Q4 2022 Welltower Inc Earnings Call
Your telephone keypad, if you would like to withdraw your question Press Star one again.
At this time I would like to turn 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 stay.
Once our detailed trial equipment and with that I'll hand, the call over to Sean.
Thank you, Matt and good morning, everyone I will review fourth quarter and the year and.
High level business trends and our capital allocation priorities.
John will provide an update on operational performance of our show and MLB 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. While we're happy to bring back full year guidance. After three years I'll point out there are many more.
Crow and visit uncertainties remain I would recommend investors and analysts to focus on 2023 exit run rate to understand the earnings power of this platform and not overly emphasize the calendar year guidance.
I have mixed emotions as I reflect back on 2022.
Described during my prior calls our results frankly, underwhelmed our expectation during the first half of the year, while we don't like to fix that on short term stock performance as we believe the appropriate window to gauge our performance is at least three to five years, you should throw tomatoes at us forge, adding an unsatisfactory.
Total return in 2022, but remember that stock is a fractional ownership of a business not a taker.
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 in spite of some of the headwinds that we experienced in 2020 to my team and I am pleased with the underlying improvements we have seen in this platform and our talent base.
Resulting in a strong rebound in our performance in fourth quarter and further improving momentum being carried into 2023. Our recent progress is all lead that tip of the iceberg of many of our initiatives.
We'll truly manifest themselves in the year next year or two 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 explore our revenue per occupied room revpar on the expense front, we have seen significant progress on addressing certain challenges we have faced over the past year plus most notably on the agency on temp labor situation in fact explore has more.
Or is it too in Q4, 234% driven largely by a deceleration in compensation per occupied room, our comp or to two 6% the lowest level, we have seen in our recorded history.
At the same time Revpar again, the revenue per occupied room remains consistent bright spot for us increasing seven 5% in Q4, a clear reflection of strong pricing power, resulting from our premier locations product an operator base.
As I mentioned on our last call one of our largest operators 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 Rick record Revpar growth in 2022, a five 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, resulting from a long runway of occupancy great rate growth in operating.
Margin expansion and despite significant macro uncertainty already 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 along with the 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 with January move into our 'twenty up 16% over 19 levels.
Resenting a meaningful acceleration from the fourth quarter 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 a private letter ruling we received which permits us to both owned and self manage independent living assets. The Peel out 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 with John and his team have been tirelessly working on we remain optimistic that further investment in our platform will not only result in a better margin profile of our assets, but also will meaningfully benefit the third party operating partners and 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, our senior living business. Following our instinct. When there is mystery there is margin.
And our people are gives us significant ammunition to accelerate the pace forward.
They pay us for what <unk> might look like I want to thank my garst, our tax team and many others, whose efforts have led to this game changing achievement.
Before turning to investing environment I want to highlight. The addition of retirement unlimited are rui to well towers roster of exceptional operating partners Iui is one of the best operating performing senior housing operator in the East coast with the highest program quality programming and care centers are you I has consistently maintained occupancy levels.
At north of 90% and with hardly any use of agent delever over past few years, we announced today that our U has assumed the management of our first related together in Alexandria, Virginia with plans to meaningfully grow our relationship with near term through acquisitions transition and development.
We're extremely excited and humbled to partner with the Frayling and Walter and families and otherwise all start precedent Dori, Sally Sullivan and welcome them to a multifamily.
In terms of other growth partners. It was exactly a year ago, when we announced our partnership with David and Simon Rubin, along with their acquisition of every health care in the U K as you know Reuben brothers is one of the most sophisticated forward thinking and well capitalized global investors with a reputation of attracting best in class talent.
And technology platforms. Our thesis was validated what Reuben brothers attract alone rose one of the most well respected operating exit senior housing operating a figurative NK to join every as the company CEO in December Lorna has spent 25 years in the industry and was most recently with <unk>, while the UK is large.
<unk> senior housing platform.
Next on the capital allocation side, we have rarely seen a favorable environment across all our product types in all three countries, we do business with.
And there are 20 plus billion of exit Q4, all real estate funds and perhaps even a longer one for non traded Reits. This along with the challenging that market gives us an enormous advantage to buy the right product at the right location at the right basis. Please note that while we are under earning.
By more than half a billion dollars of EBITDA from pre pandemic levels. We just reported debt metrics that are better than Q4 of 2019, along with more than $5 billion of near term liquidity available liquidity, we have many avenues to access and deploy capital that I've described before and we remain busy on.
All fronts, but our north star remains consistent and simple we strive to create bar share value for our existing owners by compounding over a long period of time within our circle of competence, which we define as the area, where we can assess and allocate capital with how <unk> rather.
Then gamblers odds with that I'll pass it over to John .
Thank you Chuck let me excited.
About our operating performance this quarter and the acceleration in growth growth, which we've witnessed my first conference call that <unk> was in Q2 of July 2021.
Total portfolio same store NOI was a negative seven 1% since that call. The portfolio's performance is to continue to improve in 2022 despite challenges.
Growth was in the range of 7% to 9% for Q1 through Q3. However in Q4, we accelerated to 12, 9% portfolio NOI growth driven by senior housing operating business with NOI growth of 28, 1%. Despite all the challenges of the current economy.
This amazing performance as a result of both the fantastic supply demand dynamics of the senior housing sector and aggressive asset management.
We 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 in the slide deck and clearly come through the financials when looking at the massive improvement in agency labor, which I, which I will outline in a moment.
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 Gerry was my counterpart at UDR, one of the largest multifamily Reits with a national platform of 60000 apartment homes.
We spent 30 years.
In various roles at UDR and nearly 15 overseeing all of the company's operations before <unk> retirement in 2021, he and I have always shared similar views that the operational excellence requires a focus on people processes data and technology, which if well done results in a superior experience for.
Both residents and employees and ultimately drive stronger financial performance.
We've made substantial headway over the past year, and a half and enhancing our management capabilities and Jerry's expertise will accelerate that progress.
We will focus his efforts on specific opportunities, we'll all continue to build the broader operating platform from asset management and operations to capital resource management renovation et cetera, as well tower transforms the business.
Jerry will help us to continue accelerate continue to accelerate change in the senior housing industry. Our work together without simply be additive it will be exponential.
Jay Square.
Now I'll provide some insight into our operating business, starting with the medical office portfolio.
In the fourth quarter same store NOI growth for our outpatient medical business was two 1% over the prior year's quarter.
Store occupancy was steady throughout the year at nearly 95% while retention remains extremely strong across the portfolio at 93% for the second straight quarter and nearly 92% for the entire year. This robust retention rate helps us drive improved lease rates and continued strong re leasing rates.
Turning to our senior housing operating portfolio, the 28, 1% fourth quarter NOI increase over the prior year's quarter was driven by revenue growth of 10, 3% for the period year over year margin growth of 320 basis point. It was also the strongest of the year.
All three regions showed strong revenue growth, starting with Canada at six 6% the U S and the UK unimpressive 10, six and 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 Revpar growth of seven 5%, which as Sean mentioned is the highest we've ever witnessed.
Sequentially portfolio average occupancy continued to improve with a gain of 20 basis points during the period.
Okay.
Turning to expenses agency used has obviously been a key factor in 2022 expenses. However in Q4 2022, just to just as Tim has mentioned many times agency expense is acting as an expense dis later.
Agency in our same store portfolio is down 44% year over year in Q4 'twenty two.
We often quote agency as a percentage of compensation. So looking at it that way in Q4 of 2021 agency expense was six 9% of compensation and in Q4 of 2022 was three 7%.
Regardless of how you look at agency the expenses declining in the U S and Canada, where over 90% of our senior housing portfolio is located in 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 U K is slowly adjusting to that dynamic.
Staffing model, ensuring appropriate staffing at various levels of occupancy overall comp for where compensation per occupied room, which represents about 60% of the expense per occupied room increased only two 6% in the fourth quarter compared to the prior year's quarter, which is the lowest growth rate in.
Over five years.
This moderating comp for growth helped drive the deceleration in overall expense growth. Despite continued inflationary pressures in several line items, including food and utilities, which rose 10, five and 10% respectively. In the fourth quarter of 2022 on a per occupied room basis compared to the prior years.
Quarter.
Food and utilities represents roughly 12%.
Of expense per occupied room.
The combination of seven 5% Revpar growth the highest in over five years with a three 4% expense poor growth led to remarkable growth rate in net operating income per occupied unit of 25%.
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 purposefully not giving out the details as they are proprietary however, I will say that I'm proud of the creative accomplishments of the welfare of our team and I'm grateful for the wonderful opera.
Is that we are partnering with on these first modules to.
The successes that we've had through aggressive asset management as noted in the slide deck are the result of brute force and prove the opportunity operational excellence is achieved by a focus on people processes data and technology and that is exactly what the team has done and the various initiatives that are outlined in three case studies on agency labor reduction revenue manage.
MIT and care revenue, we will continue to leverage our team.
To drive results yet the greatest opportunity will be realized as we rollout the operating platform in the coming years finally, I would like to thank our operators and all of their employees and the welfare of our employees for making these results possible. Our team work is clearly paying off leading to improved resident and employee experiences and stronger overall results.
I'll now turn the call over to Tim.
Thank you John My comments today will focus on the fourth quarter 2022 results. The performance of our Triple net investment segment in the quarter, our capital activity, our balance sheet liquidity update and finally, our outlook for the year ahead.
Whilst our reported fourth quarter normalized funds from operations of <unk> 83 per diluted share.
Representing 7% year over year growth after adjusting for prior period government grants and FX headwinds.
We also reported total portfolio same store NOI growth in the quarter of 12, 9% year over year.
Before getting into our segment results I wanted to provide an update on our recently closed per Monica restructure and to go forward reporting treatment.
In late December we announced the closing of our restructured joint venture with <unk> health system, and our newly formed joint venture with Integra health the.
So for medical health system, JV, consisting of 58 private pay assisted living assets will continue to be operated under lease with pro medical health system.
It is now part of our senior housing Triple net reporting segment.
The Integra health joint venture consisting of 147 skilled nursing properties.
The property joint venture and a master lease with Integra health.
The lease commenced upon closing in December added the first tranche of the property JV with Integra acquiring 50% of wells tower's taken 54 of the assets for $73 million.
As previously expected subsequent to year end the second tranche of assets closed in January It was integra acquired 15% interest and another 31 assets for $74 million.
The remaining 62 assets or expect to close in the second half of the year.
As for the underlying operations the sub leasing of the portfolio is progressing in line with expectations, 75% of the beds are already transitioning transition management with the remainder of the portfolio weighting 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 I'll turn to the performance of the rest of our triple net properties in the quarter.
As a reminder, our triple net lease portfolio coverage and occupancy stats reported. According arrears. Please <unk> reflect the trailing 12 months ending 932022.
And our senior housing Triple net portfolio same store NOI increased four 3% year over year and trailing 12 month EBITDAR coverage was <unk> 86 times in the quarter.
Next same store NOI on a long term post acute portfolio grew 4% year over year and trailing 12 month EBITDAR coverage was 134 times in the quarter.
Turning to capital market activity.
In the quarter, we settled $1 5 billion of previously raised equity through our four to ATM program, helping to bring debt to EBITDA down to $6 three one times at year end.
A substantial decrease from nearly seven times at year end 2021, and below pre COVID-19 levels of Q4 2019.
For the year, we settled the totaled $3 7 billion of equity to fund $3 7 billion of net investment activity.
Allowing us to continue to deploy capital into a dedicated private market, while materially de levering the balance sheet.
Looking forward, we ended the year with $722 million of cash full capacity on our $4 billion revolving line of credit and $383 million and expected proceeds from near term dispositions and loan Paydowns, representing $5 1 billion in near term available liquidity.
Before moving on to our 2023 guidance I wanted to add more context of shocks earlier commentary around the opportunity provided to our company by last year's private letter ruling.
Nearly 14 years ago Walthour sockets first one day a management agreement.
Indirect economic exposure to senior housing operations.
Over the last five plus years, we built a better and stronger alignment within this contractual structure.
Ultimately, reaching a point in 2020, one where you can generate meaningful ROI through centralized human capital and technology investment well tower.
We hired John Burkart and started to build a team around him.
The <unk>, we received last year allowed us to meaningfully accelerate that effort as the RLI friction is entirely removed under self management.
As well as our platform investment is evident through G&A with greater than 80% of our expected year over year increase in overhead costs being driven by technology investment and new physician additions in 'twenty, two and 'twenty three focused primarily on asset management data analytics and technology.
We continue to believe that the opportunity to both modernize operations and drive efficiencies through scale in our business as Vas and creates a sustainably strong cash flow tailwind when combined with the demographic driven demand of a next step a decade plus.
Lastly, moving to our full year guidance, which we're introducing for the first time since COVID-19 uncertainty began impacting our business in March of 2020.
Last night, we provided an outlook for 2023 of net income attributed to common stockholders of 57% to 75 per diluted share and normalized <unk> of $3 55.
$3.
I'm, sorry, $3 35 to $3 53 per diluted share or $3 54 at the midpoint.
As mentioned in the release, our 2020 guidance contemplates no HHS funds or other government grants received in the year. So after adjusting for <unk> <unk> of nonrecurring government grants received in 2022, we are guiding for 5% year over year growth.
This year over year increase in <unk> is composed of 36 cents from growth in our senior housing operating portfolio and <unk> growth across the rest of our segments.
These were offset by four sensitive prior mentioned higher G&A and wildflower platform costs.
And 19 of floating to floating rate interest and foreign exchange headwinds.
Underlying this guidance is estimated total portfolio year over year same store NOI growth of 8% to 13% driven.
Driven by such subsequent growth.
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%.
The midpoint of which is driven by revenue growth of approximately nine 5%.
Underlying this revenue growth is an expectation of approximately 230 basis points of year over year average occupancy increase and rent growth of approximately six for the quarter.
And with that I'll hand, the call back over to Sean.
Thank you Tim.
While we ended 2022 on a positive note. It was also a year of share grit and perseverance from our team.
As we face different challenges in our business be the expense pressure development cost pressure on a per medica will remain steadfast in our belief that our job as towards of our shareholders' capital is to solve problems. When we encounter on this journey and not to rip the band aid off and give away potential future upside to private equity to <unk>.
Profit to.
<unk> profit from either because one it is the easiest thing to do instead of walking things out or to the feeling am eastern gratification as wall Street tends to tier such decisions we.
We see too many market participation part market participants mix up short term volatility with long term risk of barman capital loss.
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 faced challenges. This is evident in the build out of our operating platform and our transaction with for Medica and integral.
To paraphrase Mr. Monger, you can rest assured that we have a deferred gratification gin in printed on all are all over our culture and we remind ourselves every day that big money is made not in buying and selling but in ways.
Lastly, I am extremely delighted to see many of my partners recently appointed to the executive and senior management roles within the organization.
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.
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 simply said, we want to attract talent that comes from the industries with higher standards.
And to that point I could not be happier that John has convinced Jay Davis to join our team as you all know from his multi many years in multifamily sector. JD has one of the sharpest operating mines in real estate I have known and admired Jerry for 15 years and cannot be more excited to work with him and learn from them.
I am more convinced than ever that John along with Jerry will have an exponential impact on transform this industry. If you are or know someone of that operating caliber and more importantly have an outsider's mindset from related or frankly unrelated industry once who joined a formidable team of J squared.
Please let us know.
Altura is wide open for business not only for asset acquisition, but also for talent acquisition with that I'll open the call up for questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. We ask that you. Please limit yourself to one question to allow everyone an opportunity to ask a question.
We will take our first question from Jonathan Hughes Raymond James.
Hey, good morning.
I wanted to.
Chuck.
I just wanted to ask about the increasing operator relationships. Obviously, we just saw another one yesterday with Rui you talked about more opportunities or expected opportunities in the future but.
I'm wondering what the landscape looks like after three years of these pandemic headwinds how many high quality operators remain as an opportunity that you don't already have a relationship with and whats the size of those individual opportunities smaller or larger in terms of investment volume.
Then the relationship established over the past few years.
Yes.
Jonathan.
Very very good question. So as I think about if your question is specific to senior housing industry.
See that obviously, we have most of the operating partners that want to do business with who already do business with.
So expansion of new operating partners is less of a focus and going deep rather than going broad is our focus we are looking for are striving for regional density with our existing partners across the different country right now we have Ive mentioned before.
Or that we have there our operating partners and the business that operators in the business that we have admired for a very long period of time 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.
Two an operating partner frankly speaking in any relationship is not enough and for our perspective. So we bring in data analytics and other operating platform initiatives that John is doing to the equation at the same time, we want to understand whether these operating partners are thinking about the business of where the business is going 10 20 years from now.
Not where the business will tend to us from 2010 20 years ago right. There is a significant mind shift that is needed in the business and frankly speaking as I mentioned few minutes ago, we need high standards higher standards of employee engagement higher standards of customer service and higher standards.
How we treat capital on what we how we deliver results for that 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 fandom fundamentally a fantastic roster of this people to drive business with now going to the second part of your question for me.
Investment volume standpoint, I would reemphasize youre going to see a majority of the investment volume with existing partners as well as sort of the partners that we have already announced in last couple of two or three years.
Yeah.
We will take our next question from Michael Griffin at Citi.
Great. Thanks.
Maybe just on transaction activity shock I know, you've always talked about how youre, an unlevered IRR focused investor I'm curious if you've seen any change in maybe a hurdle return rates that might get you more excited about one property type relative to another I know you seem pretty positive in your opening comments, but any additional clarity there would be would be helpful.
Michael If you think about with different times gives us opportunities for different types of product you have seen us buy.
<unk> sell every product that we own in last call. It seven years eight years under this under the leadership of this team right. So because different times, you get opportunities to buy different product at a very favorable basis. This might be the first time, we're seeing across all of our product type across the three countries that we do business with.
And we're seeing opportunities right. This is <unk>.
Very very disruptive time from not only from that side, but also from equity side, the people who would normally compete against right the core funds.
Non traded Reits and other everybody is facing very significant flow outflow.
Because of the denominator effect that you see in pension fund.
As it relates to show award.
Or some other reasons such as <unk> not availability of debt and other situations. So we're seeing across all product types.
Being very significant opportunities.
And frankly speaking and I have alluded to achieve.
Irr's that we haven't seen in some other product types frankly forever.
Okay.
Yeah.
Well move next to Jeff Banner line of Bank of America.
Hey, guys I guess, Jeff the divergence Josh airline here.
Yes, no I appreciate all the color on the asset management platform.
Kind of curious how we should be thinking about what kind of is this like the full investment year, and then hey, I'll start happening in 2024. This is there anything kind of built into guidance as far as like that.
Payoffs and how are we thinking about that Jay squared run rate for returns.
Yeah, I'll start and as Tim May want to comment I'm not definitely for clarity terminate on Tim's guidance.
But I think what we're seeing and what we're trying to show is the returns are already coming through and 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 as 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 and now that that's proving out and Thats. 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 Jay square to this exponential opera.
<unk> it's huge.
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 and executed.
Highest of all levels, which will speed up our process. So bottom line is we're already delivering numbers it'll continue for the many many years and they ultimately relate to significant margin improvement across the board.
And I would just add on cost.
We look at this as an investment right in the human capital side and on the technology side. So.
You know that we run our platform very efficiently and we don't take the cost slightly as far as any further investment.
We think theres a lot of return here on investment and so.
There is a bit of a lag between dollars union hires and that return, but on a go forward basis I would expect us to be very prudent about it and continue to be show show high return before dollars are spent.
Okay.
We will move to our next question from Mike Mueller at Jpmorgan.
Yes, Hi, I'm curious, what's the range of margins that you think the show business could operate at at full occupancy and to use your term when it's fully professionalized.
Okay.
Mike I'll, just not going to try.
Try to speculate what might or might not have been but I will repeat what I've said before if we went back to pre COVID-19 occupancy and pre COVID-19 margin I will be really disappointed.
That's why we and we will be disappointed.
Yeah.
Okay.
We will go next to Jared Derek Johnston of Deutsche Bank.
Okay.
Good morning.
In addition to the REIT community and a lot of generalists 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 45000 independent living units and not really being designated as health care facilities <unk> subs.
<unk>.
And so what does that mean right and importantly.
Now the decision May drive further earnings growth.
Especially given the beefed up asset and important platform. Thanks.
Yeah, 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 REIT history, a little bit and you look at the multifamily world when everyone kind of came together in the mid Ninety's. When I started when I was at and what you saw is this move from fee managers to owner.
Operators was a fundamental shift in what I think a lot of people missed was that was the basic economics behind that.
Essence is a fee manager you get paid a percentage, let's say, 5% to collect the dollar and that means you won't spend more than five to collect the dollar as an owner. Operator you were you were data dollar to collect $1. So in essence, you would spend 99 cents to collect the dollar and so that fundamental shift enabled us as owner operators.
Moves much much faster and changed how we looked at the world whether it be investing in websites with technology et cetera, or bringing things in house marketing in house et cetera. All of these things enabled a tremendous improvement in margins and that's that's what it ultimately means is it.
It will allow us to step into that business and have tremendous impact on the margins more than that I would say I break the business down into three components overall, there's a real estate or multifamily component. There is what I call the hospitality component, which relates to neil's housekeeping activities and then there's a cure.
Component and so our various residential businesses have one to three of those parts. So as we step in and we address the meeting.
The real estate as well as this hospitality component at our independent living we will be able to take those best practices and move those into the assisted living which were obviously not managing but if we find better ways more effective way to deliver higher quality meal service et cetera that will all be pushed out through our platform.
No different than what we're doing right now in our case study on revenue management, how we pushed that out to one of the.
Assisted living property. So the same concept will apply so this is pretty huge and it'll it'll impact our whole overall residential platform I'll just add one.
One thing to that just as I mentioned before we're working towards regional density.
And going deep and ongoing broad with our existing partners right. So think about it.
I don't know just you will see the future is with our select operating partners strategic partners, we're going to have.
Bigger density or higher density in a bigger scale in a market and with our investment in the technology platform. The operating platform with our operating partners the ability to execute on the ground.
Again, this is going to be not only a great win for our owners.
The asset, but also a great win for the select operator partners that will choose to do business with going forward. So it is a very much of a focus on win win.
And Thats the way.
Business is going to be.
We will take our next question from Michael Carroll with RBC capital markets.
Yeah.
Yes. Thanks.
<unk> relationship changed with its existing independent living operators since the <unk> announcement, I mean are they more willing to work with well tower, given certain goals or targets or has there been any noticeable change since that was announced.
The forward thinking ones, we're thinking about where the business needs to go 10 years from now five 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 nineties are clearly.
Realizing that future is not with us.
Okay.
Okay.
Next we'll go to Ronald Camden at Morgan Stanley .
Hey, Yes, you have Adam on for Ron and good morning, guys.
Just wanted to ask about the paramedic integra assets.
Wondering kind of in there with the new with the new operators in place there for some of them.
If you could kind of comment on the rent coverage I'm not sure. If it was in the supplemental I know there were some 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 given the kind of the prior history.
I think with the new operators, we've transitioned to at least 16 operators, so far and by the time the dust settled it'll be north of 20 operators, but in all of these transitions have happened over the last month month, and a half or so.
It's too soon to have numbers and performance.
Conversations about their performance but.
World transitions have been smooth and in the upcoming months, we will have better data to share on performance trends, but for now the focus has been on getting the building in the right hand, and as Youll see about 16 to 20 operators.
The focus has been very deep and very sharp shooter ask where are you on defined for every single asset the right. Operator, so that's been the top priority so far.
Yes.
We will go next to Steve <unk> with Evercore ISI.
Yes. Thanks, Good morning shock 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 sort of the distress in the system. You guys were obviously very active last year and I'm just curious.
You know what it takes to sort of shake the tree and and how the returns might have changed kind of looking forward on the on the new deals.
Yes, Steve I don't think I have much to add.
Nikhil has something to add after I'm done I'll just tell you that this is sort of the only timing I've seen.
Where there is opportunity in all three product types across all three countries I do you usually don't see that and Thats driven by last couple of years have been primarily debt driven right. So we have seen a lot of opportunities in the IRR.
We have done senior housing now.
10% call it circa 9% some higher some lower but call it around 9%.
Historically I have said.
Medical office is an interesting business to buy are.
Interesting space to invest around call. It seven plus Unlevered IRR finally, we're seeing opportunities in the eight plus level.
And when the wellness side, where.
The cap rates have been very very tight IRR have been in the sixes were finally seeing there in the high Sevens right. So that's sort of I would say.
Where the different investment landscape, where we're seeing opportunities but depends on some are obviously higher we're still seeing some double digit opportunities.
But I will tell you the other thing is.
Because it's not just debt driven but also equity driven most of the stuff that we have bought in last couple of years, where we're fundamentally focused on right location right product right basis.
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're seeing opportunities that with very good basis with very good locations assets are also starting to come with cash flows that's sort of I will say the slight.
Change at nuance of the investment landscape, but I don't know new Kelly you want to add and I think the other thing I'll add is we just go through a lot of pay in an effort to try and be the highest quality counterparty for someone to deal with.
Other it is the speed of execution, whether it is across the timeframe of a transaction taking 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.
We will take our next question from Rich Anderson at Smbs fee.
Hey, Thanks, good morning, everyone.
If I could just.
Good morning on the <unk> very very interesting indeed.
Right.
Just some thoughts around it 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.
And how much of the Io portfolio that you have today didn't qualify will there be kind of changes there too.
Have them pass the test so that they also can qualify for the <unk> ruling.
Yeah, So I'll take the second part.
But we.
We have independent living that are stand alone for example holiday portfolio as well as our Canada portfolio. That's roughly I would say two to three fourth of the independent living that we own that obviously qualify how this relates to.
When independent living as a part of the continuum, we will figure that out.
Most importantly, I wanted to focus on what I said before that you will see with our forward thinking select operators, who have density you will see that we will email one.
Building out the platform right. John has mentioned very clearly that he is building out the platform with our best operators right. This is not a question of what part will do in house versus and what we'll do with the operator. We have also another 15 to 20000 units in the women's housing sector.
Which obviously, we always could have done in house right. So this is finding the right balance of regional density with all of our products that are out of that region and bringing in house, where we have the density forces are keeping it outside when our partners have density. So the game is not.
Not.
Two who does what.
This is not a fight off just because we do something we will do it better. The main goal is with our operating partners build this.
Operating platform to the highest quality technology and systems and processes and data to deliver the best outcome for our residents as well as.
Frankly employee experience.
John you want to add anything to that.
Thats said perfectly and I would just add in a sense of the speed you can only imagine we're moving and we have been moving extremely fast too.
Address the opportunities that we see.
Definitely build on success, it's not exactly what John saying Thats not about going out and trying to control everything is about creating success that drives value to all the various stakeholders, so that thats, where our heads are at.
And in the and there'll be a little bit of a lag in the sense of where we spend money on G&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.
Onto the books, so little bit of a lag there, but ultimately it'll offset and then the improvement will be at margins.
We will go next to one Santa Maria at BMO.
Hi, Good morning, just wanted to hit on the shop same store same store NOI growth guidance.
Chuck I think you mentioned in your opening remarks about the exit run rate and focusing on that so maybe hoping you could provide a little color there and should we assume that there is any incremental transitions and 23, you mentioned Rui having.
Growing going forward to transitions as well. So just curious if you could maybe just comment on those two moving pieces.
Yeah.
Yeah. Thanks.
Thanks, Ron so on.
The transition piece I will start with that.
There is not a contemplation of further transitions in our guidance so.
Our first quarter is about 85% of our open and operating buildings as of 12 31, and our first quarter is 85% of that same store and that grows to mid 90. So on average kind of 90% of the <unk>.
<unk> been operating at.
Assets in that pool.
What was the first question.
Okay, the cadence or the exit run rate.
Yes. So if you think about it we're building occupancy rate you know that Q1 is sort of the weaker point and the occupancy spectrum.
And you build occupancy occupancy growth.
<unk> through spring and summer so your occupancy build on an average basis, you get closer to sort of that Q3, Q4 level, where you will get a better.
Revenue, if you will right sort of in that in that annual journey now think about expenses, which are also coming down right. So you have you probably have better significant direct entered Q4 to Q1 right.
Following both occupancy both revenue as well as expenses.
Expenses I think about how.
Other other situation that I've described before I think the last call or maybe the one before is how revpar builds right you move your rents on a bunch of people at the beginning of the year 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 play.
He is out and then you changed that.
In place rent through your market rent, which is also going out for the year. So if you think about from an occupancy from rates from expense improvement, which as you know we are we are glad that agency cost is down from call. It 7% to south for we're very unhappy it still tough for it should be significantly lower than that so if your teeth.
Through all of the main drivers youre going to get a much higher exit run rate in Q4 than Q1.
Well move next to John Pawlowski at Green Street.
Hey, Thanks for the time John Burkart.
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 theres any segments in the portfolio that are starting to hit a wall and just in terms of absolute rents.
Any color there would be appreciated.
Glad to.
Not aware of any pushback.
They of course, when a rent increase goes out there is not a discussion but in the sense of defining pushback as a market response to that I'm not aware of that I think the our partners have done a phenomenal job.
Communicating the increases and the reasons behind those increases and I think our.
Residents.
Understand that they don't want to see important services and care cut they wanted to have what they pay for the best of that and.
We're just not aware of any issues there.
Yes.
As John as I mentioned, I expect rent in a revpar increase to be better in 'twenty three 'twenty. Two so that sort of gives you will see what the market gives us but as we sit here today, we think the pricing pricing environment is getting better.
Okay.
Okay.
Okay.
Andre.
We'll move next to Vikram Malhotra with Mizuho.
Thanks for taking the question just maybe building upon the pricing bar, maybe maybe Sean called John If you can just.
Elaborate you talked about the exit.
Our run rate earnings run rate.
<unk> to the earnings power can you talk about.
Both on pricing and take Capex and do you see.
Inflation come in your costs come in.
Maybe ability to push higher rates, you said near term is not hampered but.
As you see inflation come in but occupancy is still no.
Can you just give us some context on how you see pricing power evolving until occupancy recovers and then similarly capex wise.
After two three years of Covid.
What do you need to invest from a run rate standpoint, maybe percent of NOI.
<expletive> needed.
Over the next few years on Capex.
Let me try that.
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.
Predominantly in last two three years asset, we bought one or two portfolio as the value add portfolio and when we bought it for example, the holiday Atria portfolio. We told you exactly what we underwrote to spend on Capex right. We bought in an extremely cheap basis, and we told you exactly what that capex needs are and how we.
<unk> planned to invest so from that perspective.
You think about going forward I do not believe outside those couple of value add investments that we have done and we report told you otherwise when we've done it we do not believe that business is capex needs outside the.
Sort of inflationary increases that are happening anything has changed now I think John has a very large plan very big plan to rehab monetize the portfolio sort of fundamentally changing.
What the value proposition might look like obviously, we'll do that if you think that you are getting fantastic return on that incremental investment, but from a regular capex perspective, I don't think anything has changed.
From a pricing power standpoint, I don't think what else I can add other than to what I said to John's question on the earlier question, which is we're feeling very good about the pricing power across all our countries and across all our product type as you know that Canada has been a laggard feels like Canada starting to catch.
<unk> U K and U S has been strong and continued to be strong.
So we're feeling feeling pretty good John you want to add anything to that yes.
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.
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 youre talking about what some people would call fluff and buff but <unk>.
Enhancing the units a little bit and really improving that value proposition and getting paid very well for it very much similar to.
What many of the multi have done so.
But thats all.
Enhanced returns.
Vikram I Miss.
The one part of your question I'll just tell you.
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%. There is significant part of the portfolio call it give or take half of the portfolio, 45% of the portfolio in that.
Hi, <unk> mid to high 80% occupancy there the pricing power changes to.
Raising price because have no room to sell right. So there is a dynamic that's going on and we will increasingly we will get to the point as we move average occupancy for the portfolio more and more properties within the bucket that you will get to that pricing power. Because frankly, you have no room to fill so that transition is happening and will continue to happen in 'twenty three.
We'll take a follow up from Michael Griffin at Citi.
Hey, thanks.
Wanted to clarifying question.
Joining the call if I heard this earlier, but just on the assets that are continue to be operated by <unk>.
Living in memory care, what is the coverage on those do you happen to have that handy.
Yes, those those are covered one times, an EBITDAR basis.
Okay.
And we'll go next to Gerrick Johnson at Deutsche Bank.
Yes.
Multiple small bit of it but.
Wrapping levels.
Now at 80% occupancy and senior housing I believe that near fully staffed and please correct me if I'm wrong.
But the question is what are you modeling, we're including in guidance for 'twenty three relative to agency labor as a percentage of labor expenses.
And do you view this as possible low hanging fruit to get back to pre pandemic levels of agency.
Especially as John and the team increased property level accountability.
Let me try to take part of that.
And will take part of that question. So we do not view this as a low hanging fruit, but we do view this as a crude that can be blocked right. So there's a lot of effort that's going on.
We'll tell you what model frankly, I don't know.
But I will tell you that with this.
It is.
Agency Labor is a function of frankly weak management that just what it is weak leadership.
And we're working with our <unk>.
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 nine but by no means I want you to think that I'm actually happy with that number that number needs to be substantially lower and we need to we need.
Two.
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.
From a modeling perspective, we're essentially.
The high threes as a percentage of compensation, so pretty flat from where we came out of 2022.
Well move next to John Pawlowski Green Street.
Thanks, I just have one follow up on the private letter ruling.
What else needs to happen internally in terms of people systems.
Technology before you're actually able to sell.
Op.
Operating a substantial amount of IL units I'm, just curious how quickly we could actually see well tower operated assets.
Yes.
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 from my past experience.
Two companies birds, 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.
The timing of it could be can be faster. If we wanted it to be faster by stepping in that way, obviously, what going back to what we are building as I've mentioned previously we're using largely existing modules. There is there are some creative stuff going on right now.
And with the team, but generally it's a existing modules.
That are out there and so that doesn't take that long either so the speed can go.
Fairly fast.
Bigger issue is we're focused on success and we're focused on working with people to deliver the success is thought about us necessarily doing it it's about us delivering.
Delivering success for all the stakeholders. So that's that's where my mind is that but.
Speak to go pretty fast.
And that will not surprise me to see that we start to self manage some assets <unk> assets in calendar year 2023.
Okay.
And that does conclude today's question and answer session I will turn the conference back over to management for any closing remarks.
Okay.
Okay.
Okay.
Yeah.
And that does conclude today's conference call you may now disconnect.
Okay.
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