Q3 2021 Welltower Inc Earnings Call
Ladies and gentlemen, thank you for standby and welcome to the Q3 2021, well Tower, Inc. Earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask your question during the session you will need to press star one on your telephone.
You require any further assistance please press star zero.
I'd now like to hand, the conference over to Matt Mcqueen General Counsel. Please go ahead.
Thank you and good morning, as a reminder, certain statements made during this call maybe deemed forward looking statements in 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 in the forward looking.
<unk> are detailed in the Companys 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.
Walk you through our high level business trends and capital allocation priorities, John Burkart COO.
Al will walk you through the details operating environment and show and it will be Tim will walk you through the Triple net businesses earnings guidance and capitalization. This is John's first call as he beginning to dig into the business. So please go easy on him.
Despite mediocre bottomline results, we cannot be happier with the overall results of the quarter just six months ago. Many industry participants and observers were cautioning if the Covid pandemic would result in apartment impairment of demand for senior housing and even most people who believe that the demand would come back.
We're worried that with every surge of the virus the business would take a significant step back.
As it has been our experience that these soldiers drive revenue down cost up resulting in a significant hit to the bottom line for the first time since the beginning of pandemic, we bucked this trend and despite witnessing a significant surge of the Delta variant. After we spoke three months ago.
We still posted the strongest sequential revenue growth in the company's history occupancy went up 210 basis points in the quarter relative to our guidance of 190 basis points pre delta and rate growth accelerated resulting in a three 5% sequential increase in topline.
Across our same store shop portfolio.
Importantly year over year revenue growth inflected positively in the U S and UK portfolio for the first time since the beginning of a pandemic.
This trend accelerated into September when we observed a year over year revenue increase for the intellectual portfolio led by U S and UK, which reported a year over year revenue growth of 2%.
This is particularly impressive in context of our massive delta third let's reflect on why that might be the case with nearly all residents vaccinated and stop vaccination rates approaching 90%, which is substantially higher than general population prospective residents and their families recognized that our <unk>.
These are much safer environment than alternative settings, you can see that in our data in the U S. Despite a 10 fold increase in the daily case counts across the U S. In July and August the number of cases within our shop portfolio was just 10% of peak levels observed during.
Brightcove is charges a similar trend was experienced across our Canadian and UK portfolio over the same time. This helped us build significant top line momentum in our business as we received the dual benefit of occupancy and rate growth, which we believe will continue into next year.
In fact, I believe this trend will meaningfully accelerate into next year as we feel significant momentum in the rate environment. Despite this great top line performance our bottom line performance was mediocre and impacted by a perfect storm at cross excellent stack.
We had a confluence of extraordinary cost, including agency labor as Colgate charged heightened R&M insurance costs utility costs and other 100 cost all hitting at the same time.
There was also an extra day in the quarter, which resulted in a mismatch on revenue and expenses as the majority of our operators charged rent on a monthly basis.
Additionally, we saw a meaningful rise in paid time off as many employees took advantage of the easing travel restriction during the summer.
The rise of Covid also resulted Eddie shall call off from our team members at the last minute, which drove a significant spike in the use of agency labor, which cost two to three X.
This situation was further complicated by the vaccination mandate was the system is currently working through that.
The only good news on the expense overall is that we began to see this situation normalized in October.
While it is too early to comment on exactly how long it will take for the situation to fully normalize we need to unpack what logically will stay with us in the medium to long term and what will dissipate in our opinion based wage increases are sticky and they will likely to be here as unit cost of labor.
We firmly believe well towers operating partners will be able to overcome this hurdle through rent increases as they offer a premium product within a premium micro market.
Currently of one on one care just got significantly more expensive.
We are beginning to see the green shoots in March as operating partners have been have seen expansion of labor pool with supplemental unemployment benefits rolling off and children, having gone back to school.
John will provide more details on this topic, but we believe that usage of agency labor will dissipate going forward.
Our guidance for Q4 will suggest that we do not expect this situation to completely reverse.
Mainly because of three factors.
One we have a mismatch of revenue growth and expense growth as a significant portion of our annual increases happen on Jan one.
Two after you hire people. It takes an extended period of time to go through pre employment and training process before new employees can hit the floor and three Delta wave, which peaked in late September is still with us even in November.
However, none of this has changed my view that wealth, our stabilized shop margin post COVID-19 will be higher than that of pre COVID-19 margins, even on a near term basis I do not believe the earnings power of this portfolio 2022 exit run rate. Our 2023 run rate has changed I want to repeat.
That one more time, even on near term basis I don't believe the earnings power of this portfolio is 2022 exit run rate at 2023 run. It has changed the best operators will rise from this difficult time stronger with significant higher market share while many others will find this business.
It's too hard to figure out.
We're engaged in frankly starkly different conversation with the management team of operators in this industry more broadly while everyone fatigued from the events of the past 18 months. Many of our partners are working with John to rethink how technology operational excellence revenue optimization.
And data analytics can fundamentally change this business think of some very basic question unit labor is going up but how many units do we need.
This needs to go up but how do you differentiate priced on a unit with a view of central park versus a brick wall. Many operators within the industry I would hoping things will get better on their own. Unfortunately hope is not a great strategy.
Our intense operational focus translate directly into our capital allocation strategy, Let me restate what that is we wanted to own the right assets in the right micro market with the right operator focused on right acuity and price points, and we want to own that asset at the right basis.
Either we will buy at a discount to replacement cost or will built at it extremely targeted way at replacement cost.
While bidding tents are pretty thin, primarily with few first time or relatively new capital. We remain extraordinarily active in off market privately negotiated transactions, where we bring unmatched.
Unmatched starting to close with operator and cash capital as most of these situations at debt maturity driven nothing is more important to the seller then the certainty of close with our farm handshake and as you know our reputation is we don't negotiate and we don't re trade. After we have a farm handshake.
This approach has resulted.
In one of the most active quarter in the history of our company, we closed $2 billion to investments at a significant discount to replacement cost with expected IRR in the high single digit to low double digits. We continued our momentum subsequent to the end of third quarter with another $1 3 billion.
Transaction that we have signed the purchase and sale agreement and that we have described in our press release, while they are all very important transaction, let me highlight three different flavors of the deal.
We're excited about a $580 million transaction to buy eight rental fixed entrance fee <unk>.
Communities and great micro markets, we would recall that we bought a handful of Sandra <unk> from <unk>. In 2018. This transaction is very similar in asset quality and location standpoint, but at a materially better priced and the previous owner had spent significant amount of capital over 50 million.
The last five years.
We should be able to achieve a high single digit unlevered IRR as our operating partner watermark leases of the communities. However, we think we can push this returning to double digit unlevered IRR category as we execute a higher and better use strategy similar to what we have where we are embarking on our 85 <unk>.
Portfolio 85 property Atria portfolio. For example, there is an extraordinary piece of land in a highly desirable residential Carter, our Bellevue, Washington that is entitled for a high density residential as of right. We can build a great vertical campus as premier all well as living there or sell it to a module.
Thirdly developer for many of these communities that excess land, while we enter to build additional cottage style units, which are already sold out and dislocation and get the flavor.
In a separate transaction, we bought five class a senior housing communities in.
Southeastern and mid Atlantic region, with an extraordinary partner.
Starting to operate it and development group for $172 million.
The average age of these communities is three years and we expect to generate a high single digit Unlevered IRR. We also negotiated a long term exclusive development contract with this team I cannot wait to disclose the details of this group and our growth plan with them on our next call, but here's the teaser.
This team has executed flawlessly, even during this challenging Q3 without any agency labor that gives you a sense of their operating prowess.
In a similar vein to new buildings, we bought three brand new communities in the Midwest from a multifamily developer with new perspective, our existing operator on average. These buildings that we have sold we feel our future pipeline is robust as we are on a <unk> line with several other granular transactions.
We are also building significant momentum around redevelopment and real estate value add as Jon Barker at execute our strategy at FX for over two decades. My team historically has focused on operator oriented value add as we frankly didn't have the right experience after summer.
What <unk> experienced from our vintage transaction many years ago, now with John and Mike <unk>, Our global head of development and one team redevelopment and real estate value add will be another avenue for growth going forward stay tuned for more.
On the relationship side I cannot be more pleased to announce that we started two new development projects with kisco, the second phase of Cardinal and Carnegie.
<unk> is one of our best operators in our portfolio occupancy incredibly bouncing already back to high nineties I cannot be more proud to be partnered with Andy Kohlberg and his team to find a few more a plus plus micro markets, where our Cardinal model will be fantastically successful, we signed a long term exclusive development contract.
With <unk> and look forward to grow this partnership over the next decade.
From the success of this wonderful New addition to the exclusive pipeline agreements quarter after quarter I hope that you as our investor now share the same belief that we truly have built a deep and wide moat around our real estate business through predictive analytics platform that is unique.
Unprecedented in the real estate industry with that I'll pass it onto Jon for a deep dive in operational trends John.
Thank you Scott.
My comments today will focus on the performance of our outpatient medical and seniors housing operating portfolio, starting with our outpatient medical during the third quarter, our outpatient medical segment delivered three 1% same store revenue growth over the prior year's quarter, leading to same store NOI growth of three 4%.
The increases were driven by increased property level expense recovery and a reduction in bad debt.
Vincent our same store portfolio ended the quarter at 94, 7%, a 30 basis point reduction from the prior year's quarter, we continue to see record retention rates with the third quarter exceeding 90%.
And with increasing construction costs and rising market rate, we will continue to push renewal rates and accepted reasonable level of increased turnover and related frictional vacancy as we strive to optimize top and bottomline performance and maximize the value of the portfolio.
Now turning to our senior housing operating portfolio I am pleased to report that year over year revenue growth in our Sho portfolio turned positive in September marking the first monthly increase since the onset of COVID-19, the strong demand base recovery in senior housing seniors housing was led by our U S portfolio, which year over year revenue churn.
A positive in August and our UK portfolio, which turned positive in September the occupancy recovery and improvement in Revpar, which began in Q1 reflect the needs based nature of senior housing and a recognition that these communities are active safe and social three key elements to quality senior living.
The U S continues to lead the recovery growing occupancy 600 basis points from the trough in mid March through September 30th followed by the UK at 540 basis points, our Canadian portfolio remains behind the U S and UK and the recovery that posted an occupancy gain of 70 basis points in the third quarter compared to a decline in Q2.
Two.
While the Delta variant has impacted staffing and related costs. It is clearly not slowed the demand driven recovery in occupancy and our operator's ability to drive rate growth.
Year over year same store NOI for the Sho portfolio decreased 14, 9% as compared to Q3 2020, driven by a 200 basis point decrease in average occupancy and increased expenses in part due to the delta spike and related impact on staffing.
Still down versus last year same store NOI has improved markedly from the decline of 44% in the first quarter, a trend, which should continue going forward.
The increased labor cost during the quarter were driven by a host of macro factors, which led to temporary labor shortages affecting virtually all industries there.
The result was increased compensation in the form of wages overtime bonuses and the use of agency labor as our operators have been squarely focused on both meeting the increased demand for their active safety social communities and the refusal to compromise on the quality of care.
The use of agency labor, which can be two to three times more expensive than permanent employees was particularly impactful during the quarter as employees, who had COVID-19 were exposed to COVID-19 or even had a cold had to call in sick, leaving agency staffing as the only option.
As Chuck alluded to these extraordinary labor expenses are starting to abate, although I expect we will still see some continued pressure for several months.
Hearing green shoots as our operators are making comments such as.
The peak Labor challenge has passed.
Or we've seen a substantial pickup in applications, our new hires outnumber the employees, leaving two five to one and even we are currently fully staffed at almost all of our communities.
Going forward, obviously, I don't know don't know, how COVID-19 will impact the economy, but we do know that the operators are increasing their rates substantially to cover the increased labor cost.
Similar to the multifamily business, there can be timing issues or delay between expenses hitting the bottom line when revenue flows through to the bottom line.
We are seeing that right now with elevated maintenance expense, which in part relates to preparing units for occupancy due to increasing demand. Additionally, rental rates and care service reimbursements are typically adjusted annually and require 60 to 90 days notice similar to multifamily. Therefore, we continue to move forward. Therefore, as we continue to move forward in this.
Demand is driven recovery, we expect to see the impact from these rate increases in 2022.
Additionally, despite similar occupancy improvement across all states, which withdrew early from the.
Additionally, despite a similar occupancy improvement across all states, we have seen a divergence in the impact of agency expense between states, which withdrew early from the federal unemployment programs versus those which maintained supplemental benefits through the early September more specifically states opting out of these programs early saw roughly two thirds of the incremental sequential.
Kris and agency expense as compared to those states, which maintained supplemental benefits.
Finally during the last 90 days I've been fully immersed in the various aspects of willpower senior housing business, including volunteering at site meeting with the leadership of various operators and of course Turing numerous properties.
The experience has been consistent with my expectations and that are found that the operators to deliver a very high level of care to our residents and providing top quality living experience.
While the focus on care has been and continues to be very high I believe that similar to the multifamily industry 20 to 30 years ago. There was an opportunity to modernize our senior housing business and improve the effectiveness and efficiency of the operations. These efforts will further improve the resident experience employee engagement and the financial performance of these communities.
Including the potential for significant margin expansion.
Without giving away my entire playbook.
Renovating and via monetizing certain communities implementing revenue management across the portfolio and engaging in digital transformation are just a few examples of what I'm thinking about.
Being at the beginning of this coming demographic demand wave and see an array of growth and optimization opportunities across all of our businesses make this a very exciting time to be at well tower now.
Now I'll turn the call over to Tim.
Thank you John.
My comments today will focus on our third quarter 2021 results the performance of our Triple net investment segments in the quarter, our capital activity and finally, our balance sheet liquidity update in addition to our outlook for the fourth quarter.
<unk> reported net income attributable to common stockholders of 42 per diluted share and normalized funds from operations of <unk> 80 per diluted share versus guidance of $78 83 per share.
Turning to our triple net lease portfolios.
As a reminder, our triple net lease portfolio coverage and occupancy stats are reported a quarter in arrears.
So these testing reflect the trailing 12 months and a 632021.
Importantly, our collection rate remained high in the third quarter, having collected 92% of triple net contractual rent during the period across our senior housing Triple net and long term post acute portfolios.
And our senior housing Triple net portfolio same store NOI declined 80 basis points year over year as a negative year over year impact of leases moving the cash recognition began to dissipate.
We expect same store NOI growth to turn positive next quarter.
Trailing 12 month EBITDAR coverage was <unk> 83 times.
Looking forward, we expect coverages to bottom next quarter near current coverage levels before starting their recovery in Q1.
Over the first seven months of the recover we observed occupancy EBITDAR trends within our senior housing Triple net portfolio that are in line with our U S and UK operating portfolios.
These recovery trends have strengthened the solvency restaurant operators has decreased in tandem and.
And our continued strong cash rent collection, along with the value of the collateral that sits behind many of our lease agreements continues to provide us confidence that well towers real estate position remained strong.
Next our long term post acute portfolio generated negative 1% year over year same store growth and trailing 12 month EBITDAR coverage of 125 times.
In the quarter, we transitioned 11 more genesis assets to new operators, bringing total year to date Genesis transitions to <unk> 48 properties.
Also we completed the disposition of 21 of these transition assets, bringing total year to date dispositions to 30, former Genesis assets, including our nine power back asset sold in the <unk> joint venture in the second quarter.
With another 14 scheduled for disposition in the coming months.
Long term post acute in place NOI concentration is now five 4% of total portfolio in place NOI.
And lastly, health systems, which is comprised of our pro Medicare Senior care joint venture with a pro medical health system.
We had same store NOI growth of positive two 8% year over year and trailing 12 month EBITDAR coverage was two four times.
The drop in sequential coverage was driven largely by the timing of HHS HHS stimulus as the majority of HHS revenue received by Pro Medica was received in <unk> 'twenty.
This was not repeated in <unk> 'twenty one.
HHS funds <unk> 'twenty, one EBITDA was up relative to 2020 as revenues grow grew both on a year over year and sequential basis.
Our June trailing our June trailing 12 month coverage also includes the results of the previously announced sale of 25 assets held by the joint venture 21 of which have already been sold to date with the remaining four expected to be completed in the coming months.
These assets had contributed more than $30 million negative EBITDAR for the trailing 12 months period, ending 632021 and not their disposal alone will create considerable coverage accretion on a go forward basis.
I'd also like to remind everyone that our lease is fully backed by our senior claim and the substantial real estate value held in the joint venture and also the full corporate guarantee the pro medical health system.
Turning to capital market activity.
We continue to enhance our balance sheet strength and position the company to efficiently capitalize a robust and highly visible pipeline of capital deployment opportunities.
By utilizing our ATM program to fund those near term transactions.
Since the beginning of the third quarter, we sold 11 5 million shares.
<unk> sale agreement and initial weighted average price of approximately $84 36 per share for expected gross proceeds of $966 million.
Since the beginning of the year, we have sold a total of $29 5 million shares of common stock via forward sale agreements, which are expected to generate total proceeds of $2 4 billion.
Of which $12 7 million shares were settled during the third quarter, resulting in $1 billion of gross proceeds.
At the end of the third quarter, we had approximately 11 8 million shares remaining unsettled, which are expected to generate future proceeds of $1 billion.
We ended the second quarter at $6 97 times net debt to annualized adjusted EBITDA up slightly from and HHS adjusted six eight times at the end of the last quarter.
The uptick in leverage was a product of $1 7 billion net investment activity completed in the quarter.
If we run rate the impact of the investment activity completed in the quarter pro forma net debt to EBITDA decreased to 682 times.
As a reminder, we ended the quarter at approximately $1 billion months sell equity raised on a forward basis.
Along with $309 million expected disposition proceeds and loan payoffs.
Our efforts to strengthen our balance sheet and improve our liquidity profile, coupled with a recovery underway in our senior housing sector have been recognized by S&P and Moody's with both rating agencies recently rating our credit outlook to stable.
The upgrades validate the prudent measures <unk> taken to mitigate risks through the pandemic.
To appropriately capitalize our recent investment activity.
On a forward looking basis as both shock and Jonathan noted we continue to be pleased with momentum of the recovery of the senior housing operating portfolio.
With portfolio occupancy ending the quarter at 76, 7% 210 basis points higher than at the end of the prior quarter, but still over 1000 basis points below pre COVID-19 levels.
Portfolio also since <unk> 100 basis points below peak occupancy levels achieved prior to last decade supply wave.
Setting the stage for a powerful EBITDA recovery.
Occupancy upside from strong rate growth is coupled with significant margin expansion of a very depressed base.
Lastly, moving to our fourth quarter outlook.
Last night, we provided an outlook for the fourth quarter of net income attributable to common stockholders per diluted share of 20% to 25.
And normalized <unk> per diluted share of <unk> 78 to 83 per share.
This guidance does not take into consideration any further HHS or similar government programs in the UK and Canada.
When comparing sequentially to our third quarter normalized <unk> per share will be better used on as adjusted 79 per share for <unk>, which excludes $5 million in out of period Canadian benefits that we received in the quarter.
This comparison, the midpoint of our fourth quarter guidance 85.
Represents a one 5% sequential increase from <unk>.
One five cents increases composed of three five.
Of accretion from strong investment activity in the third quarter and a sequential increase in senior housing operating portfolio NOI driven by an expected 140 basis points increase in sequential average occupancy.
<unk> <unk> <unk>.
Dilution from increased sequential G&A and increased share count from share settlement in the third quarter.
And with that I'll hand, the call back over to Sean.
Thank you Tim I want to make three quick points before Q&A.
First despite our historic amount of capital deployment over the last few months I'm very optimistic about the momentum into the year and next year. A recent prominent trend that we're starting to see that deals are bouncing back to us as buyers from buyers who need property level financing as debt.
It has become very skittish after recent disruption from Delta and labor challenges, we're working on seat three such transaction right now second.
With the significant rise of labor and other cost operators are left with two choices if they were to survive as a business.
Either to card services, our corners ought to increase prices.
We believe families understand from looking at prices of virtually all goods and services from fast food to apartment rents.
But there is an unprecedented upward pressure on cost.
After speaking with vast majority of our operators I can assure you that well towers operating partners do not plan to diminish the level of services and care provided to our residents. So far the industry in general recent increase in expense.
It would be difficult to continue to provide quality services without an appropriate balance in revenue as such rent levels will need to increase.
The industry should not cut corners, and should not it should never lose focus on the quality of their services. Please remember the simple mantra that theres no vision without margin.
Third our frenzied pace of new hiring continues through the summer and fall for both Ali Korea as well as expense professionals. In fact, we have added 125, new colleagues since the beginning of Covid, representing a 25% increase in our overall head count we're rounding up on our campus recruitment program is.
We speak and are delighted that this year class. We've made the biggest in the history of the company with that operator, please open the call our focus since.
Thank you and as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key who will be limiting questions to one question at a time will.
It will be muted as soon as she asked you a question for follow ups. Please re enter the queue.
Standby, while we compile the Q&A roster.
Our first question comes from the line of Steve <unk> of Evercore ISI. Your line is open.
Hi, Thanks, Good morning, Sean can I was just wondering if you could talk a little bit about the occupancy trend that you're expecting into the fourth quarter.
Is that.
Things are maybe seasonally slowing down as we move into the holidays, but I'm just wondering if the trends you've seen in October.
Into early part of November what are sort of the risks that you see to hitting the guidance that you've put out there.
Steve That's a really good question, so let's talk about.
Look at the history, you will see sequentially from Q3 to Q4, we usually have 20 to 40 basis points of average occupancy growth we guided 440.
Right.
If occupancy is obviously up meaningfully from that number we gave you. What we are trying to give you is it get away from this monthly weekly numbers right. We've got to run a long term company, but we can tell you if the occupancy stayed flat from here to the end of the quarter, we'll still hit our numbers now let's talk about the fundamentals.
Not about guidance right.
We are seeing unprecedented level of demand and sales environment that we have never seen even this late into the year. If you look at how our October sales trends have ended in fan. How November has started this is truly unprecedented.
However, we're going to protect that through the holiday season, we're just not in the business of doing that we're running a long term business, but I can tell you the momentum that we feel in the sales strength, which obviously translate into October sales trends translate into November and December occupancy.
We have never seen this kind of momentum that's all I'm willing to say.
Thank you next question comes from the line of Amanda Sweitzer of Baird. Your line is open.
Thanks, Good morning.
Can you help frame up how you're thinking about the potential magnitude of sharp price increases next year a bit more either in terms of our current implied loss to lease in the portfolio or the pricing premium that you expect the portfolio to achieve relative to the industry.
Amanda we created a new slide in our slide.
Slide deck.
If you look at it the inflation versus what we think.
Historic rate growth has been now remember that senior housing is not income driven sector. It's an asset driven sector housing is obviously the primary one but the other things matter to that should frame what is possible from you I will also tell you just if you go back and read my prepared remarks.
We talked about how.
That needs to be a price increase to offset labor increase and that will also give you. Some bookends of what is possible clearly we know what the numbers are because obviously you got to send letters 45 60 days before so we know what is being sent out.
And the early feedback from some of our operators, who has sustained obviously distinct Harley and remember we also have roles going through rate will not the entire portfolio is Jan one. So we have some early indications of as we have seen the spike of expenses and we have our operating partners have adjusted their pricing how is that update.
What is behind my comment that I'm very optimistic about pricing next year, but it is too early to comment we will talk about it in the February call, but I cannot emphasize it enough.
We are very optimistic about the pricing increases and frankly the industry as a whole we need to do that if we need to make more revenue that expenses in this business.
Thank you next question comes from the line of John Lucey of Green Street. Your line is open.
Yes.
Thanks, maybe just one follow up to that conversation there could you share what.
Rent increases Youre currently sending out today.
John you are putting me in a pretty tough spot I don't want to.
Put a number out there but.
<unk>.
I'm trying to avoid that but if you look at the inflation versus rent charge that we've provided we intentionally provided that I would if I were you I would look at that and then I would look at what that pricing power comes from we just started.
Housing and other asset trades.
And how people fund this.
Expense.
And you will get to a number but I will tell you.
The industry overall I just came back from the New conference.
Industry is talking about substantial rate increases.
Not mediocre or rate increases.
Thank you next question comes from the line of Nick Joseph of Citi. Your line is open.
And the best operators will rise just on kind of expense labor pressures.
Are you seeing that across all of the operators is it across all geographies are there any differences that you're seeing either from strategy from location or any other factor.
We have seen it across the board, but a different magnitude as I mentioned that the new operator that we brought in.
In Q3, the $172 million transaction.
We use zero agency.
And we have seen some operators where contract.
Contract Labor cost has gone up <unk> six months I want to repeat and repeat snick 10 X in six months right. So obviously you have seen a very different experience depending on.
Who the operator is.
But I'll tell you also all of these management teams are very focused on bringing that number down significantly our guidance assumes suggested does not contemplate that you will see a step down in Q4.
We are already starting to hear as John said, we're already starting to hear that step down is taking place even in October going through non by end of the year. What we don't know what is going to happen in the holiday season. So we're not going to sit here and speculate right. Our goal is not to speculate on what's going to be a one quarter numbers.
But go back to my comment what I said the stabilized margin.
This portfolio I can't talk about the industry. It is my firm belief that our margin will be higher than the pre COVID-19 margin on a stabilized basis.
Yes.
Thank you next question comes from the line of Mike Mueller of Jpmorgan. Your line is open.
Yes, Hi, I'm, just curious what does fourth quarter guidance assume for short labor cost trends.
Any improvement whatsoever, or just kind of a continuation of increase but on a full quarter impact.
Mike as I mentioned in the previous.
Of course, the two assume that it will not improve that's what's in the numbers that we provided you. However, as I mentioned that we are already starting to see improvement. The wild card here is how things play out in during the holiday season, we just don't know.
Thank you next question comes from the line of Juan Sanabria of BMO capital markets. Your line is open.
Good morning, just hoping you could talk to.
For new customers in the market today I recognize that.
The intention is for the industry for wall tower operators to push from Jan one or on the 12 month anniversary, but curious on how pricing trends are.
Sharing for new customers kind of across the industry or across your portfolio.
One exceptionally good question and it's actually my favorite topic.
I like this topic more than even the rent increases. It is just I am not going to mention any specific numbers I will say, let's just say that we're talking about exports and increase on average for the whole portfolio.
From our operating partners I'm hearing that street level increase in the rate is between one five weeks two weeks.
The street is moving faster than the renewal.
<unk>.
I'm hearing from my operating partners, but we will see how that plays out.
This is a very interesting cycle that we're seeing there has never been more focused on quality and safety.
In previous cycles. If you have competed on whether you are a new shiny penny on the corner not this cycle customers are focused on and they are always focused on that this cycle, they're primarily focused on quality of services quality of care and the reputation operators, they're not competing on price.
Next question comes from the line of Derek Johnston of Deutsche Bank. Your line is open.
Hi, good morning.
$5 6 billion of investments over the past year really stands out how much of this would you consider opportunistic driven by the pandemic versus perhaps in a normal well tower growth that would have happened anyway.
And is this level of investment repeatable going forward, how much more capacity do you have to.
Get through the investment process and take advantage of this market.
So Derek I do not give guidance on how much transaction, we want to do we're not a volume driven investor were value driven investor. That's the first point the $5 6 billion dollar significantly understate, what that investment volume is just to give you a <unk>.
Simple example.
That what the transactions that we have closed represent the $5 6 billion that you mentioned 25000 units, let's just think about it what that means.
25000 units would have done had $172000.
Unit pricing in a normal environment that would have been 10, 11 and $12 billion per transaction sort of we've got to put that into perspective second the industry remains very fragmented and there is a lot of churn going on in ownership as people are finding it either this is if you are in three different businesses.
And you don't want to be in this business anymore. We're seeing data from a lot of families. The labor pressure, obviously COVID-19 was hard enough now the labor pressures challenging sort of a rising.
From this in last few months, we have seen those GP transaction that we have had conversation eight months ago. You will recall I mentioned that when we are not getting to the finish line on a transaction, that's not because thats going to somewhere else. It really means that there is not selling at that price and not selling and now we're seeing a lot.
Lot of people are giving really giving up now remember they can give up because we bring an operator to the table right. You will not tell you real estate and continue to run. It. The reason you are selling real estate that you don't want to run it.
So putting all this together as I've said in my prepared remarks, despite a significant acquisition volume I remain very optimistic that this trend of acquisition at this condo prices will continue finally, frankly longer than I thought.
Next question comes from the line of Teo Sanya of Credit Suisse. Your line is open.
Yes, good morning, everyone.
In your.
Recent business updates is an interesting slide that shows your shop portfolio the power of diversification.
Just kind of curious chunk earlier on you kind of mentioned ultimately you expect winners and losers in the senior housing space over the next few years does that suggest that we start to see a little bit more concentration going forward across acuity geography on operating model based on who you believe windows will be or should we still expect to.
Kind of see real diversification across acuity monthly rents.
With the idea of being you just kind of pick the best players at each kind of pointing to on this graph.
Thank you Terry will come back.
Thank you.
Hugh.
The right slide to talk about.
We do believe that diversification will continue but there is going to be significant consolidation in the industry. Let me give you. An example, pretty good example to talk about one off our based operating partner is our operating partners Midwest NIM story point, you have a heart several times about.
How highly I think of this team.
Before pandemic, we got an unsolicited offer.
At an incredible price. So we sold the 13 buildings, we had was solely point and kept two new developments that recently at that point open right. So a big partner, we've gone from <unk> to <unk> <unk>.
That was two years ago.
Today with all the transactions that we have done and all the transactions that are in pipeline.
In that two years frankly to the pandemic in last 18 months.
We are back to 50 plus communities with story points.
That tells you how the winners and losers are changing in the business the market share of great operators is changing.
I'll give you. Another example look at how many assets Oakmont managed REIT is a great example of a fantastic operator look at how many assets Oakmont manage 12 months ago 18 months ago and make it note on your calendar to see how quant become has become a dominant player in.
Yeah.
Today 12 months from now 24 months from now right. This is just an example, I'm trying to give you. So you will see that shift of winners and losers you have seen some spectacular failure.
Senior housing operators in the business and I can tell you those are not the only ones that you know off.
Yes.
Next question comes from the line of Rich Hill of Morgan Stanley. Your line is open.
Hey, Good morning, guys, Hey, Sean you had a really interesting slide in the deck about historical.
Exactly revenue relative to inflation.
And as I listen to you talk.
Listen you're saying that this is a different cycles and past. It does strike me that maybe the outperformance versus inflation could be even higher. This time could you maybe talk about that over the medium to long term and how you think about that.
Absolutely first welcome to our call we're glad to hear from you.
If you think about inflation.
Inflation and most people think about inflation is it.
A matter of how much not just obviously the supply side, but also the demand side and in People's ability to pay rate. So generally speaking inflation is the income concept.
Obviously as we all know that for most types of products and services.
Housing is different senior housing is not a income driven sector. It's an ACA driven sector look at that asset inflation of what happened. Obviously, we tried to put together some slides to give you some sense right.
Of what happened to the people who are funding the resident.
This expense and you will see that asset inflation has never been more significant.
Therefore, the ability of the product has never been better so.
You are onto something as I've tried to say without putting a number of putting those two slides should give you a context of how much rent increases as possible not just near term, but over a long period of time and frankly speaking as I said right you could think about we have a barbell strategy.
In our portfolio. If you go back and look at the Q4 hundred 19 call. This is the last call before Covid that I talked about in details of how this barbell strategy work, where you have a high touch high service product and the cost of course tell type market, where you can where labor cost.
Can we fully recovered and still and marketing to remain on the other hand other side of the barbell, our wellness housing portfolio. There's no labor right. So we have gone to that and that diversification. We have been very very focused and very intentional. So between the two you will see a very significant.
Inflation plus growth that's coming.
It will be funded obviously through the asset asset inflation that already has happened.
Next question comes from the line of Michael Carroll of RBC capital markets. Your line is open.
Yeah. Thanks, So I wanted to go back to the street rates answer that you provided earlier, but what's the reasoning that the seniors housing street rate growth is increasing at a faster clip than the renewal growth.
Lower right now than those existing rates and it's just that gap closing or is there something different there that I'm not thinking about.
So Mike if you have to think about.
Total rate versus real estate rates right because the usual airports income said at Esa X level of care and then that goes up to say X plus two level of care. So you got to have to obviously think about when you say street rates versus in place rents do you mean, just the total rate or the real estate right there.
Stage rates, if you just call it a real estate component of the rent is not the street rates are lower it is just that the operators are realizing that they're not competing just on price right, we have a quality product and thats quality product people.
I don't hear from my operating partners people that are coming that I want to stay.
<unk>.
Down the lane for $500 less my operating partners. So you should go ahead and do that right. We're not going to there's a cost to provide the services. The first class services that we provide right. That's just not going to happen that you will cut it you are not going to stay at the Ritz Carlton for Hilton.
It's priced nothing wrong with any of those models, but thats just not our model.
So the street rates are going up because you have demand look at that take.
What we are seeing even late this kind of late into the year. When he should have seasonality, we should've come off and we havent. So as operators gain momentum on the sales side right. They're realizing that I have a special product. There is a cost obviously of serving that piece of occupancy and we have to charge for it.
Thank you next question comes from the line of Jordan Sadler of Keybanc capital markets. Your line is open.
Thanks, Good morning.
Sean I wanted to just talk about some of the new things. We saw this quarter I heard on the call in a couple of things that sort of popped out to me.
<unk> purchased during the quarter and then separately what I heard you talking about.
John.
You mentioned the ability to do sort of redevelopment and real estate value add opportunities. So could you expand on sort of these two pieces one sort of just the interest level in the.
Our increased interest level in the entrance fee communities and the return profile for those types of assets.
And then maybe what specifically.
Or maybe.
Even generically youre thinking in terms of.
Redevelopment or value add dollars are opportunities.
Those are two very good question Jordan and thank you for.
Getting two questions.
Through the first time on the line so I'll answer both and I hope I can remember it. So let's just try first it's not an increased level of interest in the Ccs communities. We are value driven real estate investors, we saw a tremendous opportunity because of the dark.
If I if I give you some details we bought that portfolio for $195000 per unit.
And with remarkable dark right. So talk about Westchester, New York, Dana Point, California, Bellevue, Washington.
<unk>.
Alexandria that level that kind of dark and then we thought what we can do with that arc and I had mentioned obviously there is an example.
Of.
The asset came with a piece of parcel.
That is our last residential zoned piece of land in residential areas Bellevue right. So when we look at a lot of <unk>. We continue to we always have we continue to look at it just we never seen this kind of opportunity where we can do more than what we bought.
Not just leasing up obviously, what we've done but also a lot more what that can be done with the dark right with the client entitlement. That's why we're interested in as I mentioned I will give you details of what I think that it can go from a high single digit Unlevered IRR to a low double digit unlevered IRR as we execute on.
And frankly, we bought that's where most of our returns have been focused on we continue to get call. It between 9% to 12%, 13% Unlevered IRR and most of the transaction, we have done and retired life right there.
Focus on the real estate value add one of the big real estate value added. This company tries to do is vintage.
Well out of the fact that Hasnt played out well for us.
So.
As I've gone through the experience.
I realize that we didn't have the right talent, it's much more difficult to do it then obviously.
We thought.
<unk>.
And we stopped that whole focus on real estate value add in a traditional sense of the real estate as you know John has done this for billions of dollars of transactions and executed.
Based on this strategy. So when we're talking to John going back two months ago, that's something that came up and now obviously John is the marketing to the portfolio.
And he is obviously one of the most important member of our investment committee. So those opportunities. We're now ready to really expand on and really execute on it also adds to what I had mentioned that we have built an extraordinary development team over the last 18 months under the leadership of Mike Weil, We brought in Mike.
Over a year ago and he has built a very large team.
And so those that all those stars are all coming together right but.
<unk> said, we didn't have and now we do have it.
Next question comes from the line of Rich Anderson.
Smb's Your line is open.
I'm going to go after Jon Burkhart here.
So John welcome to the call.
Yes.
The comments you made about some of the things that you want to sort of apply to the business from your experience in multifamily I just wanted to touch on a couple I know youre not going to give away the secret sauce now but.
The new management and some of the multifamily tech initiatives that have been sort of the name of the game.
In that business for a while now isn't.
Isn't revenue management only as good as it gets fully kind of used in.
And the industry. So if you're using revenue management and no. One else is it's sort of not useless, but certainly not as effective so how do you how do you get the word out on using revenue management, how much is it being used in the industry and then also on the tech initiatives, how much is that out there already.
There I think you can make a real difference relative to your peers. So I just wanted to see if I can get some color from you on those two topics. Thanks.
Certainly in the chalk would say you've got two questions.
Of course.
Yes.
On the revenue.