Welltower Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 12, 2025

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Welltower Fourth Quarter twenty twenty four Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I will now hand today's call over to Matt McQueen, Chief Legal Officer and General Counsel. Please go ahead, sir.

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 the 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'll review business trends and our capital allocation priorities, and the team will follow the usual cadence. We ended 2024 on a high note, delivering strong Q4 results as the company continues to fire on all cylinders, whether it be business fundamentals, capital allocation, a further strengthening of our balance sheet, our progress on the operating platform build out. The result was another quarter of solid bottom line growth with normalized FFO per share increasing 18% year over year, once again driven by our senior housing operating portfolio. Just as important, however, is that we carried significant momentum into 2025 and expect another year of exceptional growth, which I'll get into shortly.

Speaker 2

I'll also provide a brief update on the pillars of growth that I outlined twelve months ago that give us even greater confidence in our growth outlook for next few years, which we feel is positively spring loaded. In our senior housing operating business, we continue to see strengthening tailwinds. The fourth quarter delivered impressive results with nearly 24% same store NOI growth. This marks our ninth consecutive quarter of net operating income growth exceeding 20. Notably, we experienced exceptionally strong sequential occupancy growth in Q4, defying typical seasonal trends.

Speaker 2

The Shaw portfolio achieved average same store occupancy growth of 120 basis points sequentially and three ten basis points year over year. This robust performance, particularly during a period when move in activity usually moderates, stands out as perhaps the quarter's most significant highlight. In fact, 120 basis points of growth in Q4 nearly matched the level of sequential growth we witnessed in third quarter, which is typically the strongest period of leasing during the year. I would also note that on a spot basis, we gained two forty basis points of occupancy in the second half alone. This momentum persisted through fourth quarter even during the holiday season.

Speaker 2

In fact, we observed a pickup of occupancy growth during the week of Christmas, typically our slowest move in week of the year, something I have never seen in this business. We also witnessed this momentum carry into January, a period which we almost invariably experienced a sequential decline in occupancy due to seasonality. The favorable end market environment along with our team's superior execution has put us in an incredible favorable position to start the year. This is reflected in our optimism for occupancy growth acceleration in twenty twenty fivetwenty twenty four, which was already one of the strongest years in the company's history. At the same time, the trends related to RevPOR or unit revenue or export or unit expense continues to move in our favor.

Speaker 2

We remain focused on the spread between the two metrics, which during the quarter reached four sixty basis points, our highest level in our recorded history. The outcome is another three twenty basis points of operating margin expansion in our seniors housing operating portfolio. Going forward, we expect sustained improvement in margins given high operating leverage inherent in the business and the benefit of the build out of the operating platform, which John will get into momentarily. Putting this all together, we expect 2025 to be another year of exceptional net operating income growth. Shifting to capital deployment, we capped off a tremendous year of investment activity with the closing of $2,200,000,000 of transactions in fourth quarter at Attractive Economics.

Speaker 2

Nikhil will provide more details, but as we described in the last quarter, the opportunity set for capital deployment continues to expand given the widespread capital markets related challenges in the sector. To be clear, the fundamentals of senior housing business are extraordinarily healthy, but for many owners they continue to be overwhelmed by the impact of higher rates, persisted challenges in addressing upcoming debt maturities and other capital structure issues. I would also point out that not only will this acquisition be solidly accretive to our growth in coming years, but also come with two often overlooked strategic benefits. First is the greater regional densification, which we described to you in the past, reflects our intention to go deep in our markets, not go broad. Second is the accumulation of data received from these properties, which will further enhance the network effect we have already created within our data science platform resulting in a wider and deeper moat for Welltower.

Speaker 2

Each additional building added to a local cluster enhances the customer and employee experience, resulting in strong overall effectiveness and efficiency, hence a strong network effect. These bolt on acquisitions in combination with our organic growth drove 23% revenue growth, 26% EBITDA growth and nearly 20% FFO per share growth for the full year of 2024. And we achieved these results while meaningfully deleveraging our balance sheet. While we are extremely proud of our recent results, we believe we're just beginning our journey to deliver long term compounding a partial growth for our existing shareholders. To illustrate this, let's revisit the five growth pillars that I introduced a year ago.

Speaker 2

These pillars remain firmly intact, bolstering our confidence in our multi year growth outlook. Moreover, we have since added a sixth pillar, which I'll also discuss shortly. This expanded framework further strengthens our growth strategy and potential for long term value creation. First, the demand supply backdrop of senior living business. From a fundamental perspective, we're at the very beginning of an extended period of outsized demographic driven growth in the sector.

Speaker 2

In fact, 2026 should be an inflection point in the end market demand. The tailwinds which have propelled our business that is the growth of 80 population age cohort will only accelerate in the back half of this decade. And I will remind you that seniors housing products that we're focused on are almost entirely private pay and needs driven in nature. The fundamentals of our business are largely immune from geopolitical crosscurrents, regulatory or policy changes and poised to whether any economic headwinds better than most other sectors and industries. While the end market demand will continue to rise even at a faster clip in coming years, the new supply remains muted.

Speaker 2

The outlook for supply has gotten even worse in recent months as tariffs, immigration policy and higher rates will further dampen development economics which remains non existent. The demand supply outlook alone should drive outsized growth for many years to come. Number two, capital allocation. Even after a company record of $7,000,000,000 of capital deployed in 2020 and putting $20 plus billion of capital to work over past four years, our investment teams have never been busier. The opportunity set is robust, actionable and visible and we believe 2025 will be another year of above average capital deployment for Welltower.

Speaker 2

To that end, we started the year with a bang and already have $2,000,000,000 of investments under contract for our balance sheet. This is the strongest start of the year we ever had. Our phones are ringing off the hook as it is sinking into the real estate world that the Fed does not control the long end of the car and hence is not coming to rescue broken capital structures. We continue to find attractive economics in our circle of competence where we can bet with house odds rather than gamblers odds as we seek advantageous divergences in a specific niche amplified by our operating platform and our network of our best in class operating partners. Number three, capital light transactions.

Speaker 2

Over the past few years, we have transitioned hundreds of assets to our strongest operating partners. While these transitions can be challenging and occasionally near term dilutive, they have proven to be tremendously successful with new operators generating significantly more cash flow from the previous operator. For example, the Canadian portfolio which we transitioned from Rivera to Cogier at the end of twenty twenty three witnessed approximately 800 basis points of occupancy growth since we announced the transition. In 2024, we have also transitioned 68 properties from triple net to right here structures, allowing our shareholders to directly participate in the underlying cash flow growth of the communities. Since I spoke with you last quarter, we agreed to convert an additional 16 high quality senior housing communities from TripleNet to IDEA.

Speaker 2

We'll continue to mine for opportunities for further capital light transactions. Number four, digital transformation driving unprecedented structural change. John and his team continue to make extraordinary progress on the build out of the first true end to end operating platform in the senior housing sector. And as we discussed on the last call, our efforts to digitally transform the business are beginning to bear fruit as we went live with our tech platform in the first set of properties in third quarter and subsequently roll it out to additional communities in Q4 and then in Q1 of this year. Implementation of Techstars is just one example of countless opportunities to improve virtually every element of senior housing business to enhance resident and employee experience.

Speaker 2

Number five, our unleveraged balance sheet. Twelve months ago, I mentioned that we will continue to experience further organic deleveraging of our balance sheet given our expectation for outsized cash flow growth. Higher than expected cash flow growth and tactical funding of our capital deployment activity has driven a further reduction of our net debt to adjusted EBITDA to just 3.5 times. Thus, we have created even greater debt capacity to tap into to fund external growth, further amplifying our out tier growth prospects. Due to this massive debt capacity coupled with $9,000,000,000 of liquidity and our reputation for being a clean shirt in an industry while retrading counterparties is the norm, we continue to get first calls from market participants when they need liquidity.

Speaker 2

We can run our deal business in an old fashioned Ben Franklin way because of our exceptional balance sheet strength. Couple of weeks ago, we added a sixth pillar and that's the launch of our private funds management business. While we cannot provide any more details until the conclusion of this process, we believe this new pillar will result in significant revenue opportunities for Wall Tower shareholders. The funds business also represents our first foray into creating a capital light monetization of our data science platform. To conclude, I'm pleased with our execution in 2024.

Speaker 2

We have an exciting and frankly very busy year in front of us in every aspect of our business. Rarely within an industry do cyclical, secular and structural growth drivers come together to deliver a positive net vector leaping emergent effect that is unfolding at Walltower. Our business is bustling with positive energy, ingenuity, vitality and new ideas to create partial value for our existing investors. While the outlook for commercial real estate remains foggy, in some cases gloomy with ongoing malaise due to higher interest rate environment, it is a clear and bright morning at Welltower. And with that, I'll hand the call over to John.

Speaker 2

John?

Speaker 3

Thank you and good morning everyone. 2024 was another fantastic year for Welltower and based on our recent results and outlook there appears to be no abatement in the momentum we're experiencing. For the fourth quarter, we posted total portfolio same store NOI growth of 12.8% driven by our senior housing operating portfolio growth of 23.9%. I'll first comment on the outpatient medical business, which remained stable in the quarter with year over year same store NOI growth of 2%. At some level, the business is boring and yet at another level, it's increasingly stable it's incredibly stable backed by top credit tenants with long term leases delivering consistent returns.

Speaker 3

Occupancy during the period was consistent and an industry leading 94.3% and tenant retention remained strong at 93.6%. As for 2025, we expect another year of stable same store NOI growth of 2% to 3%. During turning to the senior housing operating portfolio, our streak of unprecedented growth continues, having now posted nine consecutive quarters in which same store NOI growth has exceeded 20%. We are particularly pleased with the better than expected occupancy ramp during the quarter, which equated to three ten basis points of year over year growth. I would also note that the 120 basis points of sequential occupancy growth, which Shankh mentioned was one of the strongest we have witnessed in any quarter outside the post COVID recovery.

Speaker 3

For this strength to be witnessed during a seasonally slow period of the year is testament to not only to the tailwinds driven driving the business, but especially to our proactive and dedicated asset management initiatives, which I'll detail shortly. Revenue growth was strong across property types, but we witnessed particular strength at the two ends of the acuity spectrum between our assisted living and wellness housing portfolios. In terms of pricing power, as I noted last quarter, rate growth remains healthy and we expect another year of favorable growth in 2025. On the micro level, rate growth is clearly impacted by occupancy level by unit type at each community amongst other factors. Therefore, as the assets in the portfolio lease up, their market rate will continue to rise to reflect the value proposition provided.

Speaker 3

It's important to realize that the senior housing business is very different than the multifamily business when it comes to funding the payments. The payments are generally funded mostly by assets for the relatively short period of time residents are staying at our communities on average about two years compared to the multifamily industry where rental rates are limited by earned income. I'd also note that the exponential rise in the value of homes, equity and fixed income securities and the other assets over the past fifty years has provided many seniors in our markets the ability to comfortably afford the steep cost of senior living, which is much more efficient than home care. Not to mention other benefits of senior living, including safer social and active lifestyles and peace of mind for families. Moving to expenses, we remain encouraged by the trends which we're observing across all line items, but particularly with respect to labor.

Speaker 3

This is best reflected by COMFOR or compensation for occupied room, which increased just 1.2% year over year, representing one of the lowest levels of growth in our recorded history. This is largely a function of the significant operating leverage inherent in the business, whereby most communities are now either fully staffed or approaching those levels. And as occupancy continues to grow, the need to add additional staff has moderated leading to higher flow through or incremental margin. The benefit of the building occupancy continues to be reflected in our operating margins, which expanded three twenty basis points year over year, the second highest level achieved in our history. While we have witnessed a substantial recovery in margins over the past few years, we believe that the runway for further margin expansion remains long.

Speaker 3

Not only will we still not only are we still well below pre COVID levels of profitability, but given our expectation for RevPOR growth to continue to outpace export, we expect this margin expansion trend to persist well into the future. Additionally, the operating platform initiatives which are well underway to optimize our business should serve to further boost our margins, while also improving the resident and employee experience. This is no different than what has been experienced over the last two to three decades in many other property types across the commercial real estate universe. Onto our operating platform. We made great strides in 2024 building a capital team with internal expertise capable of directly executing and or working hand in hand with our operators and vendors.

Speaker 3

The result has been fantastic. For example, in one case, our elevator experts stepped in and corrected the scope of work related to nine buildings recognizing a reduction of 49% in the cost of the work. It's critical as an owner of real estate to have internal expertise and not be forced to rely on vendors to effectively run the capital decisions on the properties often making short term decisions. The team has been strategically taking advantage of the vacant units available as our occupancy continues to rapidly increase to renovate the units in advance of the increasing demand in the coming years. Additionally, they have been executing numerous exterior renovations at our communities and modernizing the amenities where appropriate, including creating wonderful employee break rooms, delighting our critical team members.

Speaker 3

The positive impact on our site employees cannot be understated. In one case on a property visit, the employees hosted a small surprise party for me, including a special song and dance they had created in appreciation of Welltower's work. After having put $20,000,000,000 of capital to work over the last four years and converting over 100 triple net leases to RIDEA, the capital team is rapidly executing capital plans for the acquired and transitioned buildings, which is a combination of value add as well as planned capital. Our value add investment program like all investments at Welltower is based on an unlevered IRR hurdle. As I've mentioned previously, we expect elevated capital spend for a period of ultimately period of time, ultimately lowering to the ongoing capital run rate, which should be consistent with other residential properties such as the multifamily REITs.

Speaker 3

On the technical front, we are in rollout phase with our main site level platform and my team is hard at work with many other related workflows that will continue to improve the customer and employee experience and improve the margins of our business. I'll reiterate what Shankh mentioned, 2025 should be another year of exceptional growth and there's seemingly no end in sight. Fundamentals of the senior housing sector remain terrific and our efforts to transform this business through the operating platform are having a profound impact on our residents, employees and operators with the true bottom line impact soon to follow. As always, a huge thank you goes out to the Welltower team, including our operators for their tireless efforts to transform this business. Finally, I want to recognize the amazing efforts by our operators, site employees and Welltower employees responding to the recent disasters, including the Southern California wildfires where they evacuated, transported and relocated resident and provided furnished units to many seniors who lost their homes.

Speaker 3

Thank you. With that, I'll turn the call over to Nikhil.

Speaker 4

Thanks, John. I'll start with a quick refresher on the market conditions which continue to drive significant investment activity for us and then provide an overview of our 2024 transaction activity as well as color on our 2025 activity. The U. S. Commercial real estate debt market continues to face significant headwinds with substantial maturities in 2025 and in subsequent years.

Speaker 4

Total outstanding CRE debt stands at approximately $5,900,000,000,000 with $1,000,000,000,000 of loans coming due in 2025. This compares to maturities of $700,000,000 in 2023 and $950,000,000 in 2024 with upcoming maturities exceeding $1,000,000,000,000 in each year through 2028. Banks hold just over 50% of this CRE debt with regional banks holding a disproportionate share of roughly two thirds of these loans. These regional banks, which are some of the largest lenders to the seniors housing sector continue to face significant challenges due to persistently high long term interest rates, hampering refinancing efforts. This is illustrated by the fact that regional banks with less than 100,000,000,000 in assets experienced three times as many loan modifications in the second half of twenty twenty four compared to the first half.

Speaker 4

Higher long term rates further compound issues for these lenders due to larger unrealized security losses on their balance sheets. This struggle is evident in the stock performance of regional banks. In 2024, the KBW Regional Banking Index underperformed the broader U. S. Bank index by 29% and the S and P five hundred by 12%.

Speaker 4

Looking at other major lenders, GSEs hold the next highest share at 17% of total CRE debt. I've previously mentioned that over one third of the seniors housing loans on Fannie Mae's book are criticized and their origination volume is at historic lows. In addition, potential policy changes further complicate the situation with the GSEs going forward. The CMBS market which accounts for the next highest concentration of CRE debt continues to be similarly fickle as evidenced by a consistent monthly increase in the percentage of loans subject to special servicing throughout 2024. Putting all of this together, the banks and other lenders have grown increasingly reluctant to extend loans and remain extremely selective in the limited instances in which they do.

Speaker 4

Against this backdrop, we find ourselves in an extraordinary market environment where many industry participants are compelled to divest assets, allowing us to acquire high quality properties at attractive valuations. Our competitive advantage stems from a powerful combination of three factors. First, our industry leading data science platform efficiently identifies the most compelling opportunities from large datasets enabling rapid market response. Second, our team's expertise in swift and effective underwriting and due diligence. And third, the scalability of our operating partners' efforts bolstered by John's robust operating platform.

Speaker 4

This synergy creates an enviable flywheel effect for Belltower positioning us to capitalize on market dislocations. While we don't have a crystal ball, due to the factors that I have mentioned, we anticipate these favorable conditions will persist for the foreseeable future providing a sustained pipeline of attractive investment opportunities. Moving on to our transaction activity, 2024 marked Welltower's most active year as we completed $7,000,000,000 of gross investment activity, comprising approximately of $900,000,000 of development spend and just over $6,000,000,000 of acquisitions and loan funding. Our acquisition activity spanned 54 different transactions with a median transaction size of $48,000,000 Through these transactions, we acquired more than 12,000 units across 119 properties. With an average basis of $265,000 per unit for these properties and an average age of eight years, we acquired these assets at a substantial discount to replacement cost.

Speaker 4

In the fourth quarter, our acquisition and loan funding activity totaled $2,200,000,000 across 21 different transactions. After relatively muted international investment activity in 2022 and 2023, roughly one third of our acquisition activity in 2024 was represented by our international business, including our expanded partnership with Care UK completed in the fourth quarter, which represented roughly half of our investment activity for the quarter. Our relationship with Care UK dates back to late twenty twenty one when we transitioned 26 former Sunrise and Graceful communities to Care UK. Since then, occupancy has improved by more than 10% under Care UK's management and monthly NOI has doubled. Under Andrew and Matt's leadership, the Care UK team has achieved this success by delighting their customers and providing exceptional service as demonstrated by a good or outstanding CQC rating for each of the original 26 homes.

Speaker 4

Following our recent transaction in which the Care UK management team acquired the management platform from Bridgepoint, our partnership with Care UK now spans 72 communities across The UK. Moving on to twenty twenty five. The beginning of this year has been unprecedented in terms of acquisition activity. We have not seen such activity in my nearly decade long career at Belltower. In less than forty five days, we have already closed on or have under contract an incremental 2,000,000,000 of acquisitions expected to be acquired on our balance sheet across 27 different transactions.

Speaker 4

Thematically, these transactions continue our activity from last year predominantly focused on our seniors and well known housing businesses. One third of this activity is across our international business in The UK and Canada and approximately 85% of these $2,000,000,000 in transactions were negotiated on an off market basis. This robust activity underscores our position as the preferred counterparty for those seeking certainty and rapid execution in the current challenging capital markets environment. Our ability to close such a significant volume of transactions in a short timeframe demonstrates our strong market position and efficient deal making capabilities. Our transaction model is simple, acquire communities in our targeted micro markets, continue to build on our regional density with our aligned operating partners in those markets and treat our counterparties with fairness and respect.

Speaker 4

It's no surprise that as soon as we complete a transaction, the conversation with the counterparty often quickly moves on to engaging on a subsequent tranche. This is evidenced by the fact that more than two thirds of our $2,000,000,000 in investment activity so far in 2025 is with counterparties with whom we have previously done business since the start of the pandemic. This fair and win win approach gives our platform immense duration and positions us for continued success in the years to come. I will now pass the call over to Tim to cover our operating results and guidance for 2025.

Speaker 3

Thank you, Nikhil. My comments today will focus on our fourth quarter and full year 2024 results. Performance of our triple net investment segments, our capital activity, our balance sheet and liquidity update and finally the introduction of our full year 2025 outlook. Welltower reported fourth quarter net income attributable to common stockholders of $0.19 per diluted share and normalized funds from operations of $1.13 per diluted share, representing 17.7% year over year growth. We also reported year over year total portfolio same store NOI growth of 12.8%.

Speaker 3

Now turning to the performance of our triple net properties in the quarter. And as a reminder, our triple net lease portfolio coverage stats reported a quarter in arrears. These statistics reflect the trailing twelve months ending ninethirtytwenty twenty four. In our senior housing operating our senior housing triple net portfolio, same store NOI increased 5.1% year over year and trailing twelve month EBITDAR coverage was 1.12 times, marking a new post COVID high in coverage. Coverage in this portfolio continues to strengthen, now well exceeding pre pandemic levels, as fundamentals align with those of our operating portfolio, a trend we expect to persist into 2025.

Speaker 3

During the quarter, we finalized agreements to transition 16 Segura operated properties from triple net to RIDEA, effective in the first quarter, bringing the total triple net to RIDEA transitions in 2024 to 68 properties. Consistent with our strategy over the past two years, these conversions are expected to be highly accretive over time as Welltower assumes an equity position and these assets continue to benefit from recovering fundamentals and the industry's long term secular growth. For this operator specifically, the transition also unifies our entire relationship under Rodaya's structure, ensuring complete alignment across our relationship. Next, same store NOI in our long term post acute portfolio grew 2.6% year over year and trailing twelve month EBITDAR coverage was 1.58 times. Moving on to capital activity, we continue to equity finance our investment activity in the quarter raising $2,200,000,000 gross proceeds.

Speaker 3

This allowed us to fund $2,200,000,000 of investment activity and end the quarter with $3,700,000,000 of cash restricted cash on the balance sheet. Staying with the balance sheet, we ended the quarter with a net debt to adjusted EBITDA ratio of 3.49 times, a 1.5 turn decrease from the end of twenty twenty three. We intend to use cash on hand to fund both the additional $2,000,000,000 of net investment activity announced in last night's release and the $1,250,000,000 non secured debt maturing in June. As a result, driven by accretive investment activity and continued cash flow growth from our in place portfolio, we expect to finish the year with net debt to adjusted EBITDA at approximately 3.5 times. Reflecting on 2024, the combination of organic cash flow recovery and disciplined financing of our external growth led to our historic strengthening of our balance sheet.

Speaker 3

The improving fundamentals of our business over the past two years have enabled us to deliver sector leading per share cash flow growth to our shareholders, while also harnessing the power of the early part of the cyclical recovery to build balance sheet capacity. Looking ahead, as the powerful demographic trend the next two decades begin to unfold, we remain as confident as ever in our ability to capitalize on long term high ROI investments in people, technology and both digital and physical infrastructure regardless of the capital market backdrop. Lastly, as I turn to our initial 2025 guidance, which was introduced last night, I want to remind you that we have not included any investment activity in our outlook beyond the $2,000,000,000 that has been closed or publicly announced to date. Last night, we introduced a full year 2025 outlook for net income attributable to common stockholders of $1.6 to $1.76 per share and normalized FFO of $4.79 to $4.95 per diluted share or $4.87 at the midpoint. Our normalized FFO guidance represents a $0.55 increase to the midpoint from our 2024 full year results.

Speaker 3

This increase is composed of a $0.42 increase from higher year over year senior housing operating NOI, $0.03 increase from higher NOI in our outpatient medical and triple net lease portfolios, a $0.2 increase from investment and financing activity and the $0.65 of growth is netted against $0.1 of offsets made up of 0.06 from increased G and A and other expenses and $0.04 from FX headwinds. Underlying this FFO guidance is an estimate of total portfolio year over year same store NOI growth of 9.25% to 13% driven by sub segment growth of outpatient medical 2% to 3% long term post acute 2% to 3% senior housing triple net 3% to 4% and finally senior housing operating growth of 15% to 21%. This is driven by the following midpoint of their respective ranges. Revenue

Speaker 5

growth of

Speaker 3

8.5% made up of RevPOR growth of 4.8% and year over year occupancy growth of three twenty five basis points and expense growth of 5%. And with that, I'll hand the call back over to Sean.

Speaker 2

Before we go to Q and A, I want to touch on three topics that appear to be unrelated on the surface. Number one, CapEx and capital team. As John mentioned on the last couple of calls, he has built a 100 or so person capital team at Wall Tower creating internal capital and value add expertise as part of our build out of our operating platform. This has helped us to become a real operating business focused on total life cycle cost over long duration, not a deal shop that write checks. We put a few pictures of the team's work towards the end of our business update.

Speaker 2

I want to draw your attention to those because I want you to see philosophically what are we trying to achieve. For example, look at our efforts to build what I call Costco break rooms. The site level employees at our communities work really hard and we're trying to give them a really inviting and rejuvenating experience when they take their break. In 2024, we finished more than 80 of these break rooms. While some of you might legitimately see this as expenditure, we see this as an important step to hire and retain talent.

Speaker 2

I was recently reading a book on Walt Disney called Remembering Walt that talks about how Walt wanted to build a 120 feet tunnel of a railroad on a long S curve as he liked mystery and loved delighting his customers with joy and wonder. The foreman on the job suggested to him that it was way cheaper to build it straight. Walt said it's cheaper not to build at all. The only way you make lots of money for your shareholders over a long period of time is having a killer customer value proposition. In our business, our resident's first line of interaction leading to that value proposition are site level employees.

Speaker 2

We cannot delight our customers without delighting the site level employees. If you don't believe me, please study the break rooms at Costco and Jim Senegal's philosophy take care of your employees and they will take care of your business. You will understand why that company is such a long term compounding machine. Number two, technology platform. When we talk about technology at World Tower, we mean two completely different things that sometimes gets conflated.

Speaker 2

One is our data science platform and the other is our operational tech platform. Our data science efforts go back almost a decade that started with machine learning focused on structured data and then deep learning towards the end of last decade focusing on unstructured data and finally powered by AI in last few years. While we'll perhaps never win a prize for coming up with a new frontier model, our goal is to harness the power of these incredible technology advances in human history to make the right capital allocation decisions. In other words, we're trying to disrupt how capital gets invested in world's largest asset class called real estate. On the other hand, our operational technology efforts, which goes back to John Burkhard's arrival, to digitize and professionalize the business is set to disrupt how senior living operates as an industry.

Speaker 2

When we are successful in the latter, it will make the former machine, our data science platform, even more powerful as it will feed every minute customer interaction data into our algorithms, not just transactional data and vice versa, creating a positive feedback loop. While the individual goal of both of these platforms is to set is to challenge the status quo of two completely different industries, the philosophical underpinning is the same and that stems from the second law of thermodynamics. The second law of thermodynamics holds the greatest thermodynamic efficiency is achieved by working with the hottest possible source and the coldest possible sink. In other words, it is not about how fancy the underlying math or tech is, but the competitive niche where we're applying this where the contrast is the greatest. To put it simply, we found two easier games where the competitive dynamic is still focused on either labor beta financial engineering in case of real estate investing or fundamental assumptions that work in a low or declining interest rate environment or fly by sight not by instrument in case of senior living operations.

Speaker 2

And finally, number three, people. I want to congratulate John Burkhard, Nikhil, Tim, Matt, John Olympidis, Eddie and Patrick for their expanded role and promotion that we announced on January 2. It is perhaps the single most important release from this company in years. While I am not going to detail how their roles are expanding, which is described in the release, I would like to say I've never written something that I'm more proud of. I will not remember a bunch of deal offers I wrote during the Christmas break.

Speaker 2

I may even forget how freakishly good it felt seeing the occupancy grow during Christmas week. But I will never forget the pride I felt when I wrote that release during the holiday break. Many of these extraordinary leaders joined me as associates and analysts and today they run this firm. Others have joined me later to pursue this audacious dream to disrupt an industry or two. All these individuals have been instrumental in creating what is known as today as well tower by laying one airtight break at a time with an outsider mindset.

Speaker 2

These exceptional leaders share two rare qualities that set them apart, the delayed gratification gene or an instinctive bias towards sacrificing immediate rewards for substantially larger future gains. And two, fiduciary gene and innate desire to prioritize their owners' interests above their own. Their leadership has been instrumental in fostering an exceptional culture at our firm. These savvy leaders show up every day to win with quality such as a seamless wave of deserved trust, shared sacrifices, unity of purpose, mirrored reciprocation. These seemingly mundane qualities in the right combination create a Lollapalooza effect of a culture where everybody is fully committed, they go all in and they stay all in.

Speaker 2

You might be able to copy our deals, but you cannot copy our culture. So what do these seemingly disparate three items that I mentioned above such as philosophy behind CapEx, technology and people have in common. Two things. First, duration or otherwise known as longevity and second, power law otherwise known as exponential network effect. These two duration and network effect, are the most foundational architectural principle of nature.

Speaker 2

And so they are the foundational backbone of our pursuit of target, incremental, continuous progress of partial growth for our existing investors for decades to come. With that, I'll open the call up for questions.

Operator

Thank Your first question is from the line of Vikram Malhotra with Mizuho.

Speaker 6

Good morning, guys. Congrats on the strong results. So I just had a two parter, just clarifying. Just one on fundamentals, can you kind of give us a sense of the pricing power across occupancy bands within the show portfolio? And related to the comments on the pipeline, do you mind sort of giving us a sense of the 2,000,000,000 in acquisitions and the pipeline itself?

Speaker 6

Like what are you acquiring what's the occupancy of what you're acquiring in that pipeline? Thanks.

Speaker 2

Vikram, you want to start with the second?

Speaker 4

Yes, I'll start with the second one Vikram. So as I said in the prepared remarks, it's really a continuation of what we've been buying. So it's similar metrics. The $2,000,000,000 we talked about, it's low 80s occupancy, generally newer vintage assets.

Speaker 2

Vikram, on a second question, assets that are 90 plus percent occupied, the RevPAR growth has been well into the sixes. On the other end, where the assets are below 70% occupied, they're roughly flat. So everything goes sort of in between. To give you a sense of gradients, I will say maybe in 85% to 95% was closer to 6% and as I said below 70% it was close to five which would you would expect a different spectrum of occupancy.

Speaker 3

I would just add that as of year end over quarter the portfolio is still sub 80% occupied.

Operator

Your next question is from the line of Jonathan Hughes with Raymond James.

Speaker 7

Hi, good morning. Thanks for the prepared remarks and commentary. The organic growth outlook, we know that remains strong, but I wanted to tie that into external growth in recent years. As we move through this development cycle and see increasingly fewer deliveries, which is obviously a good thing for existing properties, does that make buying properties with lease up more challenging? Is there a fewer of them, which in turn would impact your growth as fewer get added to the same store pool?

Speaker 7

So much of the outperformance in recent years has come from acquiring those newer vintage lease up properties and we see less and less deliveries tend to become more challenging to sustain growth. Thank you.

Speaker 4

Yes. And I think Jonathan, if you look at the activity, that would suggest the answer is no, because candidly it's a complex operating business and without the right toolkits you don't get the same outcomes from every provider that's running the buildings. So we've had a long term track record of success of finding under operating buildings. And the under operational element, A is occupancy because that's obvious today, but there's so many more layers, right? So it's not just occupancy.

Speaker 4

At the end of the day, what we care about is NOI and every single line item has room for optimization that we bring versus somebody else operating those buildings brings. So we see a long runway to keep doing more of this.

Speaker 2

Yes, and I would just also add, don't forget the massive delivery cycle over supply cycle we have gone through post GFC sort of last decade, right? So there are plenty of people who need help on the liquidity side and we'll see what the market gives us.

Operator

Your next question is from the line of Joshua Denleman with Bank of America.

Speaker 7

Yes. Hey, everyone. Call what you want, but I'm really focused on culture as a long term driver of outcomes. And to me, a big picture of that culture is retaining talent. I guess, Shankh, how do you think about retaining talent?

Speaker 7

And is there a retention problem that well today?

Speaker 2

Okay. So let me answer both of those questions separately. So first is, you think about this is as I said mentioned many times, retaining talent is my number one priority. It's hard to find really good people who do not think of what we do as work, but take that as a life's work and there's a tremendous difference between the two. This is a hard business.

Speaker 2

It's a hand to hand combat on a 20 fourseven for all of us, right? So it is all these results that you guys are seeing today has been a function of this entire team working together and build this trust. And as I said, it's a seamless web of deserved trust, right? And definitely there's a lot of shared purpose that I talked about at North Star and everybody has bought in. It's their all in, they stay all in.

Speaker 2

That's a very hard thing to pull off. So obviously if you think about it and that shows up on our clearly on our track record, being a public company our track record is public. So anybody can see what my team is capable of. And so obviously if you think about the demographics of the industry whether it's private or public, you will see in that microcosm a huge retirement wave is unfolding as we speak. So obviously there's a tremendous amount of demand for people who are really good at the job, right?

Speaker 2

And not everybody is very good at the job. There's a fundamental tectonic shift happening in the real estate business, which last forty years have been all about declining interest rates. That game is over. So if you think about that in that context, there is just tremendous demand for our people. So let's just think about this.

Speaker 2

Is there a problem of retention at WealthTel? The answer is a resounding no. But that does not mean that we should not be acting in my capacity. I should not be acting before there's a problem. There's an interesting interview we can go and see of Lee Kuan Yew who was founded Singapore, who was the leader, was asked once asked by a reporter about a famous mile quote where he talked about a single spot can create a prairie fire.

Speaker 2

And Lee Kuan Yew said that only happens if the prairie, the grass was actually dry. All we are trying to do at Wolf Tower, what I'm trying to do every day is to keep that grass wet.

Operator

Your next question is from the line of Michael Griffin with Citi.

Speaker 5

Thanks. It's Nick Joseph here with Michael. Just on the private funds management business, I know we're targeting different stabilized versus non stabilized assets. But I was hoping you could discuss kind of what the targeted IRRs are for both and then just the size of opportunity you see in terms of those stabilized assets versus those that still have more of a growth opportunity?

Speaker 2

Nick, as we have mentioned in my prepared remarks that we have nothing more to add to the private capital business at this point more than what we have said in the press release. So we will give you more updates when that process is over. Now from the perspective of, you just think about it, we are fundamental buyers from the volatile balance sheet perspective, unstabilized assets that's what we have always done. We're growth investors. We're not yield investors.

Speaker 2

And we believe that now bringing this private capital business significantly expand our TAM. That's all I can say at this point in time.

Operator

Your next question is from the line of Nick Lucille with Scotiabank.

Speaker 7

Thanks. Good morning. So in terms of the senior housing operating segment, I was hoping if you could just break out how big the same store bucket of assets will be this year versus the total pool? And then for the non same store, where I think there's often lower occupancy, how do you expect those assets to perform on NOI growth? Better Is there better potential there versus the same store guidance you gave?

Speaker 7

Thanks.

Speaker 2

So why don't I start with the last part and Tim will give you the first part. Given that our overall portfolio occupancy is give or take call it 85 and our same store is what 87 plus, right? That would suggest to you the non same store is very well occupied, right? And so as occupancy goes up, you would expect that they are the flow through incremental margin that falls to the bottom line obviously starts to pick up, right? So growth should be better.

Speaker 2

But obviously you will see but when those properties stabilize, you will get more pricing power. So you're going to move handover growth from occupancy to growth from rates.

Speaker 3

And then you guys say, by the fourth quarter, we expect over 90% of the portfolio, current portfolio to be in the pool.

Operator

Your next question is from the line of Austin Wurschmidt with KeyBanc.

Speaker 8

Great and good morning everybody. Shankh, you mentioned in response to an earlier question that 90% plus occupancy RevPOR growth is well into the 6% s. I I think with the occupancy gains expected this year over 300 basis points, you should kind of be ending the year approaching that 90% level on top of the inflection in demographics next year and then the further rollout in the tech platform. I mean, should we take all that detail to point to a reacceleration in RevPOR growth in 2026?

Speaker 2

So Anshul, just remember, we're also buying, Nikhil just said that we're buying $2,000,000,000 of assets in the first six weeks at 80% or so occupancy, right? So reported metrics gets all sort of jumbled up because of this. But your idea of your question is the correct one. I'll remind you of the comment I made I think last call, maybe the one before. But in last couple of calls, which is post 2026 summer leasing season, we should start to see a better rip or environment than we have seen sort of call it prior to that.

Speaker 2

We shall see what the market will give us. It's hard to predict where things go. And so we are fundamental believer, it's not about predicting, it's about positioning. And we're in the business of duration. If that takes one more year, we'll still be here trying to push things forward.

Operator

Your next question is from the line of John Kukalski with Wells Fargo.

Speaker 9

Thank you. Good morning. I'm trying to understand the outsized occupancy gain that you experienced this quarter and then the guide that you're giving. Do you think it's more to do with the acceleration of retirement age individuals? Or do you think part of this occupancy gain is due to maybe a psychological effect where there's facilities that you'd like to be in and therefore you're seeing sort of people being willing to move in a little bit earlier and therefore maybe making the pace of occupancy gains that you're seeing sustainable into the future until you reach stabilization?

Speaker 2

John, why don't I offer you a third choice, which is our execution. You guys have the data from sort of industry data. You guys see other companies in the sector, which reported I think some of the data. But regardless, just look at that and you realize this is a lot of that what you say is right, but it is that does not describe the operational sort of alpha that we have seen in the quarter. But we shall see what happens going forward.

Operator

Your next question is from the line of Ronald Kamden with Morgan Stanley.

Speaker 7

Hey, just a quick one. Maybe touch on expenses a little bit in terms of an update on the labor market and any concern about sort of labor shortages and what you're seeing? Thanks.

Speaker 2

Ron, we always have concerns in a business where 60% of our capital stack, I mean their expense tech is labor. We always have concerns. But as John mentioned, we are trying to see stabilization in that sort of the growth we have seen before. We have tremendous amount of operational initiative, capital initiative just in our communities to today to significantly bring down turnover. We mentioned some of that in the slides on our business update.

Speaker 2

You can see that we're seeing tangible impact. But as I've said, this is not an easy business. This is why you get outcomes in the tails, not a sort of industry beta. But we're super focused on it. We shall see what the market gives us.

Operator

Your next question is from the line of Rich Anderson with Wedbush.

Speaker 10

Hey, thanks. Good morning. Maybe a less exciting topic, but outside of Senior Housing, what do you feel like medical office and post acute, what role do they play in the company today? And by that, I mean, obviously, there's a lot of excitement around the growth profile of senior housing going forward. But is it an off, out of sync sort of investment representing over 20% of the portfolio?

Speaker 10

Is it a view the future to sort of be in the business longer term because who knows where things will go fifteen years from now? Just curious your view on the stuff outside of the senior housing and what role it plays for investors today and in the future? Thanks.

Speaker 2

We're long time investors and our OEM as well as our post acute segment plays an extraordinary important role as we think about portfolio construction. And different you guys get excited about different parts of different asset class and their cycles around them. We are thinking about how we create long term sustainable earnings and cash flow growth on a partial basis over decades. And we're extraordinarily excited about those businesses. We allocate capital in different parts depending on where we think that we can make the best risk adjusted return

Speaker 6

on

Speaker 2

a long duration basis. And when the opportunities arise, we allocate capital. But at this point, as I've said that we're debt player, a credit player in the skilled nursing business. And obviously on the OEM side, as I've mentioned before that I want to see where long term inflation lands before I farm up my mind on how to allocate further allocate capital in a significant way or not. That's where we are and we're watching these things very carefully.

Speaker 2

But there's no question both of those strategies play a very important long term role in our portfolio construction.

Operator

Your next question is from the line of Juan Sanabria with BMO Capital Markets.

Speaker 5

Hi, good morning. John, I believe you mentioned an elevated CapEx for a

Speaker 7

period of time and then kind of normalizing back to below where you were pre COVID level.

Speaker 2

So I was hoping maybe you could provide a little bit more details

Speaker 7

or benchmarking of how you think long term CapEx to trend once we get past this hump of kind of deferred or whatever type of spend that you want to execute on?

Speaker 3

Yes. As far as for long term run rate, the capital to date or previously was done less efficiently. I've talked about that many times. People made short term decisions. For example, you might replace a roof, but not do the skylights and the gutters and then you come back and do both of those and you've got cost for mobilization, cost for tearing up the roof again to replace those.

Speaker 3

And so what we've done when we've stepped in with the team and bringing in the internal expertise is to create the proper scopes and planning for capital and to execute that. That in the end that lowers the run rate of the capital. And as I mentioned, people are looking for reference points. One reference point out there that's been out there for years is for example, multifamily residential, what their run rate is on CapEx. There's no reason why our run rate for ongoing capital would not be similar to that.

Speaker 3

Our units are slightly smaller with less kitchen, a little bit more on the amenity side for sure. But balance, it puts it into a zone for context. On the value add side, as I said, those are pure investments. We could turn it on and off at any point in time. And Nikhil and I are connected as far as what those investment hurdles are unlevered IRR investments.

Operator

Your next question is from the line of Michael Carroll with RBC Capital Markets.

Speaker 3

Yes, thanks. John, I wanted

Speaker 7

to circle back on your comments regarding the tech platform rollout. Can you give us an idea of the timing of this? I mean, what percentage of the portfolio has this capability today? And should we think about the majority of your operators having this capability by the end of the year? Or is it a longer more thought out process than that?

Speaker 3

That's a good question. Yes, we're rolling it out over the next couple of years. There's a lot of work that goes into doing that and doing it very well to make a seamless experience for our site associates. So very focused on that. And I am glad you asked because I've talked spent a lot of time talking about the benefits of the platform as it relates to digitization and the improved customer and employee experience.

Speaker 3

I haven't much spoke about the aspects of providing real time actionable data, insightful data to the site employees. So I'll give you just a little story on that. When I was working my way through college 1980s, I worked at a company called Price Club, which is a predecessor of Costco for those of you who remember. Every morning about three a. M, the store manager would come to me with a computer printout, which showed all of the sales for every item on my aisle, as well as the aisle in total.

Speaker 3

So I could see if I placed tide in the middle, if I placed tide as an end cap, what the impact was on sales and then adjust my aisle accordingly to maximize my total sales for my aisle. Very competitive process there at Costco. And today what we're able to do, we're at the very cusp of providing our employees with real time actionable data, enabling them to positively impact the business. So super, super excited. We're going as fast as possible, but we have to do it right.

Speaker 3

And so it does take a little bit of time.

Speaker 2

Mike, just remember, Nikhil is not making this process particularly easy by adding 10,000, 12 thousand units a year as well. So it's a running target.

Operator

Your next question is from the line of Jim Kammert with Evercore.

Speaker 11

Thank you. Good morning. I was intrigued by Nikhil's comments regarding sounds like an apparent uptick in European investing activity. Have you ever provided sort of the sense of scale of the opportunity set for Welltower in Europe and does that extend beyond The UK? Thanks.

Speaker 2

I don't think you heard it correct. We are focused on in a sort of I guess you can say in a European context is UK. I've said many, many times we have no desire to go outside our circle of competence which is U. S, UK, Canada and his comments is entirely focused on UK.

Operator

Your next question is from Mike Mueller with JPMorgan.

Speaker 7

Yes. Hi. You have about $2,000,000,000 of developments in process. Can you talk about how long to stabilize the properties upon completion? And is that trending faster or slower than a few years ago pre COVID?

Speaker 7

Yes, Mike.

Speaker 3

So thinking about that development pipeline that has predominantly been focused in two areas, active adult within our kind of residential portfolio and then OM. OM as you know is pretty much 100% leased for anything that we're developing. Active adult has a shorter lease up timeframe than seniors. So it's shorter and that's kind of more like a twelve, eighteen month type timeframe.

Operator

Your next question is from the line of Emily Merkel with Green Street.

Speaker 12

Yes. How does 2025 expected expense growth for The U. S. Senior housing portfolio compared to The U. K.

Speaker 12

And Canada? And then have the increased employment taxes and increased minimum wage in The U. K. Had any notable impact there?

Speaker 3

Yes. So OpEx growth in The UK is greater than The U. S. And it's Emily to your question on the impact of, it's like combined impact of the two is the right way to look at it, right, because you get the kind of headline cost of living adjustment and then you've got the insurance impact. So two of those are heightened and that is causing higher OpEx growth there.

Speaker 3

But we're also seeing great top line growth in The UK. So it's offsetting some of that flow through, but we're still seeing positive growth.

Operator

Our final question comes from the line of Jonathan Hughes with Raymond James.

Speaker 7

Thanks for taking the follow-up. Can you talk in more detail about the outlook for seniors housing development? The fundamentals are as good as they've ever been. There's a lot of visibility for demand in the next decade. And why haven't developers of private equity rushed in to get projects started to capture that inevitable upside?

Speaker 7

Is it lack of operators, financing? I guess what changes this? Thank you.

Speaker 2

Yes. So, Jonathan, I'm going to make my comments on average. There's always exception to average. So just think about as an average. I fundamentally believe that people do something, an economic activity called development if there is development profit, right?

Speaker 2

So you sort of have to think about. So let's just dig into that. I'm going to so first, I think there's a fundamental misunderstanding of what development profit is. I hear I've seen some very interesting performance of developments that says, just take an example, this is an example. I can make a 8% yield five years from now and isn't there 200 basis points above say prevailing cap rate of 6%.

Speaker 2

That is fundamentally people who say that have a fundamental misunderstanding of the most basic idea of finance called time value of money. We make decision, development decision based on untrended yield, not trended yield, untrended yield as in what's today's cost and what's today's market rents, right? You can always buy a six and trend that and get rent growth for five years and we'll get to eight. So that is sort of the fundamental sort of number one problem. Number two problem, which I describe you as sort of a underpants norms reasoning, if you have seen that famous South Park episode and it goes like this.

Speaker 2

You have a proposition one which is there is a lot of demand coming, right? That's step number one. Step number three is we should be able to make profit from that by developing more. The step number two in the middle is missing. And that missing middle is what we talk about.

Speaker 2

What happened to cost? What happens to your cost of construction? Your cost of labor? Your cost of sort of your rates, right? All of these things.

Speaker 2

Your exit cap rate, all of these things. So if you just think through that, senior housing development business reminds me of that South Park episode, which is Underpants NOMS episode. If you haven't watched it, I will go and like you to watch that. Third one is what is just straight up preference falsification. I have talked to smart developers who understand that this idea of silver tsunami they're trying to sell it to someone gave development capital is just what I call private truths and public lives, right?

Speaker 2

So all I tell them to do is if you truly believe in that, why don't you just put your 100% of your own money and held up? Why try to get other people's money to try to do that which this business has two really, really bad episodes. One in the 90s, massive oversupply, lots of money lost, other people's money lost. And the second is what happened in the last decade. So if you just put it all together, you will see, all I say, just if the economics doesn't exist, I fundamentally believe it will not happen.

Speaker 2

And if somebody is particularly excited about doing it, I recommend they do it on their own money, not get sort of an unassuming small bank who doesn't understand all the details and just get them and then obviously get them on the hook just like it happened in the last decade.

Operator

This does conclude today's call. Thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Welltower Q4 2024
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