh, you've obviously talked about the robust acquisition opportunities a lot on the call and then the multi year growth that you from senior sales. And so curious how you are seeing competition for both assets and loans. Is this Attracting additional capital into the space?

Speaker 7

And then also just some more question on the development side. Obviously, we haven't seen development pick up yet, but given the multi year growth outlook, When would you expect that to start to pick back up?

Speaker 3

Yes. I think from a competition perspective, As I mentioned in my prepared remarks, most of the transact all of the transactions that we've executed on, they have been privately negotiated directly with the sellers. So it's not that we're participating in auctions or anything like that. And a big part of that is there is really no liquidity in the market. So we're not seeing any competition really.

Speaker 3

And then I think remind me again what was your second question?

Speaker 2

Let me answer that question. That was the development question. Yes. We Nick, we put out a Page 8 in our slide decks that could be informative from thinking about this question. If you think about there are some Interesting things to think through.

Speaker 2

1, let's just talk about things that we all know. Cost of construction is up significantly. Cost of capital, you just think about it, as senior housing development loan today, if you can get one, good luck with that. Even we struggling to get one if we need 1, is it $350,000,000 $400,000,000 over. So you're talking about your debt cost of capital In the 9th and the 10th, right?

Speaker 2

No, we haven't seen a development pro form a that works. That's sort of a Financial aspect, you guys know then obviously think through what it takes to an average world. I'm not talking middle of Manhattan, West Westside of Boston, places like that, an average was our location in a very wealthy micro market In East Coast, West Coast or locations like that probably takes 2 to 3 years of pre development and you know that it takes couple of years of construction after that. But what is more interesting that we have noticed is last 12 to 18 months that a lot of the changes that happened because of what I just described to you in the platforms that have developed most of the senior housing assets, they have been dismantled. So if you look at Page 8, we have added something for you to sort of ponder over.

Speaker 2

The first thing that needs to happen, if people and find money and they think it's a good thing to do is to build back the human capital side before you think about the financial capital side. The last thing I will leave you to think about, my understanding is developers build or develop product to sell at a profit. When majority of the product traded in last 3 years at $0.70 on the dollar, what confidence do you have Then when you build a product for a dollar that you will get $1.30 I don't think the confidence will be very high on the equity side. And obviously, Your takeout financing when there is no have an acquisition financing because of the rollover we just described in the previous one, we think development In any meaningful way is Ears away. But again, as I said, we don't know the future.

Speaker 2

That's what seems logical. We'll see what the future plays out.

Operator

Your next question comes from Mike Mueller with JPMorgan. Please go ahead.

Speaker 8

Yes, I guess following up on development for the, Affinity development program. How soon do you think we could see starts there? And Is there a way to size up, how big the annual investment outlay could be that you could ramp up to?

Speaker 2

Mike, so my answer to Nick's question was focused on senior housing development as in what you understand as a Regular senior housing product. Affinity or wellness housing, these are apartments, right? These are not why care that gets delivered. So these are housing product, these are rental housing product. How can it be?

Speaker 2

I will tell you probably if you think about it, Nikhil said, Average age is 8 years. The portfolio size is 25. So just call it 3, 4 starts a year. Something like that would be something that I would expect, but we don't know. It depends on where the product is year over year, what the client pipeline is, but something like that can be expected Over

Operator

time. Your next question comes from John Pawlowski with Green Street. Please go ahead.

Speaker 9

Thanks for the time. John, I was curious if you could share a current stat on average age of move in for your Traditional senior housing portfolio, how that compares to pre COVID? And just any big shifts you guys are seeing in terms of the demographics coming in the door or the behavior of the current tenants again versus pre COVID, would love to hear.

Speaker 3

Yes, that's a good question. And what I am seeing is a little bit longer stays. As far as for the details That I don't have that specific information. I can look to see if I can get it back to you offline.

Speaker 2

John, I'll just add that if you look at the Coming out of the pandemic, average age and acuity went up, right? Just coming out of the pandemic was sort of 1st 3, 6, something like that months, where we've seen the acuity has gone up and the average age has gone up. As we sort of things have normalized, I will say, We're hearing more and more comments from our operating partners that average age is coming down and length of stay because of that acuity is coming down, but length of going up because of that.

Operator

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

Speaker 3

Yes, thanks. I'm impressed with your guys' occupancy gains reaccelerating. Is that mostly driven by move ins Coming in or is it kind of the dynamic that you're talking about in the last question related to move outs as you're seeing longer length of stays. So maybe move outs are trending a little bit lower to helping that occupancy gain reaccelerate in 2024?

Speaker 2

Yes. So Mike, let me try to answer the I was just looking at this couple of days ago. Interestingly, as we looked at the 4th quarter data, obviously, we're talking about the Counter sort of seasonal trends that we have seen in 4th quarter, specifically looking at that, both move ins and move outs were better. So we have seen better move in rates move in trends and we have seen better move out trends. So that sort of both created this an unusual seasonal pattern.

Speaker 2

As you have noted, not only the quarter was kind of interesting or Frankly, confounding in a positive way from a seasonality standpoint. But what happened intra quarter was even more confounding Because as you go sort of get through more deeper and deeper into winter, we see the business slows down just seasonally And these here are exactly opposite happened. So what's the reason? Just from a pure math perspective, as I said, both move ins and move outs are better, But obviously, we're not projecting that in the future, but we'll see how it plays out as we get through the year.

Operator

Your next question comes from Rich Anderson with Wedbush. Please go ahead.

Speaker 10

Thanks. Good morning. So I guess a question for John and the optimization process that you're going through skilled Senior Housing. A lot of it is sort of it's very interesting and believable the work that you're putting into it, but yet to be sort of quantified. And I'm curious if very soon or in some reasonable period of time that We might see sort of this optimization line a new line item on your slide Page 19, where you're bringing some of the work into real dollars and cents in terms of the effort because right now it's not really something you can model.

Speaker 10

And I wonder if that will be more in the way of expense savings, which I would expect or maybe to be less frictional vacancy, so it would impact The revenue side, I'm just curious if you could sort of triangulate it all, putting some quantified numbers into your effort or when that might come for all of us to look at?

Speaker 3

Great question. As you know, I tend to avoid A lot of details because everyone tends to copy things and it's better to execute. I think what you're seeing in our numbers, There's real numbers coming through. So it's not just discussing it. You're seeing it in the output.

Speaker 3

But I do appreciate you want to get some more specifics. You mentioned Frictional vacancy, we're nowhere close to that right now. The opportunity to just literally Increased vacancy without worry or concern about frictional vacancy is there all day long. And so there is Really both. There's some level of opportunities on the expenses, but that really relates to productivity because Again, as I say over and over, our focus is on improving the customer experience.

Speaker 3

It's not about trying to cut anything. So to the extent there's some productivity opportunities there, which the platform is focused at, in the sense of mentioned last time, sometimes it takes hours to move someone in because of the paperwork and having a unified platform will solve for that and eliminate That wasted time enabling our staff to spend more time with the customers. A lot of the opportunity though really is focused on the revenue side, whether it be increasing occupancy because we're just simply out executing. Frankly, we're answering the phones and delivering that quality customer experience that's driving occupancy or because we're changing the value proposition And the market says this is worth more. Hopefully that helps.

Operator

Your next question comes from Nick Yulico with Scotiabank. Please go ahead.

Speaker 11

Thanks. Yes, maybe a question for Tim, on the balance sheet, if we look at substantial amount of cash at the end of the quarter and then the outline to have another $1,000,000,000 of asset sales and guidance. It just seems like relative to the acquisitions you've announced so far that you're sitting in like a significant excess cash situation. So maybe you could just give us a feel for how you're thinking about that. I don't know if there's any planned debt repayments or anything else we should be thinking about there?

Speaker 3

Yes. Thanks, Nick. So you're correct on the excess debt side or excess cash side. I will highlight that As we indicated in the past, we have $1,350,000,000 of unsecured maturities here in the Q1. So $450,000,000 of which matured in January and we paid off and the remainder will be paid off in March.

Speaker 3

So that's one component of the uses. And I think what you're hearing from the rest of our team today is a lot of optimism around opportunities to put cash to work. So I think the balance sheet is very well positioned for that.

Operator

Your next question comes from Wes Golladay with Baird. Please go ahead.

Speaker 12

Good morning, everyone. Could you speak to

Speaker 4

the share gains you might

Speaker 12

be seeing in senior housing versus the local competitive set when you look at that 2 30 basis points of expansion this year?

Speaker 2

Wes, I missed the first part of your question. Can you please repeat the question and get closer to your phone?

Speaker 12

Yes. Okay. Sorry. Can you hear me now, Shyam? Yes.

Speaker 10

Yes.

Speaker 12

Can you speak to the share gains

Speaker 4

you might be seeing in

Speaker 12

the senior housing versus the local competitive set? You did mention the 3 30 basis points this year, which is a record year.

Speaker 2

Yes. So look, we have a very large portfolio. It's hard to Speak in general, it is and obviously across 3 countries. But if you look at all other industry data that you will see, our portfolio has meaningfully outperformed both in rate growth as well as occupancy growth. But what's new about that?

Speaker 2

But you can probably look at the NIC data and others decide that, get to that point. But as I said, we don't know what the future will give us. What we endeavor, what I promised to you that we'll put 200 percent effort to outperform the market and that's what we are trying to do. And so far what I've seen, I mean, John mentioned a stat that if we do achieve our NOI growth guidance in the SHOP portfolio this year, there's no guarantee we will. But if we do, that will be 75% compounded growth over 3 years, right?

Speaker 2

There is I don't believe there is any precedence of that in a large broad sort of a portfolio. So we are meaningfully outperforming the market And that gap is widening and I think it will continue to widen.

Operator

Your next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.

Speaker 13

Hi, good morning. Just a question on pricing trends for new customers. One, how has that Evolve through the Q4, just to think about that relative to occupancy. And I guess the second part would be, you mentioned the operating leverage changes as occupancy improves and you're fully staffed. So how should we think about how are you thinking about the trade off between occupancy and price going into the rest of 'twenty four and into 'twenty five?

Speaker 2

Let me try to answer that question. So Q4, if you look at I'm actually pretty very pleased with pricing trends. As you know that we have a lot of the portfolio sort of ratably turned through the year, right? So we have And so if you just look at the Sunrise situation that I talked about, RevPAR growth was up 6.8%. That's a very, very strong number.

Speaker 2

And with that kind of occupancy growth, you don't expect that kind of numbers. But put that aside, Let's just think about what next year's look like and we passed the Jan 1. A lot of operators in Jan 1, a lot of operators sort of have moved from Jan 1 to February 1, I think I talked about that 2 years ago. Just not just be after holidays, sort of moved a little bit out of that. So just generally speaking, talk about the half of the portfolio that's sort of rolling in the Q1 specifically rather than just talking Jan 1.

Speaker 2

I would say Existing customer rent increases has been relatively in the same ballpark of last year, but probably 100 basis points to 150 basis points lower. This generally It feels right around that level. So if it was 10 last year, it's 9 this year, something like that. I'm not saying don't hold me Some operators have done more than 10 last year. So generally speaking, in that range of probably 100, 150 basis points lower.

Speaker 2

And we will see what the rest of the portfolio does as we go through the year. Just also remember, RevPAR is not just a function of ECRI, Our existing customer rent increases, but it's also a function of sort of market rent, right, what that your mark to market And we will see, we don't know, usually speaking, market rents are lower in Q1 and sort of goes out from the summer months and we'll see how this all plays out. There is a math aside, we feel that the second part of your question, which is a brilliant question, sort of thinking about In this kind of occupancy, just call it mid-80s occupancy, what is that sort of efficient frontier Pricing versus occupancy, that question is harder to answer on a conference call, but I will tell you what you are Going after is a very important one because how operating leverage because of operating leverage how your incremental margins work. While it is in the late 70s, early 80s, it is obvious that you should go after the rate, not the occupancy that may not be true in the mid 80s where your optimized level could be some occupancy, some rates.

Speaker 2

We'll see how this plays out. But we think It's our guess as we sit here today and nothing but a guess that we'll be largely in the same ballpark of close to double digit revenue growth that we have seen last year.

Operator

Your final question comes from Ronald Kampton with Morgan Stanley. Please go ahead.

Speaker 11

Hey, just want to sort of close the thought on the occupancy, just because the sequential Sort of improvement as well as the guidance acceleration coming out of it a different way. Is this like how much of this we think of as an industry wide phenomenon where we should expect other operators to see occupancy accelerate versus sort of John's operating platform creating that alpha is sort of part 1. Part 2 would be When you think about that occupancy recovery slide in your deck, are we at the point where we should start thinking about 91 as the new target versus for the 88 because based on the guidance, you're going to be at 85 at the end of the year. Just trying to get a sense of how much conviction Growing conviction you have in getting back to that peak occupancy level? Thanks.

Speaker 2

Ron, let me try to answer that question. The second part is an easier one. If all we do is we end up at 91% occupancy, which is sort of 2015 achieved, And we frankly speaking, we didn't add a lot of value. Because if you think about let's I don't know, let's pick a number, 2 years, 3 years, whatever your number of years is, Demand supply, I think you understand, starts to get materially better starting 2025, 2026, right? Sort of And the delivery schedule, if you look at it, you know what the starts are, which is not much, right?

Speaker 2

You can see the demand supply imbalance Gets really interesting next year and the year after, right? So at least we can say that because we don't know if there's other people that Without our knowledge, it's building. It's unlikely, but we don't know. But at least we can sort of see next 2 years with a reasonable clarity. And we don't believe that frictional vacancy of this business is 9%, right, John?

Speaker 2

Is that

Speaker 3

It's absolutely not. It's a financial calculation and it is not 9%. It is substantially less. So that's Just not an option.

Speaker 2

So do we believe that we'll end up at 91? I'll be very disappointed if that's the case, but We shall see what the market gives us. What was the first part of your question, Ron, that I missed?

Speaker 11

Sure. It was just so we expect every operator to see Occupancy reaccelerated in 2024 or what are you guys doing that's different?

Speaker 2

Yes. So look, I can't speak for others, Clearly, what do I know about others? My promise to you and our fellow shareholders have always been that we will put A 1000% effort to outperform the market. So far we have done it, right. I don't think Q4 numbers will be much different.

Speaker 2

And I think our hope will be that we will continue to do so. My confidence in our ability to outperform The average of the industry is widening. I think that gap is widening and my confidence is increasing. But we still have to This is February 14. We have to see what the year gives us.

Operator

There are no further questions at this time. This will conclude the Welltower 4th quarter 2023 earnings conference call.

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Earnings Conference Call
Welltower Q4 2023
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