Q1 2021 Welltower Inc Earnings Call
Statements and the meaning of the private Securities Litigation Reform Act, although <unk> believes any forward looking statements are based on reasonable assumptions. The company can give no assurances that its projected results will be attained.
Factors that could cause actual results to differ materially from those and 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.
Thank you, Matt and good morning, everyone I hope that all of you and your families are safe and healthy during these extraordinary times.
Make some introductory comments from the state of senior housing business are.
Ongoing alignment efforts with our operating partners and we will also provide the detailed perspective on our client thoughts relative to capital allocation.
Tim will then get into detailed operating and financial results.
We are cautiously optimistic on the senior housing business with Green shoots emerging and U S and U K, while it is too early to raise and all key a flag at the end of their COVID-19 resurgence can never be wound up we are delighted to report and occupancy increase of 120 bps and U K and 90 bps in U S over past six weeks.
Despite growing optimism and U S and UK performance and Canada has remained somewhat weak due to an increased COVID-19 cases across many regions. While most residents within our Canadian senior housing properties have been vaccinated the rollout to the broader population has lagged meaningfully due to lockdown and southern area.
And within Ontario, and Quebec move in stores and visitation have.
I've been highly restricted which has ultimately led to an occupancy loss of 50 basis points. Since mid March this trend has improved.
And April despite the drag from Canada, the moving activity and March is higher than the last non COVID-19 impacted month of February of 2020.
In addition, as I have described and in past quarters rates continue to hold as adjusted for 2020 leap year and rates and up one 6% IL weighted up 7%, mostly dragged down by the Canadian business senior apartments, and wellness housing rates were up six 3%.
And our operators across the board I think broad momentum that continued to build irrespective of product type and geography acuity. This is the most optimistic tone and I have heard from our operating partners and a long time, we're even seeing the lifestyle driven customers are starting to come back, which frankly surprise me and a positive way.
Fundamental results have exceeded our expectations in Q1, and we're anticipating strong momentum in Q2.
And while we continue to avoid speculation and one on.
On what the arc of the recovery May look like we have provided additional disclosure on the addition, NOI and earnings power of our portfolio and assuming a return to 2019 level of NOI for our stable portfolio and adding incremental NOI from our filler portfolio.
We believe this would result in additional $480 million of NOI and remember this assumes a return to 2019 level of occupancy and margin.
And it does not assume and returned to frictional vacancy or any rate growth. Since Q4 of 2019 were seeing something similar happening and the private market, while client cash flow multiples of what were buying might be high as compared to what we are willing to pay two to three years ago. This is a moot point we're paying.
And much lower multiple and a stabilized cash flow as evidenced by a much lower price per unit, while and most other classes asset classes. This could be a matter of opinion I believe and real estate is a simple business, where you can obtain a very granular view of price per unit and how that compares to replacement cost while we can see 10 debate.
And how different assets and portfolios prices compared to prices by unit two to three years ago replacement cost of shooting upwards.
With a white hot housing market driving construction cost exponentially higher than recent quarters.
This phenomena is now selling into other material cost due to a $2 trillion infrastructure plan announced by the bright and administration as costs continue to rise the market clearing rent to achieve minimum extra acceptable return is also ratcheting up. However, those returns are not going to be easy to achieve today.
And as much.
As much of the senior housing industry, effectively remains and lease up more given the impact of COVID-19 and occupancy.
And if this was not announced now the interest rate curve is backing up creating further pressure on developers pro forma.
And backdrop clearly is unique to the current cycle, which will believe will result, meaningfully lowered new start and near to medium term the supply outlook, along with already rising demographic growth in the first half of the decade gives us confidence that we'll achieve the level of asset performance that we provided.
No I have nothing to add in terms of the timing and other trajectory of the recovery. Our analysis was done one asset at a time and I Hope you will find this new disclosure useful.
During the first quarter, we continued our effort to create greater alignment of interest with our operating partners by restructuring several relationship construct.
And as we mentioned on our last call. We have made structural changes to several senior housing agreement I would also like to highlight some recently announced strategic transactions with Genesis and for America with elements of both deals reflects our approach to value creation for our shareholders first Genesis as.
As we announced announced last month. After 10 years, we have substantially exited our Genesis real estate relationship through a series of transactions, which meaningfully derisk, our cash flow stream going forward and <unk>.
Waiting this nearly $900 million per transaction wasn't easy it is.
<unk>, a skilled nursing operator deeply impacted by COVID-19, pandemic that transition of access to local and regional operators and walking through our outstanding loan to Genesis at the same time, creating opportunity for <unk> to participate in the post COVID-19 recovery and post acute fundamentals.
Ultimately, we executed a mutually beneficial transaction for Genesis and what our shareholders for.
For identity the transaction resulted in a meaningful deal.
Net deleveraging of its balance sheet, which help will help you to reposition the company post COVID-19, and for <unk>, we're able to execute the transaction and a <unk> value of $144000 and generated an eight 5% unlevered return over the full term of Genesis relationship.
And upon the repayment of the outstanding debt that return will rise to two 9%.
And with even further upside potential from participating preferred and equity position.
We believe that this represents a very favorable outcome for the shareholders with our shareholders, particularly in light of challenging environment that we have faced in the post acute sector and then COVID-19.
Related pandemic induced.
Downsides, we have seen wild transactions will result in some near term earnings dilution for <unk>, we expect to create significant value for our shareholders. Following the deployment of the $745 million of anticipated proceeds over a range of high quality opportunity that I'll discuss shortly.
Since our announcement last month Genesis has received an infusion of equity capital and named Daytona and specialist and Harry Wilson CEO.
And we wish the team of Genesis much success and the future as we have substantially exited a challenging legacy structure identities I hope our shareholders. Appreciate the favorable ultimate outcome as we have done with several operating relationship over the last few years and discussed on various call our team embraced complex.
<unk> six creative solutions doesn't run away from their problems and situations, where the choices, maybe and perfect and ultimate ultimately wife's tirelessly to fulfill our commitment to our owners operating partners and employees.
And for America, we announced two transactions strengthen and expand for our relationship with for America, which will enhance the quality of our joint venture position and continued growth. The first transaction and while 265 million sales of 25 skilled nursing assets with an average of 41 years.
Which will result in an immediate improvement to the quality of the portfolio.
And the same time, we also crystallized at 22% Unlevered IRR over two and a half years for ownership of the asset which is a true reflection of the power of our book value oriented investment philosophy.
Well, our firmly believe that basis, not yield or cap rate determines investment success.
Through a separate transaction, we are pleased to maintain and 80% stake in a state of the art Fireback asset, which has been contributed to our 80 20 joint venture with for America for America has already assumed the operations of these assets, which have been rebranded as for America senior care.
First we'll transaction is yet another example of our focus on improving quality and growth profile of our portfolio, while doing so at favorable economics Thomas to all stakeholders.
For America team is making progress and developing new relationships with other health system as a provider of choice as for medical represents the premium not for profit provider and the leading edge of health care evolution, we're hopeful that we'll be able to deploy fiber accretive capital with this innovative partner of ours.
Speaking of our accretive capital deployment, we are pleased to share with you that and we are closed in excess of $1 $3 billion for acquisitions year to date with <unk> and with very attractive Unlevered IRR and particular extremely happy to announce that we have partnered with a soften that led investment group to recap.
Capitalized HC, one of the largest and most reputable operator of care homes communities and U K, our investment in excess of $800 million.
Pumps, and former first market that one <unk> real estate and equity and recapitalization. We also received significant ones that will further for us to participate in the post COVID-19 upside that we are confident that management and process of executing.
<unk> will add a value option to our high and protest UK platform. This is significantly a significant opportunity to upgrade the asset based operating platform and people in this portfolio and we have tremendous confidence and James and David to fulfill fulfill their mission to deliver the highest.
And the care along with the resident and employee satisfaction.
In recent weeks <unk> has experienced the same positive occupancy momentum as our broader UK portfolio, gaining 90 bps of occupancy from the March 2021 trough. Our data investment represents the last bond exposure of just for Teekay per unit.
And important status for given our unrelenting focus on basis.
<unk> also represents a significant discount to replacement cost in addition to the upside from equity and why we think this is an extraordinarily risk adjusted return story, we believe we'll be able to generate low to mid teens unlevered IRR from this transaction, while adding a highly strategic partner to fill it.
GAAP net we have and our portfolio new day.
With acquisitions and patience is a virtue and solar is our cash on boardman.
And so you mentioned in our October call. The moment of bolt and says here, we have closed in excess of $1 $8 billion per acquisition. The initial yield of this whole tranche is six 8% why do we expect it will stabilize at a significantly higher number.
While the environment, while the environment was very uncertain, and then and we didn't get into institutional and priority about headline pressures and we relied on independent thinking and resilience of our team. We remain very bullish on acquisition opportunities and have several attractive deals under contract currently and a highly visible pipeline.
Which we think will be able to execute through year end.
While our focus continues to be on the right asset with the right basis and with the right operator and <unk>.
And that our 2021 <unk> acquisition will be immediately accretive to 2022 earnings and we will be significantly accretive to 2023 and beyond.
Lastly.
I will address a very interesting question I received from an Investor post our last call I was asked why we have such an emphasis on partner selection and whether it would be better off vertically integrating.
We think this is an excellent portion that deserve some reflecting for a moment notwithstanding with the RIDEA law and senior housing. We believe we're better off in this ecosystem of partners and implementing and industrial view of vertical integration that view is rooted in our belief that the combination of centralized cash.
Allocation and decentralized execution creates the best long term return, we believe this strategy of decentralized execution related and the entrepreneur and energy and keeps politics and cost per day. This is especially important and real estate, which is profoundly and local business.
However, overall, we're happy with our execution, so far and the year to create parts share value for our shareholders, but by no means we're satisfied.
And we're cautiously optimistic about the fundamental environment.
And excited about our opportunity set of opportunities total assets create new relationships and attract quality talent with that I'll pass it over to Tim Tim.
Thank you John.
And my comments today will focus on our first quarter 2021 results and <unk>.
Performance of our investment segments, and the quarter, our capital activity and finally and balance sheet liquidity update and addition to outlook for the second quarter.
After a year defined by infection protocols, moving restrictions and incredible operating challenges for our partners. We started 2021 and arguably the most challenging environment yet with cash.
Cash counts hitting new highs across all three of our geographies and operating restrictions moving up and lockstep.
Towards the end of February the vaccine rollout to hit its stride and nearly 80% of our facilities had their second vaccine clinic cash counts across the portfolio dropped precipitously and we're starting to see the early signs of stabilization.
The effectiveness and rapid deployment of vaccines within our communities are just starting we felt across our resident population.
And while we are encouraged by the last six weeks of recovery from the U S and UK significant uncertainty remains with respect to the prevalence of the virus amongst the general population and the timing of the reopening the economy and the timing of further rollbacks of operating restrictions, especially with respect to our Canadian portfolio.
The results for the near term operating environment that although notably improve remains highly unpredictable and the short term.
As a result of this uncertainty like last quarter and provided a one quarter outlook with our results last night and.
As we've done over the past 14, plus months, we will continue to disclose and other information on a frequent basis with the intention and provide a more complete outlook as soon as the virus related variables moderate to a level that allows for more reliable forecasting.
Now turning to the quarter.
<unk> reported net income attributable to common stockholders of <unk> 17 per diluted share and normalized funds from operations of <unk> 80 per diluted share versus guidance.
71% to 76 per share.
Regarding guidance last quarter, we also provided expectations for $31 million of HHS for laterally funds to be received in the quarter.
We ended up recognizing approximately $34 7 million weighted jet funds, along with $2 $5 million of out of period payments for similar programs in Canada.
And we're moving the impact of these funds along with the $3 $5 million termination fee that was received and one of our senior housing management company investments, which was not contemplated guidance for.
Normalized <unk> was <unk> 70 per share.
And therefore on an apples to apples basis, we came out of a penny above the top and the rates such as adjusted prior guidance of 64 to 69 per share.
Now turning to our individual portfolio components first our triple net lease portfolios Azure.
As a reminder, our triple net lease portfolio coverage and occupancy stats reported a quarter and arrears. So these statistics reflect the trailing 12 months and a 12 31 2020 and importantly, our collection rate.
And for rent remain high and the first quarter, having collected 96% of triple net contractual rent during the period.
Starting with our senior housing Triple net portfolio same store declined 2% year over year as leases that were moving cash recognition and prior quarters continue to comp against prior year full contractual rent received.
EBITDA coverage to create points here, one times and a sequential basis and the portfolio to 100.
During the quarter, we transition the remaining five capital senior assets, moving one day or triple net structure under new operator, and the other for tornado structure with CSU and tell transition.
We also completed the transition of for properties leased by Heart management to story points under New lease agreement. These transitions had a net positive impact of pointed out a few times and total portfolio coverage.
Net long term post acute portfolio generated positive 2% year over year same store growth and EBITDAR coverage increased $3 seven times sequentially to 137 times at 51% to 79 Genesis assets began operator transitions.
Three assets have already transitioned as of this call, including nine former power back properties, which moved a program for medical senior care.
Pro forma for the already completed for medical JV Genesis healthcare represents less than 90 basis points from our total in place NOI and <unk>.
Long term post acute will be reduced to 6% of total NOI.
And lastly, health systems, which is comprised of our pro medical senior care and joint venture with the pro Medical Health system.
We had same store NOI growth of positive two 8% year over year and trailing 12 EBITDA coverage was one nine times.
Before turning to outpatient medical and want to highlight and disclosure change remainder of presentation of occupancy and our supplemental disclosure historically, we've reported occupancy to 100% ownership, but going forward, we will present, both bulk and <unk> pro rata share to better reflect well powered ownership economics.
And there's no impact and NOI, which has always been presented and Walthour share.
We are footnote and the occupancy levels and presented 100% ownership and both the senior housing operating and medical office portion of our supplement.
Now turning to our outpatient medical portfolio, which delivered positive three 1% year over year same store growth as cash rent growth and higher platform profitability combine to produce and acceleration and NOI growth.
Tenant retention continued to be strong and 87.
7% for the quarter as we executed renewals and more than 540000 square feet of space and the quarter, our highest amount ever reported.
Additionally, <unk> also seen the length of term and execute renewals increase as compared to last year.
Also in the quarter, we completed our second joint venture with Invesco real estate for a portfolio of outpatient medical assets and completed our first with whopper.
Our ability to for joint ventures, and best in class capital partners over the last two years and allowed us to maintain scale and more importantly, the tenant relationships generated from announced asset management platform.
And at the same time and diversified our access to capital during a period of significant capital market turbulence.
Look forward to growing these relationships further going forward.
Now turning to our senior housing operating portfolio.
Before getting and this quarter's results I want to point out that we received approximately $35 million from our department of health and Human services Cares Act provider relief fund.
As we've done in the past quarters. The funds are recognized on a cash basis and as such will flow through financials for the quarter. They received for <unk>.
Normalizing these HHS bonds on our same store metrics, however, along with any other government bonds received they're not matched to expenses occurred in a period their seat and the <unk>.
First quarter, there were approximately $33 8 million and reimbursement normalized out of our same store senior housing operating results, mainly tied for the HHS program and the U S.
Now turning to results for the quarter same store NOI decreased 44% as compared to the first quarter of 2020 and decreased 15, 6% sequentially from the fourth quarter.
Sequential same store revenue was down three 6% and Q1, driven primarily by a 310 basis point drop in average occupancy versus our guidance midpoint of 325 basis points.
Turning to Rab for in the quarter show portfolio Revpar was down one 5% year over year, but mix shift and an extra day of rent and comparable leap year quarter are distorting the true picture and rent growth metrics and over 40% of our revenue is derived and the per diem basis.
When adjusting for the leap year total portfolio Revpar growth moved to negative 1% and breakout of individual segments are active adult independent living assisted living segments reported year over year growth of positive six 3% positive <unk>, 7% and positive one 6% respectively.
As I mentioned in the past few quarters. The combined total portfolio metric is being impacted by considerable change the composition of occupied units and year over year portfolio.
Our lower acuity properties comprised of independent living and senior Department held up considerably better and the occupancy front and start of COVID-19.
The mathematical impact of having a higher portion of our total portfolio occupied units being lower acuity and therefore lower rent paying units.
So in conclusion rental rates are proving resilient and more resilient across our portfolio and what appear and our aggregated reported statistics.
Lastly expenses total same store expenses declined two 6% year over year and decreased 20 basis points sequentially.
And I will focus on sequential since the changes and more relevant to trends and the current operating environment for.
20 basis points sequential decline and operating cost agenda, and mainly by lower COVID-19 costs as case counts dropped dramatically in March.
The meaningful decline and our topline combined with these expense pressures had a significant impact to our operating margins, which declined 280 basis points sequentially and 19, 4%.
As I noted earlier and the call for <unk> government reimbursement and that type of period expenses and.
And therefore, COVID-19 expenses negatively impacted same store by $14 8 million.
Not factoring any HHS funds into our second quarter outlook.
Looking forward for the second quarter and starting with the April quarter to date data. We've already observed we've experienced a 20 basis point increase and occupancy through April 2000, and <unk> with a U S UK up 48% and 90 basis points respectively.
Canada is down 20 basis points.
While we are encouraged by the recovery and the U S and UK and are hopeful that the effectiveness of the vaccines and put a Florida operating results.
And we remain cautious in projecting the acceleration and recent trends given the lack of historical precedents and uncertainty of reopening trends, particularly in Canada.
And a spot basis, we're currently projecting a 130 basis point increase and occupancy from March 31, <unk> through June 30.
We expect monthly revpar to be plus one 2% sequentially, although adjusted for the extra day, and <unk> versus <unk> and reduced the plus 70 basis points sequentially.
Lastly, we expect total expenses to be effectively flat as increases and operating costs and higher occupancy should be offset by reduction and COVID-19 related expenses.
Turning to capital market activity, we continue to execute and our strategy of maximizing balance sheets ability for maintaining flexibility to position us to take advantage of attractive capital deployment opportunities and.
In March we issued $750 million senior unsecured notes due June 2031 bearing an interest rate of two 8% and use these proceeds to redeem all remaining senior unsecured notes due 2023.
As a result, we were able to extend all senior unsecured debt maturities to 2024 and beyond and extend our weighted average maturity profile for nearly eight years.
We also extinguished 42 million secured debt and a blended average interest rate of seven 8% per quarter.
And February the island and robust our robust pipeline of capital deployment opportunities as these transactions materialize and the pipeline has grown and utilize our foreign ATM program selling three 7 million shares of common stock to date and.
And initial average weighted price of $73 43 per share.
These shares will generate future gross proceeds of approximately $272 million and along with $1 billion cash in our balance sheet will enable us to efficiently capitalize our highly visible pipeline of capital deployment opportunities.
Moving on to leverage we ended the quarter and $6 five nine times net debt to adjusted EBITDA of 31 basis point increase over the previous quarter and underlying cash flows continue to be pressured by the impact from COVID-19.
And while transactions close and the second quarter for <unk> will result, and a slight increase and leverage after adjusting for expected proceeds from assets held for sale and 272 million and proceeds from the forward sales of common stock.
Spec leverage to settle and high <unk> for the ramp and senior housing cash flows begin and naturally drive leverage lower and the coming quarters.
Speaking of recovery, Sean spoke earlier about the magnitude and potential cash flow growth from just returning to pre COVID-19 levels of margins and occupancy and our senior housing operating portfolio.
This will have a significantly positive impact and cash flow based leverage metrics and although the duration of this recovery remains highly uncertain.
Inflection point and this quarterly just optimistic and it has begun.
And our demonstrated ability to access significant equity proceeds through asset sales given the most difficult times along with a return on the equity markets. This last quarter gives us confidence that we will be able to keep the balance sheet and a position of strength as a natural deleveraging from senior housing recovery and returns us to well within our historical target levels.
And the not too distant future.
Lastly, moving to our second quarter outlook.
And last night, we provide an outlook for the second quarter of net income attributed to common stockholders per diluted share.
After 31 to 36.
And normalized <unk> per diluted share of <unk> 72 to 77 per share.
And I noted earlier this guidance does not take into consideration any further HHS funds are similar government programs and the UK and Canada.
So and comparing it sequentially to our first quarter normalized <unk> per share. It is better to use a <unk> 70 per share number I mentioned earlier and my comments, which excludes the benefits of these programs as well.
And then comparison the midpoint of our second quarter guidance of $74.05 per share represents a four 5% sequential increase from <unk>.
The $4 five increase was composed of a <unk> <unk> increase per share increase from our senior housing operating portfolio, driven by an increase and sequential average occupancy and expected reduction and COVID-19 costs.
For $2 five per share increase from net investment activity and strong post quarter investment is offsetting the initial dilution from loan reductions and operator transitions related to Genesis.
And once an increase and NOI from Triple net and outpatient medical segments.
And it is offset by an expected <unk> increase and sequential G&A driven mainly by new hires.
And with that I will turn the call back over to Sean.
Thank you Jim despite the challenges caused by the pen posed by the pandemic on our business. We have remained resolute in our commitment to ESG initiatives and in fact, our efforts on this front and have only grown over the past year and we're pleased to report significant progress not just in terms of numerous awards and accolades.
We have received but also by our action to strengthen and expand our ESG platform, which we believe will bear fruit and many of us to come and we have recently received the energy star partner of the year Award for the third consecutive year and elevated to the level of sustained excellence the EPS.
As highest recognition within the energy Star program. We have also been honored that our social initiatives.
We are recognized with a quality score of one by ISS the highest ranking in the social category and last but not least we continue to receive and a rating from MSCI one of the most widely well respected global organization for our broader ESG practices and disclosure on the <unk>.
Streamlet proud to be working with our board of directors one of the most diverse and corporate America in this commitment to create long term and sustainable shareholder value by share throughout <unk>.
Initiatives with that operator, we can open it up for questions.
Thank you.
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Our first question comes from the line of Rich Anderson with <unk>.
Hey, Thanks, and good morning, I got up at six and good morning to be first in line.
Good morning, guys.
And disclosure on the recoveries is great and I appreciate that you can't comment or know what the trajectory is going to be but it is question number one and every one of my conversations because right now we have to.
Deal with and elevated multiples because of trough earnings and so people want to know what the snapback is going to look like.
My estimates are down 30% versus pre COVID-19 because of all of this noise and so and I guess for the way I would ask the question is if you can't give trajectory what would disappoint you in terms of.
Getting back to square, one and would you say boy, if we're not there and two years that would be quite a disappointment.
Can you kind of triangulate and at least a range of expectations as opposed to committing to one.
Yes.
Thank you very much rich hope you don't have to wake up and <unk> to be consumed.
But.
And I'll just I'll just address the question is any definitive answer from our end is as much of a guest from us and it is from you. So just understand there is no historical precedent.
What's going on we're simply telling you if we go back acid bias as to where the NOI of this assets, whether it's an important and exercise because we have sold a lot of assets bought a lot of assets to and very hard for you to figure it out from our supplement what the number looks like so we tried to answer that question and if we just went back for the stabilized pool of assets.
For Q4 of 19, one will the NOI looks like and we add a filler portfolio and stabilize that and what does that combine looks like now I cannot answer the question whether it is two years of for years.
You've got to really put that into context, and your expectation, However, and I will say this and it's and paying important point it.
It is too in Q4 of 2019 rent level PK that if you assume that this will be expanded our legislature will take four years from today to get to that stabilized level of NOI, so what's going to stabilize in 2026.
You have to assume the rent.
The business remained flat to achieve that NOI right, which we don't think obviously is happening. We have continued to say that we expect that rent growth will hold up right. So you might get it later, but you will get X number of years of rent growth to get added to that obviously that rent growth and the contribution margin and thats very.
Hi, and it falls from the bottom line on the other hand, if you'd say, okay. We're going to give that RDR you are not going to get as much rent growth you will only get just say that you decided that you could use if youre going to get there in two years right I'm, making this up and two years for us. So you will only get the rent growth from 19% to 23 instead.