Welltower Q4 2022 Earnings Call Transcript

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Provided by Quartr
February 16, 2023

Key Takeaways

  • In Q4, RevPAR rose 7.5% while expense per occupied room growth moderated to 3.4% (driven by a record-low 2.6% increase in compensation cost), leading to a 25% gain in net operating income per unit and strong 4Q senior housing NOI growth.
  • Welltower secured a private letter ruling from the IRS allowing it to own and self-manage independent living communities, which management says will accelerate its operating platform and margin expansion across senior housing.
  • The company reinstated full-year guidance for 2023, projecting normalized FFO of $3.35–$3.53 per share (≈5% growth) and same-store NOI growth of 8–13%, including senior housing operating NOI growth of 15–24%.
  • Balance sheet metrics remain strong with $5.1 billion of near-term liquidity, debt/EBITDA at 6.31× (below pre-COVID levels), and $1.5 billion of equity raised in 4Q to drive deleveraging and new investments.
  • Operational momentum is building into 2023: January move-ins were up 16% versus 2019 levels and senior housing tour volumes rose 25% year-over-year, highlighting resilient demand.
AI Generated. May Contain Errors.
Earnings Conference Call
Welltower Q4 2022
00:00 / 00:00

There are 16 speakers on the call.

Operator

Good morning. My name is Zadra, and I will be your conference operator today. At this time, I would like to remind everyone I would like to welcome everyone to the Welltower Fourth Quarter Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Call. At this time, I would like to turn the conference over to Matt McQueen, General Counsel. Please go ahead.

Speaker 1

Thank you, and good morning.

Speaker 2

Call. 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. Call. 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. Call.

Speaker 2

Factors that could cause actual results to differ materially from those in the forward looking statements are detailed in the

Speaker 1

company's filings with the SEC. And with that, I'll

Speaker 2

hand the call over to

Speaker 1

Sean. Call.

Speaker 3

Thank you, Matt, and good morning, everyone. I will review Q4 and the year and describe high level business trends and our capital allocation priorities. John will provide an update on operational performance of our show and MOB portfolios, and Tim will walk you through our triple net business, balance sheet highlights and 2023 full year guidance. Nikhil, our newly appointed CIO is also on the call to answer questions. Call.

Speaker 3

While we're happy to bring back full year guidance after 3 years, I'll point out that many macro and business uncertainties remain. I would recommend investors and analysts to focus on 2023 exit run rate to understand the earnings power of this platform call and not overly emphasize the calendar year guidance. I have mixed emotions as I reflect back on 2022. Call. As I've described during my prior calls, our results frankly underwhelmed our expectation during the first half of the year.

Speaker 3

Call. While we don't like to fix it on short term stock performance as we believe, an appropriate window to gauge our performance is at least 3 to 5 years, You should throw tomatoes at us for generating an unsatisfactory return total return in 2022. But remember, call. Stock is a fractional ownership of a business and not a ticker. We view our fellow investors as partners for the long haul and continuously strive to improve the prospects for long term compounding of this business.

Speaker 3

In spite of some of the headwinds that we experienced in 2022. My team and I are pleased with the underlying improvements we have seen in this platform and our talent base, call, resulting in a strong rebound of performance in 4th quarter and further improving momentum being carried into 2023. Call. Our recent progress is only the tip of the iceberg of many of our initiatives will truly manifest themselves in the year next year or 2, call, which I'll go in a minute. While overall macro headwinds persist, we have seen a considerable improvement in the key indicators of the unit economics of the business as reflected by expense per occupied room or X POR or revenue per occupied room or RevPOR.

Speaker 3

Call. On the expense front, we have seen significant progress on addressing certain challenges we have faced over 1st year plus, call, most notably on the Agency and TempLab situation. In fact, Xpore has moderated to in Q4 to 3.4%, call, driven largely by a deceleration in compensation per occupied room or compor to 2.6%, call, the lowest level we have seen in our recorded history. At the same time, RevPAR, again, the revenue per occupied room, remain a consistent bright spot for us, increasing 7.5% in Q4, a clear reflection of strong pricing power call resulting from our premier locations, product and operator base. As I mentioned on our last call, one of our largest operators call.

Speaker 3

Pull forward January rent increases in Q4. Even without that, our Q4 RevPAR would have exceeded 6% plus and reflecting a broad based strength across our portfolio. And while we achieved record RevPAR growth call in 2022 of 5.5%, we expect to surpass this level of growth in 2023. While we achieved an impressive 19% SHOP NOI growth in 2022 and expect circa 20% NOI growth In 2023, I believe we're only at the beginning of a multi year double digit NOI growth call, resulting from a long runway of occupancy grade, rate growth and operating margin expansion. And despite significant macro uncertainty already call.

Speaker 3

Weighing on the fundamentals of many other sectors, our confidence in future growth of our business is supported by the need based nature of our asset class call, along with a favorable demand supply backdrop, which is getting better every single day. I'm pleased to report that 2023 is already off to a great start call with January move ins up 16% over 2019 levels, representing a meaningful acceleration from the 4th quarter. Call. Forward looking indicators are also showing promise in January with our total volume tour volume across our senior housing operating portfolio is up 25% year over year. I would be completely remiss to ignore perhaps one of the most important milestones in the 53 year history of our company, and that is the private letter ruling we received, which permits us to both own and self manage independent living assets.

Speaker 3

Call. The PLR provides us significant flexibility in operating our assets and its timing coincides almost perfectly with the build out of our industry leading operating and asset management platform, which John and his team have been tirelessly working on. We remain optimistic that quarter. Further investment in our platform will not only result in a better margin profile of our assets, but also will meaningfully benefit call, the 3rd party operating partners across the senior living spectrum who we choose to do business with in the future. We continue to see a tremendous opportunity to professionalize and modernize the operating side of senior living business following our instinct where there is mystery, there is margin.

Speaker 3

Call. And our PLR gives us significant ammunition to accelerate the pace for which accelerate the pace for what Welltower 3.0 might look like. Call. I want to thank Mike Gerst, our tax team and many others whose efforts have led to this game changing achievement. Call.

Speaker 3

Before turning to investing environment, I want to highlight the addition of Retirement Unlimited or IUI to Welltower's roster of exceptional operating partners. Call. IUI is one of the best operating performing senior housing operator in the East Coast with the highest program quality programming and care standards. Call. IUI has consistently maintained occupancy levels at north of 90% and with hardly any use of agency labor over call.

Speaker 3

We announced today that RU has assumed the management of our first community together in Alexandria, Virginia with plans to meaningfully grow our relationship in near term through acquisitions, transitions and development. We're extremely excited and humbled to partner call with the Praline and Waldron families and REI's All Star President, Doris Sali Sullivan, and welcome them to our Welter family. Call. In terms of other growth partners, it was exactly a year ago when we announced our partnership with David and Simon Rubin call, along with their acquisition of Avery Healthcare in the U. K.

Speaker 3

As you know, Rubin Brothers is one of the most sophisticated forward thinking and well capitalized global investors call with a reputation of attracting best in class talent and technology platforms. Our thesis was validated when Rubin Brothers attracted Lorna Rose, call. One of the most well respected operating senior housing operating executive in UK to join Avery as the company's CEO in December. Lorna has spent 25 years in the industry and was most recently with Barchester, one of the UK's largest senior housing platform. Call.

Speaker 3

Next, on the capital allocation side, we have rarely seen a favorable environment across all our product types call in all three countries we do business with. Tim, there are $20 plus 1,000,000,000 of exit queue for core real estate funds call and perhaps even a longer one for non traded REITs. This along with the challenging debt market give us an enormous advantage call to buy the right product at the right location at the right basis. Please note that while we are under earning call. By more than $500,000,000 of EBITDA from pre pandemic levels, we just reported debt metrics that are better than Q4 of 2019, call, along with more than $5,000,000,000 of near term liquidity available liquidity.

Speaker 3

We have many avenues to access and deploy capital that I've described before, call, and we remain busy on all fronts. But our North Star remains consistent and simple. We strive to create partial value call for our existing owners by compounding over a long period of time within our circle of competence, which we define as the area call, where we can assess and allocate capital with Howe's odds rather than Gambler's odds. With that, I'll pass it over to John.

Speaker 4

Call. Thank you, Sean. I'm excited about our operating performance this quarter and the acceleration in growth call, which we've witnessed. My first conference call at Welltower was in Q2 of July 2021. Total portfolio same store NOI was a negative 7.1%.

Speaker 4

Since that call, the portfolio's performance has continued to improve. In 2022, despite challenges, Growth was in the range of 7% to 9% for the Q1 through Q3. However, in Q4, we accelerated 12.9 percent portfolio NOI growth driven by senior housing operating business with NOI growth of 28 growth of 1% despite all the challenges of the current economy. This amazing performance is a result of both the fantastic supply demand dynamics of the senior housing sector and aggressive asset management. I continue to see many opportunities to professionalize the business, which are being proven out through various initiatives as noted in the case studies we presented call in the slide deck and clearly come through the financials when looking at the massive improvement in agency labor, which I'll outline in a moment.

Speaker 4

Call. It is this abundance of opportunity, the opportunity of applying proven industry solutions to the senior housing industry, which led me to reach out to my friend Jerry Davis and engage Jerry as a strategic advisor. As many of you know, during my multifamily days, Jerry was my counterpart at UDR, one of the largest multifamily REITs with a national platform of 60,000 apartment homes. Jerry spent 30 years conference call in various roles at UDR and nearly 15 overseeing all the company's operations before retiring in 2021. Call.

Speaker 4

He and I have always shared similar views that the operational excellence requires a focus on people, processes, data and technology, call, which if well done results in a superior experience for both residents and employees and ultimately drives stronger financial performance. Call. We have made substantial headway over the past year and a half in enhancing our management capabilities and Jerry's expertise will accelerate that progress. Call. He'll focus his efforts on specific opportunities while I'll continue to build the broader operating platform from asset management and operations call to capital, resource management, renovation, etcetera, as Welltower transforms the business.

Speaker 4

Jerry will help us to continue accelerate call. Continue to accelerate change in the senior housing industry, our work together will not simply be additive, it will be exponential. J Square. Call. Now I'll provide some insight into our operating business starting with the medical office portfolio.

Speaker 4

Call. In the Q4, same store NOI growth for our outpatient medical business was 2.1% over the prior year's quarter. Call. Same store occupancy was steady throughout the year at nearly 95%, while retention remains extremely strong across the portfolio at 93% call for the 2nd straight quarter and nearly 92% for the entire year. This robust retention rate helps us drive improved lease rates and continued strong releasing rates.

Speaker 4

Turning to our senior housing operating portfolio. The 28.1% 4th quarter increase over the prior year's quarter was driven by revenue growth of 10.3% for the period. Year over year margin growth of 3 20 basis points was call, also the strongest of the year. All three regions showed strong revenue growth starting with Canada at 6.6%, call. The U.

Speaker 4

S. And the U. K. An impressive 10.6% 19.2%, respectively. Revenue growth in the quarter was driven by a 200 basis point increase in average occupancy and another quarter of healthy pricing power with Rev score growth of 7.5%, which as Shankh mentioned is the highest we've ever witnessed.

Speaker 4

Sequentially, portfolio average occupancy continue to improve with a gain of 20 basis points during the period. Turning to expenses. Call. Agency use has obviously been a key factor in 2022 expenses. However, in Q4 2022, just as Tim had mentioned many times, Agency expense is acting as an expense deflator.

Speaker 4

Agency in our same store portfolio is down 44% year over year in Q4 'twenty call. We often quote agency as a percentage of compensation. So looking at it that way, in Q4 of 2021, agency expense call 6.9% of compensation and in Q4 of 2022 it was 3.7%. Regardless of how you look at agency, The expenses declining in the U. S.

Speaker 4

And Canada where over 90% of our senior housing portfolio is located. The UK is still impacted by overall labor shortage as well as some rigid staffing models, which have led to lower occupancy properties being overstaffed. Management in the UK is slowly adjusting to and dynamic staffing model ensuring appropriate staffing at various levels of occupancy. Overall, comp call. Compensation per occupied room, which represents about 60% of the expense per occupied room, increased only 2.6% in the 4th quarter call compared to the prior year's quarter, which is the lowest growth rate in over 5 years.

Speaker 4

This moderating comp growth helped drive the deceleration in overall expense growth despite continued inflationary pressures in several line items, including food and utilities, call, which rose 10.5% 10% respectively in the Q4 of 2022 on a per occupied room basis compared to the prior year's quarter. Food and utilities represent roughly 12% of expense per occupied room. Call. The combination of 7.5 percent RevPOR growth, the highest in over 5 years with a 3.4% ExpenseCore growth call led to remarkable growth rate in net operating income per occupied unit of 25%. Call.

Speaker 4

Regarding our operating platform, we continue to be on pace to pilot our first module in Q1 'twenty three with several other modules in the works. I must say that I'm purposely not giving out the details as they are proprietary. However, I will say that I'm proud of the creative accomplishments of the Welltower team call and I'm grateful for the wonderful operators that we are partnering with on these first modules. The successes that we have had through aggressive asset management as noted in the slide deck call. The result of brute force and prove the opportunity.

Speaker 4

Operational excellence is achieved by a focus on people, processes, data and technology, call. And that is exactly what the team has done in the various initiatives that are outlined in 3 case studies on agency labor reduction, revenue management and care revenue. Call. We will continue to leverage our team to drive results, yet the greatest opportunity will be realized as we roll out the operating platform in the coming years. Call.

Speaker 4

Finally, I would like to thank our operators and all their employees and the Welltower employees for making these results possible. Our teamwork is clearly paying off, call leading to improved resident and employee experiences and stronger overall results. I'll now turn the call over to Tim.

Speaker 5

Call. Thank you, John. My comments today will focus on the Q4 2022 results, the performance of our triple net investment segments in the quarter, or capital activity, a balance sheet liquidity update and finally our outlook for the year ahead. Welltower reported 4th quarter normalized funds from operations of $0.83 per diluted share, representing 7% year over year growth after adjusting for prior period government grants and FX headwinds. Call.

Speaker 5

We also reported total portfolio of same store NOI growth in the quarter of 12.9% year over year. Call. Before getting into our segment results, I want to provide an update on our recently closed ProMedica Restructure and the go forward reporting treatment. Call. In late December, we announced the closing of our restructured joint venture with ProMedica Health System and our newly formed joint venture with Integra Health.

Speaker 5

The ProMedica Health System JV consisting of 58 private pay assisted living assets will continue to be operated under lease with ProMedica Health System call. It is now part of our Senior Housing Triple Net Reporting segment. The Integra Health joint venture consisting of 147 skilled nursing properties comprised of a property joint venture and a master lease with Integra Health. The lease commenced upon closing in December as of the first tranche of the property JV call with Entegra acquiring 15 percent of Welltower's stake in 54 of the assets for $73,000,000 As previously expected, subsequent to year end, the second tranche of assets closed in January as Entegra required 15% interest in another 31 assets for $74,000,000 The remaining 62 assets are expected to close in the second half of the year. Call.

Speaker 5

As to the underlying operations, the subleasing of the portfolio is progressing in line with expectations. 75% of the bats have already transition management with the remainder of the portfolio waiting on state specific approvals. We will continue to update the market as the progress of management transitions in addition to underlying property level fundamentals. Now turning to performance of the rest of our triple net properties in the quarter. Call.

Speaker 5

As a reminder, our triple net lease portfolio coverage and occupancy stats are reported according to arrears. These statistics reflect the trailing 12 months ending ninethirtytwenty twenty two. Call. In our senior housing triple net portfolio, same store NOI increased 4.3% year over year and trailing 12 month EBITDAR coverage was 0.86 times in the quarter. Call.

Speaker 5

Next, same store NOI in our long term post acute portfolio grew 4% year over year and trailing 12 month EBITDAR coverage was 1.34 times in the quarter. Call. Turning to capital market activity. In the quarter, we settled $1,500,000,000 of previously raised equity through our forward ATM program, call, helping to bring debt to EBITDA down to 6.31 times at year end, a substantial decrease of nearly 7 times at year end 2021 call and below pre COVID levels of Q4 2019. For the year, we settled a total $3,700,000,000 of equity to fund 3,700,000,000 of net investment activity, allowing us to continue to deploy capital into a dislocated private market while materially delevering the balance sheet.

Speaker 5

Call. Looking forward, we ended the year with $722,000,000 of cash, full capacity on our $4,000,000,000 revolving line of credit and and $383,000,000 expected proceeds from near term dispositions and loan pay downs, representing $5,100,000,000 in near term available liquidity. Call. Before moving on to our 2023 guidance, I wanted to add more context to Shankh's earlier commentary on the opportunity provided to our company by last year's private letter ruling. Call.

Speaker 5

Nearly 14 years ago, Welltower stuck its 1st Rodeo Management Agreement, giving a direct economic exposure to senior housing operations. Call. Over the last 5 plus years, we built a better and stronger alignment within this contractual structure, ultimately reaching a point in 2021 call, where we can generate meaningful ROI through centralized human capital and technology investment at Welltower. We hired John Burkart and started to build the team around him. Call.

Speaker 5

The PLR we received last year allow us to meaningfully accelerate that effort as the ROI friction is entirely removed under self management. Call. This Welltower platform investment is evident through G and A, with greater than 80% of our expected year over year increase in overhead costs being driven by technology investment and new position additions in 2022 and 2023, focused primarily on asset management, data analytics and technology. Call. We continue to believe that the opportunity to both modernize operations and drive efficiencies through scale in our business is vast and creates a sustainably strong cash flow tailwind when combined with the demographic driven demand of the next decade plus.

Speaker 5

Call. Lastly, moving to our full year guidance, which we're reintroducing for the first time since COVID uncertainty began impacting our business in March of 2020. Call. Last night, we provided an outlook for 2023 of net income attributable to common stockholders of $0.57 to $0.75 per diluted share and normalized FFO of $3.35

Operator

call to $3.53

Speaker 4

per diluted share

Speaker 5

or $3.54 at the midpoint. As mentioned in the release, our 2020 guidance contemplates no HHS funds or other government grants we received in the year. So after adjusting for $0.07 of non recurring government grants received in 2022, we we're guiding for 5% year over year growth. This year over year increase in FFO is composed of $0.36 from growth in our senior housing operating portfolio and $0.03 from growth across the rest of our segments. These are offset by $0.04 of prior mentioned higher G and A in Welltower platform costs and $0.19 of floating rate interest and foreign exchange headwinds.

Speaker 5

Underlying this FFO guidance is estimated total portfolio year over year same store NOI growth call of 8% to 13%, driven by subsequent growth of outpatient medical 2% to 3%, long term post Q2 to 3% and senior housing triple net of 1% to 3%. And finally, senior housing operating growth of 15% to 24%, call. The midpoint of which is driven by revenue growth of approximately 9.5%. Underlying this revenue growth is an expectation with 230 basis points of year over year average occupancy increase and rent growth of approximately 6% in the quarter. And with that, I'll hand the call back over to Shankh.

Speaker 3

Call. Thank you, Tim. While we ended 2022 on a positive note, it was also a year of shared greet and perseverance from our team. Call. As we face different challenges in our business, be it the expense pressure, development cost pressure or ProMedica, call.

Speaker 3

We remain steadfast in our belief that our job as stewards of our shareholders' capital is to solve problems when we encounter on this journey call. And not to rip the band aid off and give away potential future upside to private equity. To profit from either because, 1, call. It is the easiest thing to do instead of walking things out or 2, the feeling of instant gratification as Wall Street tends to cheer such decisions. Call.

Speaker 3

We see too many market participants mix up short term volatility with long term risk of Farmland Capital loss. Call. As our partners in the business, our investors can count on us to take tough road to deliver strongest returns we believe are achievable when we face challenges. Call. This is evident in the build out of our operating platform and our transaction with Promedica and Integra.

Speaker 3

To paraphrase Mr. Munga, you can rest assured call. That we have a deferred gratification gene imprinted on all our all over our culture, and we remind ourselves every day call that big money is made not in buying and selling, but in weighing. Lastly, I'm extremely delighted to see call. Many of my partners recently appointed to the executive and senior management roles within the organization.

Speaker 3

We grew up in the business fighting it together in the trenches and I'm convinced that we have the deepest bench strength along with the wrongness runway as I look across the real estate space. Supplementing this talent is our unmatched data and machine learning capabilities, which allows us to efficiently and cost effectively evaluate new investments as well as reinvestments in our portfolio. In addition to our strength of our existing team, We continue to attract best in class talent from outside the industry who share our belief that the future of our business may look very different from the past. Call. Simply said, we want to attract talent that comes from the industries with higher standards.

Speaker 3

And to that point, I could not be happier that John has convinced Jerry Davis to join our team. As you all know from his many years in multifamily sector, Jerry has one of the sharpest operating minds in real estate. I have known at Admire Jerry for 15 years and cannot be more excited to work with him and learn from him. I am more convinced than ever call that John along with Jerry will have an exponential impact and transform this industry. If you are or know someone of that operating caliber call and more importantly have an outsider's mindset from a related or frankly unrelated industry who wants to join the formidable call.

Speaker 3

Welltower is wide open for business, not only for asset acquisition, but also for talent acquisition. Call. With that, I'll open the call up for questions.

Operator

Thank you. Question. Call. We'll take our first question from Jonathan Hughes at Raymond James.

Speaker 6

Hey, good morning.

Speaker 3

Good morning.

Speaker 6

I wanted to call.

Speaker 1

Good morning, John.

Speaker 7

I just wanted to ask about the increasing operator relationships. Obviously, we just saw another one yesterday call. With RUI, you talked about more opportunities or expected opportunities in the future. But I'm wondering what the landscape looks like after call. 3 years of these pandemic headwinds, how many high quality operators remain as an opportunity that you don't already have a relationship with?

Speaker 7

And What's the size of those individual opportunities? Are they smaller or larger in terms of investment volume than the relationship established over the past few years? Call.

Speaker 3

Thanks. Yes. Jonathan, you asked a very, very good question. So as I think about if your question is specific to senior housing industry, call. I see that obviously we have most of the operating partners that we want to do business with, we already do business with.

Speaker 3

Call. So expansion of new operating partners is less of a focus and going deep rather than going broad is our focus. Call. We are looking for striving for regional density with our existing partners across the different country, right? Call.

Speaker 3

Now we have, I mentioned before, that we have there are operating partners in the business that operators in the business that we had admired for a very long period of time. Call. And this is a long dating process. It takes a long time for both parties to understand how we can add value to each other, right? Capital is a commodity, Just capital, us bringing capital to an operating partner, frankly speaking, in any relationship is not enough.

Speaker 3

And for our perspective, so we bring in data analytics and other operating platform initiatives that John is doing to equation. At the same time, we want to understand whether these operating partners are thinking about the business or where the business is going 10, 20 years from now, Not what the business was tended to was from 10, 20 years ago, right? There's a significant mind shift call that is needed in the business. And frankly speaking, as I mentioned few minutes ago, we need higher standards, higher standards call of employee engagement, higher standards of customer service and higher standard of how we treat capital and what we how we deliver results for the capital. And those are the type of operating partners and business partners that we're looking for and we're grateful that We have a fundamentally a fantastic roster of these people to drive business with.

Speaker 3

Now going to the second part of your question call. From an investment volume standpoint, I want to reemphasize you're going to see majority of the investment volume with existing partners call. As well as sort of the partners that we have already announced in the last couple of 2, 3 years.

Operator

Call. We'll take our next question from Michael Griffin at Citi.

Speaker 6

Great, thanks. Maybe just

Speaker 8

on transaction activity. Call. Shankh, I know you've always talked about how you're an unlevered IRR focused investor. I'm curious if you've seen any change in maybe hurdle or return rates that might You more excited about one property type relative to another. I know you seemed pretty positive in your opening comments, but any additional clarity there would be helpful.

Speaker 3

Call. Michael, if you think about different times give us opportunities for different types of product. You have seen us Buy and sell every product that we own in last, call it, 7 years, 8 years under this under the leadership of this team, call. Right. So because different times, you get opportunities to buy different product at a very favorable basis.

Speaker 3

This might be the first time we're seeing Across all our product types, across the 3 countries that we do business with and we're seeing opportunities, right? This is a call. Very, very disruptive time from not only from debt side, but also from equity side. The people who we normally compete against, right, the core funds, the non traded REITs and others, everybody is facing very significant flow, outflow, call. Either because of the denominator effect that you see in pension fund world as well as institutional world or some other reasons such as Availability of not availability of debt and other situations.

Speaker 3

So we're seeing across all product types. We're seeing very significant opportunities call. And frankly speaking, an ability to achieve IRRs that we haven't seen in some of the product types, frankly, forever. Call.

Operator

We'll move next to Jeff Benerlein at Bank of America.

Speaker 9

Call. Hey, guys. I guess, it's Jeff

Speaker 1

at Iberge. It's Jeff at

Speaker 9

our line here.

Speaker 10

Yes, no, I appreciate all

Speaker 9

the color on the asset management platform. I'm just kind of curious how we should be thinking about kind of is this like the full investment year and then payoffs start happening in 2024. Is there anything kind of built into guidance as far as like a payoff? And how are we thinking about that J squared run rate for returns?

Speaker 4

Call. Yes. I'll start and as Tim may want to comment, I'm not definitely for clarity not commenting on Tim's guidance. Call. But I think what we're seeing and what we're trying to show is the returns are already coming through.

Speaker 4

I mean, you look at what's going on from an aggressive asset management perspective. You see that in the agency move and what the team has done, which is tremendous amount of blocking and tackling. The additional work that we're doing really relates to scaling those things. And partly why we included that in the deck is, I came in and I had a view of things From my gut, you might say, so to speak, and I probed around and got confirmation. And then we started workflows.

Speaker 4

And now that that's Proving out and that's what we wanted to show because that is critical. We were right. There is tremendous opportunity here. And the more I got into it, the more opportunity I see. When you look at J Squared to this exponential opportunity, it's huge.

Speaker 4

My view is where I'm working right now is across the whole platform, as I mentioned, and Jerry will be able to focus in on individual items call. Execute highest of all levels, which will speed up our process. So bottom line is we're already delivering numbers. It will continue for the many, many years and ultimately relate to significant margin improvement across the board.

Speaker 5

Now just add on cost. If you look at this as an investment, right, on the human capital side and on the technology side. So call. You know that we run our platform very efficiently and we don't take the cost lightly as far as any further investment. Call.

Speaker 5

But we think there's a lot of return here on investment. And so there is a bit of a lag between dollars in and hires in that return. Call. But on a go forward basis, I expect us to be very prudent about it and continue to be show high return before dollars are spent.

Operator

Call. We'll move to our next question from Mike Mueller at JPMorgan.

Speaker 5

Call. Yes. Hi. I'm curious, what's the range of margins that you think the show business could operate at full occupancy and Use your term when it's fully professionalized.

Speaker 3

Mike, I'll just not going to Sit down, try to speculate what might or might not happen, but I will repeat what I said before. If you went back to pre COVID call. Occupancy and pre COVID margin, I will be really disappointed. That's why we end, we'll be disappointed.

Operator

Call. We'll go next to Derek Johnston at Deutsche Bank.

Speaker 4

Call. Hi, guys. Good

Speaker 1

morning. In addition to the REIT community, a lot of generalist investors are closely following well. So I know we touched on it in the opening, but can you expand on this favorable private letter ruling with the IRS? I think around 45,000 independent living units are not really being designated as healthcare facilities and or subject to RIDEA. And so what does that mean, right?

Speaker 1

And importantly, how the decision may drive further earnings growth, call, especially given the beefed up asset management platform. Thanks.

Speaker 4

Yes, I'll Touch on that. So what it means, I think the easiest way to look at it is if you just go back and read history a little bit and look at the multifamily world when Everyone kind of came together in the mid-90s when I started where I was at. And what you saw is this move from Fee managers to owner operators was the fundamental shift and what I think a lot of people missed was, there was a basic economics behind that. Call. In essence, as a fee manager, you get paid a percentage, let's say 5% to collect a dollar and that means you wouldn't spend more than $0.05 to collect a dollar.

Speaker 4

As an owner operator, you were paid $1 to collect $1 so that's it you would spend $0.99 to collect $1 and so that fundamental shift enabled us as owner operators to move much, much faster and changed how we looked at the world, whether it be investing in websites, technology, etcetera, or bringing things in house, marketing in house, etcetera. All these things enabled a tremendous improvement in margins. And that's what it ultimately means is it will allow us to step into that business call. And have tremendous impact on the margins. More than that I would say, I break the business down into 3 components overall.

Speaker 4

There's a real estate or multifamily component. There's what I call the hospitality component, which relates to meals, housekeeping activities, And then there's a care component. And so our various residential businesses have 1 to 3 of those parts. So as we step in and we address the real estate as well as this hospitality component at our independent living, We'll be able to take those best practices and move those into the assisted living, which we're obviously not managing. But if we find Better ways, more effective ways to deliver higher quality meal service, etcetera, that will all be pushed out through our platform.

Speaker 4

Call. No different than what we're doing right now in our case study on revenue management, how we push that out to one of the assisted living property. So the same concept will apply. So this is pretty huge and it will impact our whole overall residential platform.

Speaker 3

I'll just add, Derek, one thing to that. As I mentioned before, we're working towards regional density call. And going deep and not going broad with our existing partners, right? So think about it, I don't know, but just you will see the future is call. With our select operating partners, strategic partners, we're going to have bigger density call.

Speaker 3

Or higher density and a bigger scale in a market. And with our investment, in the technology platform and the operating platform, call. With our operating partners' ability to execute on the ground, I think, again, this is going to be not only call. A great win for our owners, our assets, but also a great win for the select operative partners that we'll call choose to do business with going forward. So it is a very much of a focus on win win, and that's the way business got to be.

Speaker 3

Call.

Operator

We'll take our next question from Michael Carroll at RBC Capital Markets. Call.

Speaker 8

Yes, thanks. How has Welltower's relationship changed with its existing independent living graders since the PLR announcement. I mean, are they more willing to work with Welltower given certain goals or targets? Or has there been any noticeable change since I was announced?

Speaker 3

Call. The forward thinking ones, we're thinking about where the business needs to go call. 10 years from now, 5 years from now, 15 years from now, has come forward and want to participate in building out the platform together. The ones that are holding on to the notion of what the business was in the '90s are clearly realizing their future is not with us.

Operator

Call. Next, we'll go to Ronald Kamdem at Morgan Stanley. Call.

Speaker 11

Hey, you have Adam on for Ron. Good morning, guys. I just wanted to ask about the ProMedica and Integra assets. Call. Wondering kind of with the new operators in place there for some of them, if you could kind of comment on the rent coverage.

Speaker 11

I'm not sure if it was in the supplemental. I know there changes there in terms of the reporting structure. So I'd love to just hear about the rent coverage. I think it would be helpful for investors kind of given the kind of the prior history there.

Speaker 12

Call. Look, I think with the new operators, we've transitioned to at least 16 operators so far. And by the time the dust call settled. It will be north of 20 operators. But all these transitions have happened over the last month, 1.5 months.

Speaker 12

So it's too soon to Have numbers and performance, I mean, I have conversations about their performance, but overall transitions have been smooth. And in the upcoming months, we'll have better data to share on performance trends. But for now, the focus has been on getting the buildings in the right hands. And as you'll see with 16 to 20 operators call. That the focus has been very deep and very sharpshootersque where you want to find for every single asset the right operator.

Speaker 12

So that's been the top priority so far. Call.

Operator

We'll go next to Steve Sakwa with Evercore ISI.

Speaker 13

Yes, thanks. Good morning. Shankh, I was just wondering if you could talk a little bit more about the investment opportunities that you're sort of seeing out there and call. Sort of the distress in the system, you guys were obviously very active last year. I'm just curious what it takes to sort of shake 3 and how the returns might have changed kind of looking forward on the new deals.

Speaker 3

Yes. Steve, I don't think I have much to add. Maybe Nikhil has something to add after I'm done. I'll just tell you that this is sort of the call. Only time I've seen where there's opportunity in all three product types across all three countries, right?

Speaker 3

You usually don't see that and that's driven by Last couple of years have been primarily debt driven, right? So we have seen a lot of opportunities and the IRR. So we have done senior housing 9%, call it circa 9%, some higher, some lower, but call it around 9%. Historically, I've said call. Medical office is an interesting business to buy or interesting space to invest around, call it, 7 plus unlevered IRR.

Speaker 3

Finally, we're seeing opportunities in the 8 plus level. And on the wellness side, where The CapEx have been very, very tight. Our R's have been in the 6s. We're finally seeing they're in the high 7s, call. Right.

Speaker 3

So that's sort of, I would say, where the different investment landscape, where we're seeing opportunities, but depends Some are obviously higher. We're still seeing some double digit opportunities. But I will tell you the other thing is call. Because it's not just debt driven but also equity driven, most of the stuff that we have bought in last couple of years, we're fundamentally focused call. Right location, right product, right basis.

Speaker 3

And we have bought lots of assets with no cash flow, negative cash flow. And finally, we're seeing Because people have to transact, right, what's happening, we are seeing opportunities that with very good basis, with very good locations, Assets are also starting to come with cash flow. That sort of, I will say, is a slight change and nuance of the investment landscape. Call. But I

Speaker 14

don't know, Nikhil, you want to add anything? Yes.

Speaker 4

I think the other thing

Speaker 3

I'll add is we just go through a

Speaker 12

lot of pain and effort to try and beat the highest quality counterparty for someone to deal with. Whether it is the speed of execution, whether

Speaker 4

it is

Speaker 12

across the timeframe of a transaction, sticking with what we started off saying initially the deal was. And in times like these, it just makes us the preferred counterparty. And so there's a lot of recognition for that across the street and It's times like these that we really are able to shine. So we're excited about our pipeline for the year.

Operator

We'll take our next question from Rich Anderson at SMBC.

Speaker 10

Hey, thanks. Good morning, everyone. If I could just sneak a little bit Good morning. On the PLR, very, very interesting indeed. I just had some thoughts around it.

Speaker 10

Does this mean that we should See sort of a pace of investment from you guys to bring managers in house for what you have currently? Call. And how much of the IL portfolio that you have today didn't qualify? And will there be kind of changes there To have them pass the test so that they also can qualify for the PLR ruling. Thanks.

Speaker 3

Call. Yes. So I'll take the second part. Think about we have independent living that are standalone. For example, Holiday Atria portfolio as well as our Canada portfolio, that's roughly, I would say, 2 third to 3 fourth of The independent living that we own that obviously qualifies.

Speaker 3

How this relates to call. When independent living is a part of the continuum, we will figure that out. Most importantly, I want to focus on what I said before call. That you will see with our forward thinking select operators who have density, you will see that we will call. Building out the platform, right?

Speaker 3

John has mentioned very clearly that he is building out the platform with our best operators, right? This is not a question of call. What part we'll do in house versus in what part we'll do with our operator? We have also another 15,000, 20000 units in the Wellness Housing sector there, Which obviously we always could have done in house, right? So this is finding the right balance of regional density call with all the product that's around that region and bringing in house where we have the density versus Or keeping it outside when our partners have density.

Speaker 3

So the game is not to who does call. This is not a fight of just because we do something, we'll do it better. The main goal is with our operating partners, call. Build this operating platform to the highest quality technology and systems and processes and data call to deliver the best outcome for our residents as well as frankly employee experience. Call.

Speaker 3

John, do you want to add anything to that?

Speaker 4

Yes. I mean, that's said perfectly. And I would just add in a sense of the speed. You can only imagine we're moving call. And we have been moving extremely fast to address the opportunities that we see.

Speaker 4

We'll definitely build on success. It's not exactly what Sean is saying. It's not about going out and trying to control everything. It's about creating success that drives value to All the various stakeholders. So that's where our heads are at.

Speaker 4

And in the end, there'll be a little bit of a lag in the sense of where we spend money on G and A versus where we start to offset that because of reduced fees because we're just moving it like the multifamily moving the property management services onto the book. So a little bit of a lag there, but ultimately it will offset and then the improvement will be in margins.

Operator

Call. We'll go next to Juan Sanabria at BMO.

Speaker 6

Hi, good morning. Just wanted to hit on the shop Same store NOI growth guidance. Shankh, I think you were mentioned in your opening remarks about the exit run rate and focusing on that. So maybe Hoping you can provide a little color there. And should we assume that there's any incremental transitions in 2023?

Speaker 6

You mentioned RUI having They're growing going forward through transitions as well. So just curious if you could maybe just comment on those 2 moving pieces. Call.

Speaker 5

Yes. Thanks, Juan. So on the transition piece, I'll start with that. There's not a contemplation of further transitions in our guidance. So, our first quarter has about 85 5% of our open and operating buildings since the twelvethirty one.

Speaker 5

Our first quarter has 85% of that same store and that grows to mid-90s. So on average you kind of have 90% call. Of the open and operating assets in that pool.

Speaker 3

Call. What was the first question?

Speaker 6

The cadence for the exit run rate?

Speaker 3

Yes. So if you think about it, call. We're building occupancy, right? You know that Q1 is sort of the weaker point in the occupancy spectrum. And you build occupancy.

Speaker 3

Occupancy growth Happens through spring summer. So your occupancy build on an average basis, you get closer to sort of Q3, Q4 level where you will get a better revenue, if you will, right, sort of in that annual journey. Now think about expenses, which are also coming down, Right. So you have you probably have a better significantly better exit run rate in Q4 than Q1, right? So following both revenue as well as expenses.

Speaker 3

Think about how other situation that I've described before, I think the last call maybe the one before is how RevPAR builds, right? You move your rents on a bunch of people at the beginning of the year call. And as well as our for our portfolio, just call it half and half. We also have a very large operator who moved in Q4, but just think through how that plays out. And then you chase that in place rent through your market rent, which is also going up for the year.

Speaker 3

So if you think about from an occupancy, from rates, from expensive improvements, which is we are glad that agency cost is down from, call it, 7% to Sub-four. We're very unhappy it's still Sub-four. It should be significantly lower than that. So if you think through all of the main drivers, You're going to get a much higher exit trended in Q4 than Q1.

Operator

We'll move next to John Pawlowski at Green Street.

Speaker 9

Call. Hey, thanks for the time. John Burkhard, could you just give me a sense for how much More pushback your operators are seeing on rent increases today than in recent quarters, but they've had no issue pushing rents. And If there's any segments of the portfolio that are starting to hit a wall on just in terms of absolute rents, any color there would be appreciated.

Speaker 4

Call. Yes. No, glad to. I'm not aware of any pushback. It's not to say, of course, when the rent increase goes out, there's not a discussion.

Speaker 4

But in the sense of defining pushback as a market response to that, no, I'm not aware of that. I think our partners have done a phenomenal job of Communicating the increases and the reasons behind those increases. And I think our residents call. Understand that they don't want to see important services and care cut. They want to have what they paid for, the best of that.

Speaker 4

And call. We're just not aware of any issues there.

Speaker 3

John, as I mentioned, I expect, rent RevPAR increase call. To be better in 'twenty three than 'twenty two. So that sort of gives you a we'll see what the market gives us. But as we sit here today, We think the pricing environment is getting better. Call.

Operator

We'll move next to Victor Melholtzer with Mizuho. Call.

Speaker 15

Thanks for taking the question. Just maybe building upon the pricing power, maybe Shankh or John, if you can just You can elaborate, you talked about the exit run rate earnings run rate sort of as a guide to the earnings power. Can you talk about Both on pricing and say CapEx, as you see inflation come in, your costs come in, your maybe ability to push call. Higher rates you said near term is not hampered, but as you see inflation come in, but occupancy is still low. Can you just Give us some context on how you see pricing power evolving until occupancy recovers?

Speaker 15

And then similarly CapEx wise, After 2, 3 years of COVID, what do you need to invest from a run rate standpoint, maybe percent of NOI? Is there a uptick needed over the next few years on CapEx? Thanks.

Speaker 3

Let me try that. So first on the CapEx, I do not believe other than inflationary changes anything changed from a CapEx standpoint, right? So just understand that we bought call. Predominantly, in last 2, 3 years, new assets. We bought 1 or 2 portfolio as a value add portfolio.

Speaker 3

And when we bought it, for For example, the Holiday Atria portfolio, we told you exactly what we underwrote to spend on CapEx, right? We bought it in an extremely cheap basis, and we told you exactly what the CapEx needs are and how we plan to invest. So from that perspective, as you think about going forward, I do not believe Outside those couple of value add investments that we have done and we told you otherwise when we have done it, call. We do not believe that business's CapEx needs outside the sort of inflationary increases that are happening, Anything has changed. Now I think John has a very large plan, a very big plan to reammunitize the portfolio and sort of fundamentally changing what the value proposition might look like.

Speaker 3

We will do that We think that we get a fantastic return on that incremental investment. But from a regular CapEx perspective, I don't think anything has changed. Call. From a pricing power standpoint, I don't think what else I can add other than to what I said to John's question and the earlier question, Which is we are feeling very good about the pricing power across all our countries and across all our product types. Call.

Speaker 3

As you know that Canada has been a laggard, feels like Canada is starting to catch up. UK and U. S. Has been strong and continue to be strong.

Speaker 14

Call. So we're feeling pretty good. John, you want to add anything to that? Yes.

Speaker 4

I mean, again, I would just say on the value add side, This is purely opportunistic. I mean, I just look at the world and see our portfolio is positioned so well to come with another layer of value add opportunities because of the age of the portfolio, which are Really the highest returns because the infrastructure is all in great shape. And so you're talking about what some people would call fluff and buff, but re amenitized, Enhancing the units a little bit and really improving that value proposition and getting paid very well for it. Very much similar What many of the multi have done. So but that's all enhanced returns.

Speaker 3

Vikram, I missed one part of your question. I'll just tell you that from a pricing power standpoint, this is something I mentioned in the last call, That we are despite our average occupancy of the portfolio, call it circa 80%, the significant part of the portfolio, call it, give or take, half of the portfolio, 45% of the portfolio is in that high 80s, mid to high 80 2% occupancy there, the pricing power changes to raising price because I have no rooms to sell, right? So there is a dynamic that's going on and we will increasingly we'll get to the point as we move average occupancy for the portfolio, call. More and more properties within the bucket, but you will get to that pricing power front because frankly you have no rooms to sell. So that transition is happening and will continue to happen in 2023.

Speaker 6

Call.

Operator

We'll take a follow-up from Michael Griffin at Citi.

Speaker 6

Hey, thanks. I just wanted a

Speaker 8

clarifying question. I don't recall if I heard this earlier, but just on the assets that are continued to be operated by ProMedica, the assisted living and the memory care, what is the coverage on those? Do you happen to have that info handy?

Speaker 5

Call. Yes, those are covered one times in EBITDA basis.

Operator

And we'll go next to Derek Johnston at Deutsche Bank.

Speaker 4

Call. We won't make a habit

Speaker 1

of it. But on staffing levels, At 80% occupancy in senior housing, I believe that's near fully staffed and please correct me if I'm wrong. But the question is, What are you modeling or including in guidance for 2023 relative to agency labor as a percentage of labor expenses? Call. And do you view this as possible low hanging fruit to get back to pre pandemic levels of agency, Yes, especially as John and the team increase property level accountability.

Speaker 3

Yes, let me try to Take part of that and Tim will take part of that, portion. So we do not view this as a low hanging fruit, but we do view this as a fruit that can be plucked, call. Right. So there's a lot of effort that's going on. Tim will tell you what's modeled.

Speaker 3

Frankly, I don't know. But I will tell you call. That this is agency labor is a function of frankly weak management. That's just what it is, weak leadership. Call.

Speaker 3

And we're working with our best in class operators to get the right people in the right place so that we should over a period of time See that improvement. As I've said, coming below 4% is an achievement when you start from 9%. Call. But by no means I want you to think that I'm actually happy with that number. That number needs to be substantially lower.

Speaker 3

And we need to call. Really get full time employees in the communities. This is not just a question of cost, but also as John alluded to, It's also a question of culture and the customer experience.

Speaker 5

Anna, from a modeling perspective, we're essentially call. The high 3s as a percentage of compensation, so pretty flat from where we came out of 2022. Call.

Operator

We'll move next to John Pawlowski at Green Street.

Speaker 4

Thanks. I just have

Speaker 5

one follow-up on the private letter ruling.

Speaker 9

I guess, what else needs to happen internally in terms of people, systems, technology before you're actually able to self operate a substantial amount of IL units. I'm just curious How quickly we could actually see Welltower operate these assets?

Speaker 4

Yes. So I'll comment on What would need to happen, but not necessarily the speed at which but if you look at it, I mean, one way To look at it is really just to simplify the world a lot and to say, what would happen when a company Yes, from my past experience, when the 2 companies burst, you look and say, okay, if I step into their systems and start to fly the plane with what they have, That could happen pretty fast, right? That's not that complex. And so call. The timing of it could be can be faster if we want it to be faster by stepping in that way.

Speaker 4

Obviously, what going back to what we're building is that I've mentioned previously, We're using largely existing modules. There's some creative stuff going on right now, with the team. But generally, it's existing modules That are out there. And so that doesn't take that long either. So the speed can go fairly fast.

Speaker 4

Call. The bigger issue is we're focused on success and we're focused on working with people to deliver the success. It's not about us call. It's about us delivering success for all the stakeholders. So that's where my mind is at, but

Speaker 6

call. The

Speaker 4

speed could

Operator

go pretty fast. And then

Speaker 3

It surprised me to see that we start to self manage some assets, our MREL assets in calendar year 2023.

Operator

Call. And that does conclude today's question and answer session. I'll turn the conference back over to management for any closing remarks. Call. And that does conclude today's conference call.

Operator

You may now disconnect.

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