Q1 2023 Welltower Inc Earnings Call
Speaker 2: Please stand by, we're about to begin.
Speaker 2: Good morning ladies and gentlemen. Welcome to the Whale Tower first quarter 2023 earnings release conference call and webcast. At this time all participants are in a listen only mode and please be advised that this call is being recorded. After the speakers prepared remarks there will be a question and answer session. If you would like to ask a question during this time.
Speaker 3: be deemed forward-looking statements in the meaning of the private securities litigation reform acts. Although well-tired believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Bacter that could cause actual results to differ materially from those in the forward-looking statements are detailed and accompanied file against the FCC.
Speaker 3: With that, I'll turn the call over to Sean for his remarks.
Speaker 4: Thank you, Matt, and good morning, everyone. I'll review our first quarter results and describe high-level business trends and our capital allocation priorities. John will provide an update on the performance of our Senior Housing Operating and Outpatient Medical portfolio. The team will walk you through triple net businesses, balance sheet highlights, and revised guidance.
Speaker 4: Nikhil is also on the call to answer questions. We're at least to report another strong quarter with results that would exceed our expectations. A strong performance was once again driven by outsized growth in a senior housing operating portfolio, which generated 23.4% same-store NOI growth with both revenue and expense trends continue to move in the right direction.
Speaker 4: In fact, we produced our fifth consecutive quarter of double-digit organic revenue growth on the back of strong pricing power and occupancy built, with each coming slightly better than expected.
Speaker 4: But perhaps equally, if not more encouraging, is the margin expansion story, which is being driven by a significant improvement on the cost side. While we generated strong revenue growth in 2020, these gains were largely offset by pressure across the expense tax.
Speaker 4: which ultimately resulted in a lost year in terms of partial growth.
Speaker 4: We are delighted by the progress made on various expense items, but particularly pleased by the sharp decline in agency labor or temporary staffing across the portfolio. Over the past few quarters, we have noted the headway our operating partners have made in net hiring as general employment rates have been weakening.
Speaker 4: This has ultimately translated into a meaningful reduction of prohibitively expensive temporary staffing with costs declining over 50% versus the first quarter of last year. Though we still have a long way to go to eradicate this problem, which is largely attributed to community leadership challenges.
Speaker 4: We believe that this trend, along with strong pricing power, will continue to be a tailwind for further margin expansion.
Speaker 4: From a product and geographic standpoint, while assisted living continues to outperform independent living, IEL pricing is starting to strengthen.
Speaker 4: to almost 40% margin for the first time since COVID. We've grateful to our partner Mathieu Duguay and his team for their hard work and dedication.
Speaker 4: Sticking with the international theme, our UK portfolio continues to produce strong revenue growth, and we're starting to see some green shoots on the cost side. During our call, I expressed my enthusiasm around the appointment of Lorna Rose as the CEO of our largest UK operator Avery. Lorna is already making significant impact with a strong commercial acumen.
Speaker 4: and impeccable leadership skills. We expect our UK portfolio to be a strong source of growth as we look at 2024 and beyond.
Speaker 4: Returning to the US, our largest operator, Sunrise, continues to produce strong top and bottom line results. There is meaningful embedded upside to this incredibly well-located and virtually impossible to replicate portfolio, which sits at mid-70s occupancy today.
Speaker 4: Also during our last call, I mentioned that we expect meaningful step function growth from a large regionally concentrated portfolio of StoryPoint. I'm pleased to report that Dan and his team has started the year off with a bang as their no excuse culture and relentless focus on performance is paying off significantly.
Speaker 4: And last but not least, Oakmont. A year and a half ago, we moved six well-located California properties to Oakmont, and at that time, Courtney Siegel, Oakmont's CEO , made me a promise that her team would lease out this portfolio in two years. I'm pleased to report that the portfolio today sits at 86% occupancy.
Speaker 4: Well, NOI has gone up 13 times since then. Courtney has set a simple performance-driven culture at Oakmont. If you are not 95% occupied, you are not performing. I am confident that I will be able to soon report to you that this portfolio has reached 90-plus percent occupancy level. The pursuit of higher standards is a prerequisite of high performance.
Speaker 4: Last year, I described to you that we as capital allocators strive to create partial value by compounding over a long period of time, but doing what's right in the long term for our continuing shareholders may result in short-term pain.
Speaker 4: Our proactive portfolio management efforts, which includes transition of properties to a strongest operatives is an example of this philosophy. I encourage you to look at the case studies within our business update presentation for more details on Oakmont success and the other key operatives including P's capital, which has created substantial value for shareholders. Today was the third calling of work. So this week we ayrall the official legislative leadership and
Speaker 4: following the transition of a portfolio of skilled nursing facilities two years ago. By operating these facilities more efficiently from an expense perspective while increasing quality mix, the disease has been able to improve EBITDA by more than 75% relative to the pre-COVID levels.
Speaker 4: This point is further underscored by our COVID class of acquisitions and our further efforts to transition other assets over the past few years. We're just beginning to capture significant embedded NOI from these properties as they return to their pre-COVID NOI levels and higher. And in fact, we have achieved-
Speaker 4: 20% of that incremental NOI in the past quarter alone. Shifting to the operating platform are asset management initiatives.
Speaker 4: As you know, as you have come to know, at World Tower, we vehemently reject mediocrity and are in relentless pursuit of higher standards. We continue to believe that there is an opportunity to recognize meaningful cash flow from the
Speaker 4: using machine learning, our operating platform initiatives are now becoming more tangible, moving from drawing boards to pilots.
Speaker 4: While a few weeks don't make it trend, we are optimistic that John and his team are on the verge of some real creative breakthrough. More on that in coming quarters.
Speaker 4: In terms of recent operating conditions, while I don't like to fix it on short-term trends, I want to mention the consistent rise in demand for a senior's product in Q1. Tour volumes are up roughly 20% in the quarter, partially attributed to an easier comparison period last year due to Omicron variant, but also the recent rise in demand for a senior's product in Q1.
Speaker 4: because of great organic demand as we enter another year of significant growth of the 80 plus population. These and towards a picked up far than in April , while we remain confident in the prospect of business, I'd be remiss not to acknowledge the rising macroeconomic uncertainty as we approach the summer and fall leaf season.
Speaker 4: the seasonally lowest lowest point in the year. Therefore, we need to see the market what market gives us during the all-important upcoming leasing season.
Speaker 4: The need-driven nature of our product gives me hope that we will outperform majority of the asset classes, not just real estate, but it is also important for you to understand that we have no delusion of certainty.
Speaker 4: Moving to capital allocation, since our last call, US banking sector has started to show some significant signs of strength, resulting in material declining trade flow in the economy. While no one is rooting for macroeconomic uncertainty, the current backdrop has...
Speaker 4: certainly created a further expansion to our already attractive set of capital deployment opportunities.
Speaker 4: We remain disciplined and will not risk the enterprise that we built with blood, sweat, and tears, but we remain optimistic that we'll be able to grow our portfolio with well-located assets at a highly favorable basis and in-place cash flow. To illustrate that point further, we acquired 529 million dollars of assets during first quarter at a great basis.
Speaker 4: in place cash flow. The K Street Medical Office building that we acquired in DC perhaps tells you how favorable the investment environment has become. We continue to see underwriting standards starting meaningfully, leverage levels decline, and banks are now requiring more commercial deposits and more reports.
Speaker 4: opportunities to deploy capital across senior housing in all three countries, outpatient medical in the US and data opportunities on the skill side. Our team remains active and yet highly disciplined and price conscious as always. From a balance sheet standpoint, I wanted to quickly highlight
Speaker 4: The continued progress we made in terms of leverage and liquidity under Tim's leadership, he will get into more details, but I'm very pleased with significant deleveraging that we have achieved in past year, with net debt to EBITDA falling almost a turn to 6.3, with further organic deleveraging going forward.
Speaker 4: and our ability to source over a billion dollars of capital this year in the midst of a very challenging capital markets environment is a testament to the confidence entrusted in us by the banking community, the lenders, our investors, and our other partners. With approximately $700 million of cash on the books and an unrun line of credit, we are not only positioned to endure further capital markets volatility, but we are pushing this way to a investable target why have we been in a bar for years now other than art. So it will claimed in the digital world where we are right now and since then we want to be profitable. At our hub we have had many considerations for building a financial mutual fund spark for example school loans and summer contracts
Speaker 4: but also to deploy capital as opportunities arise. To summarize our optimism regarding the long-term growth trajectory of the business remains firmly intact. Top-line growth remains strong, expenses are moderating, and our external opportunities continue to expand.
Speaker 4: while all the while John and his team are making progress in turning our vision of creating a world-class operating platform into a reality. And with that, I will turn it over to him for an update on the operational element of the business and build out of the platform. John ?
Speaker 5: Thank you, Sean. Another great quarter, 11% same store NOI growth of the prior year's quarter, led by the senior housing operating portfolio with 23.4% year-over-year growth. These results speak for themselves. They're great, so I'll provide limited color this quarter.
Speaker 5: Medical Office Portfolios first quarter same-store NOI growth was 1.6% over the prior year's quarter. As our guidance outlines we expect the NOB portfolio to deliver between 2 to 3% same-store NOI growth in 2023 and therefore
Speaker 5: we expect the remaining three quarters to be well above the first quarter number. Same-stroke occupancy was 94.9%, while retention remains extremely strong across the portfolio at 91.4%.
Speaker 5: The 23.4% first quarter NOI increase in our senior housing operating portfolio was a function of the 10% revenue growth and continued expense control for the period.
Speaker 5: I want to remind everyone that last quarter's revenue growth was driven in part by an operator pulling forward rental increases.
Speaker 5: Excluding that specific operator, revenue growth in Q1 would have been 10.8%, 130 basis point increase over the growth for Q4 2022 for the comparable portfolios.
Speaker 5: All three of our regions continue to show strong revenue growth starting with Canada at 7.7%,
Speaker 5: And the US and UK grow in 9.3% and 17.4% respectively. Revenue growth for the quarter was driven by a 240 basis point increase in average occupancy and another quarter of healthy pricing power with rev 4 growth of 6.8%.
Speaker 5: The 10 basis point increase in sequential occupancy during the first quarter, period that it historically sees an occupancy decline due to seasonal factors reflects the continued increased demand for senior housing as we move into the all-important spring and summer leasing season.
Speaker 5: Turning to expenses, agency use continues to decline, leading to a 53% expense decrease year over year for the same store portfolio in the first quarter of 2023.
Speaker 5: WellTower's continued aggressive asset management is keeping expenses in check, enabling margin expansion.
Speaker 5: During the first quarter, the operating margin expanded 240 basis points over the prior year's quarter. Regarding our operating platform, I'm very pleased with the progress the teams have made. We are executing rapidly as planned. As many of you know, I'm somewhat secretive about the details of our platform.
Speaker 5: for proprietary reasons. However, I will say that one of the challenges our operators in the pilot are having is keeping up with the increased qualified leads.
Speaker 5: a very good problem to have. We're at the very beginning of this process, but all lights are green at this time, and I'm very excited about the future.
Speaker 5: I'm grateful for the diversity of operational experience, engagement and enthusiasm of those operators who understand how the platform will transform the business. Lead to consolidation and great success for the operators who leverage our best in class platform.
Speaker 5: to improve the delivery of service to our customers, the quality of life of the employees, and returns for our owners. I will now turn the call over to Tim. Thank you, John . My comments today will focus on our first quarter 2023 results, performance of our triple net investment segments in the quarter, our capital activity, a balance sheet liquidity update, and finally, the overall performance of our total investment. Thank you, John . Thank you, John . Thank you, John . Thank you, John . Thank you, John . Thank you, John .
Speaker 5: our updated full year 2023 outlook.
Speaker 5: WellTower reported first quarter net income attributable to common stockholders of 5 cents per diluted share in normalized funds from operations of 85 cents per diluted share, representing a 4% year-over-year growth and 13% growth after adjusting for the year-over-year impact from a stronger dollar and higher base rates on floating rate debt.
Speaker 5: We also reported total portfolio same-store NOI growth 11% year-over-year. Now turn to the performance of our TripleNet properties in the quarter. As a reminder, our TripleNet lease portfolio coverage and occupancy stats reported a quarter in arrears.
Speaker 5: In our senior housing Triple Net portfolio, Same Store NOI increased 0.2% year over year and fairly 12-month EBRD coverage is 0.86 times the quarter.
Speaker 5: Next, SAMHSA or NOI in our long-term post-acute portfolio grew 4.2% year-over-year and trailing 12-month EBITDA coverage was 1.33 times.
Speaker 5: Turn to capital market activity. In the quarter we raised $413 million through our ATM program which helped fund a creative investment activity during the quarter and maintain debt to EBITDA at 6.31 times at quarter end, a substantial decrease from 7.1 times at 331 2022. In March we swapped $350 million for $1 billion.
Speaker 5: last year under a $4 billion revolving line of credit and $393 million of expected proceeds from near-term dispositions and loan paydowns.
Speaker 5: Representing $5 billion in your term will have available liquidity.
Speaker 5: Over the last 12 months, we've seen leverage menically improved from its post-COVID peak reaching the first quarter of 2022.
Speaker 5: As our senior housing operating NOI has started to recover, we've experienced the beginning stages of a cash flow growth driven deleveraging, and we have amplified this organic leverage reduction to the disciplined approach to capitalization of our external growth pipeline.
Speaker 5: The result of this approach is a balance sheet that in its current form is poised to be substantially lower levered than it was pre-COVID as we continue to see senior housing operating and will then recover. Lastly, moving to our full year guidance.
Speaker 5: Last night we updated our previously issued full year 2023 outlook, the net income attributable to common stockholders to a range of $0.57 to $0.72 per diluted share and normalized FFO of $3.39 to $3.54 per diluted share or $3.46 and a half cents at the midpoint.
Speaker 5: Our updated normalized FFO guidance represents a two and a half cent increase in the midpoint from our previously issued guidance.
Speaker 5: This increase in guidance is reflective of two cents of fundamental outperformance, mainly from our senior housing operating segment, roughly half a penny of which is from subsidies received in Q1.
Speaker 5: and a half cent from investment activity completed in Q1.
Speaker 5: Underlying the 7-po guidance is an increased estimate of total portfolio year-over-year same-sort-in-why growth of 9% to 13%. Driven by sub-segment growth about patient medical 2% to 3%. Long-term post-acute 3% to 4%. Senior housing triple net 1% to 3%. And finally...
Speaker 5: Increased senior housing operating growth of 17 to 24% year-over-year. The mid-point of which is driven by better than expected expense trends to start the year, along with year-over-year growth expectations of revenue approximately 9.5%.
Speaker 5: Underlying this revenue growth, the expectation of approximately 230 basis points of year-view or average occupancy increase and rent growth from approximately 6.3%.
Speaker 4: And with that, I'll hand the call back over to Sean. Thank you, Tim. Well, we're very pleased with our quarterly results and our improved outlook. It's a bittersweet moment for us in Toledo, as we mourn the passing of George Chapman. George was the former chairman and CEO of Healthcare Read.
Speaker 4: World Tower's predecessor company, and a gifted person, and a visionary in the healthcare real estate space, and perhaps above all, an incredibly kind and generous individual. During his many years at Healthcare Read, George not only served as a leader of the company, but was also a mentor and teacher to numerous individuals across the real estate space.
Speaker 4: he has done for us and he'll be missed dearly.
Speaker 4: Lastly, before we go into Q&A, I wanted to highlight a document which we posted on our website last evening, which was also part of our shareholder letter published a couple of weeks ago. This document contains a set of ground rules or shared principles which form World Tower's philosophical foundation for long-term compounding through capital allocation, risk mitigation, and culture amongst... Oh, one,
Speaker 4: other factors. And ultimately, the most importantly, ultimately and most importantly, who we seek as our long-term investor partners as we execute our mission of delivering to them superior, absolute and relative total shareholder returns.
Speaker 4: I will now open up the call for questions.
Speaker 2: Thank you very much, ladies and gentlemen. At this time, any questions, please press star one. If you find your question has already been addressed, you can remove yourself from the QB pressing the E-Pound key. And just a reminder, we ask you, please let me yourself to one question initially.
Speaker 2: We'll take our first question this morning from Derek Johnston of Deutsche Bank. Hey, everybody. Good morning. Can you share your thoughts on further transitions and potential consolidation of operators within the portfolio? Because in your case studies, you know, we were most impressed with Kisco. Are there opportunities to expand this relation in seven or eight communities?
Speaker 2: Like you did with the King's Denzing Tint and look, we ask, given all operators are not operationally equal, so is there a plan or potential for further accretive transitions?
Speaker 4: So, Derek, you asked a lot of questions, so I'll try to, I think I'll try to remember and answer the question. KISCO is one of our best operating partners, and there are very significant opportunities to grow with KISCO, whether that's through transition, that's through acquisition, that's through development. Obviously, there's no question that they have absolutely hit it out of the park.
Speaker 4: So, and we're having all these conversations going on. As I mentioned on last quarter's call, I believe, that we finally have figured out, hopefully, how to do transitions very accretively as you, you know, sort of your words, but I think that's a good one. I think I've given some examples of, you know, in my script, and
Speaker 4: So these properties, the first trans, these 18 properties, the story point took over from the existing operator. At that point, at the end of Q2, it had 74% occupancy, call it circa $6.5 million, $6.4 million of annualized NY. And nine months later, they started taking this over in July .
Speaker 4: you would think that through transition and all of those, you know, obviously moving these assets, NOI, it'll be a great win if occupancy and NOI held. Nine months later today, not today, end of March, you know, in the quarter end, occupancy was 82%, NOI was $16.2 million.
Speaker 4: That tells you what a great operator with significant focus can do. So it is my belief that now you got, obviously, John and his team and with our premium operating partners who have done this many times over, during the most difficult time of COVID. Let's see about that.
Speaker 4: has figured out how to do this extremely well and creatively. I gave you a bunch of examples. We obviously provided more case studies. And we do think that there is significant opportunities to enhance our portfolio by what I said, optimizing four things, right? It's an optimization problem, which is location, product, and
Speaker 4: price point and operator. So that's what obviously Swagat and Kevin and their team are trying to constantly do, and we are executing that with our premium operating partners.
Speaker 4: and operate that, right? So that's what obviously Swagath and Kevin and their team are trying to constantly do, and we're executing that without premium operating partners.
Speaker 2: Thank you. We'll be going back to now to the Commerce Diversity at Wells Fargo.
Speaker 2: Good morning out there. Thanks for having me on the call. A question on labor for me. Can appreciate that Welltower, the operator base, has made a lot of headway on improving labor sourcing methods across the portfolio and then the positive trends related to agency usage. So I'm curious, what does the training schedule look like for a new hire in a senior housing facility? And can you provide any color or number as to what turnover levels look like currently compared to say this time last year?
Speaker 2: and then what your expectations or goals are related to that turnover metric looking forward.
Speaker 5: Yeah, I'll answer that. So, a couple things there. One is things are.
Speaker 5: going fantastic. We've fundamentally changed how we looked at or how the operators look at personnel and effectively created a hiring funnel to move people through that process. The training is dependent upon position, but can take from a few weeks to a couple of months in some jurisdictions.
Speaker 5: as far as certain requirements that are there. One of the things that I want to bring up that's pretty important, it's a subtle piece, but it's pretty important. We appreciate the agency stepping in when necessary to provide some assistance, but it's obviously both disruptive and not very efficient.
Speaker 5: So, as we move forward and we reduce agency and create a group of steady long-term employees, that substantially improves the quality of life for our residents. It improves our effectiveness and our efficiency. So the benefits are not just reduced expense. The benefits will come through.
Speaker 5: via increased occupancy, increased rev-poor, et cetera. As far as for the turnover, the turnover at this point in time is going down. We have numerous initiatives to improve the quality of life for our employees as well. I've mentioned in the past we are focused on that. We're looking through the lens of the employees. They're very hardworking people and making sure that they have what they need.
Speaker 5: really for the whole aspect of their employment, whether it be things as simple as parking to break rooms to time off, etc. We've put a lot of effort into that. We continue to put effort into that. So that's a very positive area. Thank you for the question.
Speaker 6: Thank you the next now to Dicor Mahotra and Mizzou O.
Speaker 4: Thanks for taking the question.
Speaker 4: Shankar, I have a broad two-part question surrounding investments. Just maybe first, one of your peers had some challenges with the debt investment. They had to convert that. There are some headwinds there. If you could maybe give us some color on your loan book and particularly anyother
Speaker 7: the investment you made with 8C1, I think a couple of years ago, it would make correct me, maybe it was over 700 million. I just want to understand the structuring, perhaps kind of the time you underwrote that and just maybe give an update on the status. And it's related to investments.
Speaker 7: Shanku, a very unique cost of capital, relative cost of capital retain. In a world where equity and debt is very, very hard to get, a lot of fear in the market. I'm just wondering, can you broadly give us a turn where you're greedy in terms of capital structure or type of property? Thank you.
Speaker 4: Let me try to address both of those questions and Nikhil will jump in if I miss anything. So let's just start with the second question first. We are always greedy when others are fearful, as you know. Where we are finding opportunities, as I mentioned on my prepared remarks, is not a good thing.
Speaker 4: that we see a substantial actionable pipeline in seniors housing in all three countries. This is the first time we're seeing opportunities not just in US, but also in Canada and UK. So we're very optimistic about senior housing opportunities in all three countries, and we are seeing substantial opportunities.
Speaker 4: All these small deals, as you know, become more very focused on individual buying, individual assets, small transactions, outpatient medical in the U.S., right? So that sort of – and we're seeing across capital structure, we're seeing opportunities on the debt side in the skills side of the business.
Speaker 4: was originated after COVID.
Speaker 4: And we try to, as we have discussed in many of these cases, so let's just talk about three buckets and you'll understand. The first bucket is HC1. You have specific questions, I'll get to it. The second bucket is our partnership is related and as I mentioned in previous calls, these developments are structured as a participating mess, right? That's the second bucket.
Speaker 4: much focused on not just debt but also last dollar basis of every debt and possibly, as in the majority of these cases, an equity feature that is attached to that debt. So let's talk about one at a time. We talked about the Relative Development Pipeline and that's obviously structured as a participating base by definition that's equity like structure.
Speaker 4: pound basis of that loan is $32,000 pounds per bet, which tells you how low leverage that loan is. But to your question, if we have to take that over, which is we have no intention of, but if we have to take that over, there is no senior loan that exists in front of us.
Speaker 4: Understand our last dollar basis, you know what the values are in UK, that sort of gives you a sense of what it is. But more importantly, if you go back and see what I said when we did the loan.
Speaker 4: We have actually a substantial amount of equity behind that in terms of warrants, right? So, and then you go to the last one, there are some, you know, pure debt, there's a lot of participating prep, participating means, that's sort of the convention of the loan book. So, we don't lend.
Speaker 4: anywhere where we don't think the last dollar is not significantly beneficial to us. We hope the people who borrow from us will do substantially well, and from the equity participating nature of many of these loans, will participate with them, not just get a return, on and off our capital. Hopefully that's what's helpful for you.
Speaker 8: I'll just quickly add on the two related projects that have delivered, New York and San Francisco. New York senior housing opened in January of this year, and so four months in. Occupancy is beyond where we underwrote at the end of the first year. And San Francisco, which has been open for about a year, is also ahead of underwriting. And so rates are substantial above what we see. Exactly.
Speaker 2: Thank you. We'll go next now to John Pawlowski at Green Street. Thanks for the time. Sean, you made the comment recently that if John and team are successful with their initiatives, that the pace of improvement and expense growth will intensify from here. We thank you for coming out of Green Street what an Cyb legly
Speaker 9: I'm just curious, if some of the early operating issues you're currently working on more flowing through the cost structure of the business in racing quarters, how much lower would expense per occupied room growth been relative to like the 3.5% reported growth in racing quarters.
Speaker 4: So, I'm going to take that and answer that question in two parts. First is asset management initiative and that asset management initiative that John has with his team, that you are seeing the impact on the agency labor and replacing that agency labor with permanent employees. And John mentioned many other, you know, sort of initiatives that's going on to attract and retain.
Speaker 4: which would continue to reduce that number. The other side of that, your question is the operating platform question. The Earth's today, John , is entirely focused on top line. And, you know, we are seeing some signs of, as I mentioned on my prepared remarks, that we've just moved on few places from drawing both to pilots and we're seeing some significant successes on leads and other situations that, you know, obviously, we're not prepared to talk about it.
Speaker 4: that you're going to see on top line, not on the expenses yet. He will get to the expenses, but he's focused on the big ball today on the revenue side. Thank you. Next, now to Michael Griffin at City. Great. Thanks. Maybe turning back to capital allocation.
Speaker 2: least for the K Street one seemed kind of low. Maybe the keel in your underwriting, are you assuming maybe a stabilized, you know, high eighties, low nineties occupancy? And then, and then shock as a capital allocator, if we go back to your third quarter prepared remarks about those, those five sources of capital, does any one of those whether it's
Speaker 4: that are equity selling assets. Is anyone's screen is more attractive right now? Thank you. Okay, Nikhil will walk you through the MLB acquisition that we did in the quarter, but let me just answer some of the other questions you asked. So, as you think about it, the five sources of capital, we have accessed,
Speaker 4: three of them this quarter, right? We have done public equity, we have done private equity, right? We have sold assets and took capital and very attractive, obviously, returns. You can see it, you know, as an example on slide 12, the case studies that we put together on some of those assets and how we significantly maximize value there.
Speaker 4: We still have some participation left in that transaction. And the other thing was debt, but that was on the secured side. So as you think about the menu of capital, don't just think this is public equity and public debt, right, which is obviously a very good source of capital and has been for us. But also think about
Speaker 4: private source of capital, whether it's joint venture, asset sales, and private source of debt. Senior housing is a housing business and we have substantial portfolio under leverage portfolio in US and in Canada, which has very significant agency support. So this quarter in US, we have executed one transaction but as you think about capital, think about menu of options.
Speaker 4: And depending on what that manual option, how it is priced on a given day, we execute and think and only think through that use of capital as it relates to what are the returns of that as we deploy the capital back on an unlevered IRR basis.
Speaker 8: And from the perspective of a long-term return, that's just how we invest capital. Nikhil? Yeah, I think, Don, to answer your question on the MOBs, if you look at the K Street, that's roughly 20% of the capital we deployed towards medical office this quarter.
Speaker 8: case rate and we're buying it at less than half of replacement costs with a 6.6% in place yield at low 80s occupancy and we've underwritten this to be beyond a 8% stabilized yield with occupancy with a minor 9 in front of it. Let me just think about the quality of the real estate. I mean it's three blocks from a metro station.
Speaker 8: It's two blocks from the George Washington University Hospital. You've got some great parking committed. It's that high quality of an affidavit that you can get. And we're getting it with very healthy and way skilled with a lot of off-site. The other two portfolios, they're core as they get. They've got healthy lease terms. High occupancy of about 95%.
Speaker 6: and very good affiliation with great health systems. Thank you. We'll go next now to Joshua Dinnerline of Bank of America.
Speaker 10: Thanks everyone. Tim, you mentioned there's more de-levering ahead. Just curious if you could expand on those comments and how we should think about the trajectory of that de-leveraging.
Speaker 5: As you're saying, so we've, as you've talked about in the past, there's kind of two prongs to which we get the balance sheet back to the range, pre-COVID range target range of five and a half to six times leverage. And the main one is just seeing an ally recover back to pre-COVID.
Speaker 5: back to that level and then obviously we plan to take it well and well beyond that. So think about our current leverage profile.
Speaker 5: Part of our deleveraging from 7-1 last year has been driven by the kind of beginning stages of that NOI recovery. And then as we've capitalized our external growth pipeline, we've continued to be pretty disciplined about the way that we've capitalized it via equity. And so we've driven down current leverage much faster than it would have if it had just been purely...
Speaker 5: our current capital structure, we do nothing, and you continue to see NOI recover back to pre-COVID levels. You'll see us get to a leverage level that's well below where we would have been, or where we were pre-COVID.
Speaker 11: feedback you're getting from the operators, these are the kind of the residents and how you see that pricing maybe trending you know into the second half of the year and does that continue in the 24.
Speaker 5: across the board. The feedback from the operators is very positive. What's going on is people are appreciating that the environment that they have, they're appreciating the social environment and the demand is strong and it's quite affordable. Obviously it's an asset play for the assisted and memory
Speaker 5: And so the expectations as to how this plays out, we have nothing that we're seeing would indicate that it's not going to continue with great strength for the foreseeable future. It's a supply demand situation at one point and obviously demand is substantial and supply is very, very, very limited going forward.
Speaker 4: I'll just add one point of color perhaps. First thing is, Steve, as I mentioned, as you think about pricing power, the initial phase of pricing power has been that our cost has been going up. And obviously, to bring back these communities to a profitable level, the only way to do
Speaker 4: this will actually continue to serve the community if they're profitable, right, over a long period of time, is to increase pricing. And as I mentioned in last call, that you will see the next 12, 18 months handover from pricing because cost has gone up, to pricing power because we have no room to sell, right? And that handover will come.
Speaker 4: And so, you know, the second point is just understand that we're not focused on absolute level of pricing, but we're focused on the difference, the delta between REPOR and XCOR. That's what drives P&L, right? So keep those two in mind, and you will see where our focus has been and continue to will be. As we think, you know...
Speaker 2: Thank you. We'll go next now to Mike Muller of Jake Morgan.
Speaker 12: Current development pipeline, it looks like it's about 15% outpatient medical office and the balance in senior housing. I guess, as you think about anticipated starts over the next few years. Do you see that mix shifting dramatically between those buckets?
Speaker 4: Actually, if you look into the senior housing bucket, you will see the majority of the new capital outlay has been on the wellness side of the house rather than on the senior housing side of the house. And I expect that will absolutely continue.
Speaker 4: Medical office, majority, obviously all of our medical office, I shouldn't say majority, all of our medical office developments have been 100% pre-leased, yield on cost developments that were not exposed to the cost rate. Some hits in different quarters, so you saw a bunch of them hit this quarter, which we have been working on for many, many years, but we should not expect anything different going forward, and majority of that.
Speaker 4: what is showing up as senior housing development are actually on the wellness side of the house. Senior housing development as senior's product is very, very hard to make numbers work today. So we're not that focused on that side of the house unless it is a very special project in a very special location, such as some of the related projects that Nikhil talked about.
Speaker 2: Got it. Okay. Thank you. Thank you. We go next now to Michael Carroll of RBC Capital Markets.
Speaker 13: Yeah, thanks. So if the seniors housing operator wants to access WellTowers platform, what do they have to do? I mean, do they need to sign some types of exclusive agreement or will you help any operator that manages your specific assets? And just one last thought, are there different levels of services that you provide operators? So if you have an exclusive agreement, what do you do?
Speaker 4: of different levels of service and situations that might be going. We'll just focus on the fact that we have a aligned interest with our operators, as always said for years and years, that the Right Ear, Three Ears, or other structures are all about thinking and swimming together, right? You know, and...
Speaker 4: There is substantial upside to many of these portfolios for us, but also for our operating partners. So, this is, you know, we have different types of arrangements with different people. We're not going to obviously get into on this call. But understand, at the end of the day, the goals are very simple, right? We're trying to create a very good environment for our residents. We're trying to create—
Speaker 6: Thank you. We go next now to Austin Werschmit at KeyBank.
Speaker 11: Great, thank you. Shank, you highlighted a robust investment pipeline with opportunities across all your regions. I know you're return driven as you consistently highlight, but given the pricing power you're seeing in IL and Canada or the acceleration in growth you highlighted in the UK heading into 2024.
Speaker 4: Canada is a very tight market with very significant, you know, few handful of owners, handful of banks, and very significant CMA fee present. So returns in Canada usually are pretty tight. We're seeing opportunities to create value through our great operating department that's there.
Speaker 4: UK, we're actually now starting to see very significant returns. We made one investment in UK this quarter, like last quarter, and we're seeing that. So, UK returns are good, but actually very good. But I will tell you the vast majority of opportunities are in the US. And, you know, and frankly speaking, we're seeing a lot of increases in the US.
Speaker 4: because it's such a deep and robust pipeline, that you can pick your spots and make some significant returns. We're seeing the unlevered IRRs in the senior space today without getting into which country, which return for which country, but roughly speaking, I'll say.
Speaker 4: close to double digits. We're seeing opportunities that are in the double digit. Medical office today, our opportunities are eight and a half plus, I would say. And obviously, we're very focused on participating death structures in the SNF side where we can create.
Speaker 4: high team returns despite using some debt and some equity-like features that I talked about and probably in the high team.
Speaker 4: So that's kind of our focus. We're purely return driven, we're purely basis driven, and all we're trying to do is we're trying to figure out where can we add value, not through just financial capital, but those four things I talked about. It's an optimization problem, right? It's an optimization problem of location, product,
Speaker 6: price point, and operator. That's how you make money in this business. And that's how we're trying to create value. Thank you. We go next now to Stephen Vadaket at Barclays.
Speaker 2: Thanks, good morning. So just to follow up on your earlier comments on the senior housing pricing power for the rest of 23 and into 24. I think you kind of suggested for us to maybe not focus as much on the absolute price increases at this stage which is more on the spread between REV-POR versus X-POR. I guess really the question is without giving any specific guidance you just give us maybe just a general sense or range of what you might be targeting for the spread between REV-POR and X-POR.
Speaker 4: uh... on the fact that says that pricing power is cooling down in fact itself is that i think John problem mention that all i was trying to point out that long-term without thinking about it is a six percent is it twelve percent is it three percent the way you're gonna get the pnl right which is ultimately what we are focused on is the spread between that report and export right that's what i was trying to answer
Speaker 4: we do think that we'll see significant pricing power continue as, as I mentioned, half of our portfolio gets renewed at different points in the anniversary cycle and three trade continues to go up. Hope that's helpful. Thank you.
Speaker 6: Thank you. We can now turn to Nick Ulico at Deutsche Bank. Thanks. I'm just turning to the guidance. I want to make sure I'm understanding this right. So in terms of the NAIRIT FFO guidance range coming down, there's various normalized items, expenses.
Speaker 6: that are being added back to your normalized FFO. A lot of that's the transaction costs promotes, I know you guys break this out, but just trying to understand what's driving that. It's a pretty regular line item going back to the last year. And how we should think about, is this still gonna be other transaction costs hitting?
the P&L for the rest of the year, but it's just not in your NAIRIP FFO guidance right now? Thanks. Yeah, thanks Nick. So the transaction costs you're referencing, so other expenses which predominantly transaction costs, are not in your NAIRIP FFO guidance.
Think about that being, as they describe in the footnote, non-capulizable transaction costs. A lot of that tends to be dead deal cost. So it's tough to predict kind of how that comes through or pretty active firm and say that that stepped up a bit this quarter just because of...
As we've talked about and as Sean highlighted on a few prior calls, our underlying standards picked up a bit and we've seen cost increase. So you think about some developments that we've gotten beyond early stage development spend and we think in a fairly disciplined manner have walked away from. So as we kind of look forward, similar in the way we don't kind of guide the acquisition cost.
We try to have a pretty flexible framework as to how we think about our acquisition volume. Flexible framework is how we think about investing dollars. And the same goes for, you know, as we pursue things with the intent to move forward. If we end up not moving forward with them, they could end up coming through this line item. And that's something that we kind of have.
we've made decisions on right now or else it'd be coming through this quarter. Thank you. We'll go next now to Ronald Camden at Morgan Stanley .
Great thanks, just the presentation is sort of highlighted that the outsize occupancy gains
was in AL and other parts of the business. Just a little bit more color on sort of the IL versus AL difference would be helpful because some of the NIC data suggest IL was accelerating and I think you mentioned that as well would be helpful. And then the follow-up was post the PLR ruling. Just what are the updated thoughts and vision?
in terms of having an in-house operating platform and any color and timing costs would be helpful. Thank you.
Let me try to take the first one, and John wanted to take the second one. As I mentioned on my prepared remarks, assisted living continued to significantly outperform independent living. The only thing I was trying to highlight that after underperformance, independent living is starting to pick up, particularly in Canada, and that's what we are seeing.
seeing starting to come through our Canadian numbers, right? But if you just look at an absolute performance between the two, there is no question that assisted living has been outperforming. And if economic continues to weaken, on a given rolling 12, 18-month period, my guess is that it will continue to outperform very significantly, given the
need driven nature of the business. Yeah, regarding the self-management of the PLR, I want everyone to keep in mind our focus is, it always has been, on driving results. That is the number one most important thing. So whether we're managing directly, whether we're asset managing and our partners are managing.
is less the point and it's more about getting the results. So with that said, I think it's probable that we end up in some form of self-management this year. And I would say as far as the cost goes, what's happening right now is we're working very quickly on the technology aspect and data analytics aspect of the operating platform.
And that really is...
just swapping out. So, our operators have modules, they're paying for those modules, and now we're switching them to our module. So, that is close to a net zero on the cost side. There are a few other costs as we improve things, which will provide some more clarity going forward, but none of these are really big numbers.
So I wouldn't worry about that in the sense of very big surprises. It's just really changing out and getting improved modules going forward. Hopefully that's helpful.
Thank you. We'll go next now to Michael Griffin at Citi. Great. Appreciate the follow-up. Just a quick one. I noticed in your investor presentation, I think it's slide seven, last quarter it said the comp poor growth decelerated at 2.6. I know it's kind of nitpicky and I didn't see anything on the slide in the current.
quarter, the first quarter, and we gave the number on what first quarter would have been based on the fourth quarter pool as you noted in the footnote. And then just on the pickup in general from the reported same store number in 4Q1Q. It's actually because we continue to expand the same store pool so you've got 95% of our operational properties that we've owned for more than four quarters in our same store pool now. And a lot of the locations that came in were from the UK and
we've just seen expense growth run higher than the rest of the portfolio, largely driven by utilities, which we've talked about a lot in this call. So some of the increase you're seeing just Q1 is from that mix shift and inclusion of things also you gay is at the
sort of the earlier stages of normalizing labor costs. So it's the addition of UK that it makes it look like the compo has gone up. But if you look at on a same store basis of, you know, not a same store basis, but the same pool of fourth quarter, you will see was relatively, you know, same.
Thank you. We'll go next now to Juan Sanabria at EMO Capital Markets. Hi. Just a big picture question. I'm curious if you guys could comment on overall seniors housing penetration. Talking to some of the privates and just reading some of the trade racks, it seems like acuity levels have gone up and maybe seniors are waiting to come in. Maybe they may be. Maybe.
Just I guess are you seeing that, what does that mean for the business and what are your thoughts about overall penetration rates and the ability to effectuate that through marketing or what have you as part of this new data driven platform and efforts?
So, I'll try to address first part of the question. So, acuity actually went up, I would say in 2020, right? If you didn't absolutely need it, you would avoid the product pre-vaccine. So, we obviously have seen acuity gone up in 2020.
But since then, we have seen acuity sort of normalized. So I'm not sure that I subscribe to this idea that acuity across the board for the industry has been going up. In fact, someone just asked earlier in the portion for
about Kisco. I was with the Kisco team last week and you know Kisco CEO were talking to me that Acuity they have seen Acuity actually gone down right so you know probably gone down for some gone up for some but I do believe that Acuity has normalized from that 2020 peak levels.
As we have seen a vaccine coming to play, you want to answer the 2nd? Yeah. Yeah. I just add a little bit. So, you know, obviously, they said the supply demand incredibly favorable. We've said it many times. Then you get to the next piece, which is penetration, which you're talking about.
And I actually see penetration increasing and what we're seeing is the seniors desire, the loneliness and the desire for social, you know, safe, active location, as well as the cost of care. The cost of care has continually gone up. We all know that labor for care has been a challenge. And where you see that the most is in home care.
And so we've had people move into our properties because they can't afford or cannot get the level of care. And so their costs actually net go down, which is a benefit. So I see that playing itself out over the next couple of years so we get the benefit of supply and demand. Additionally, we get the benefit of penetration. And then finally the platform will drive greater market share.
and we'll get that benefit as well. So I see a very, very favorable future going forward.
We'll take our final question this morning from Vikram Malhotra at Maju. Thanks for the follow-up. Just two clarifications. Tim, I guess in your last call you had mentioned in the guide you were keeping the temp usage as a percentage of total intact or flat through the year.
in your guide, and with what you've seen in 1Q, are you changing that in terms of it being lower? And then second, in the medical office side, I think the OpEx went up maybe 7% or 8%. I'm just wondering, was there anything one time in that number? Yes, so I'll start with your...
with full-time employees coming on, but net net we ended up in a more favorable spot for compensation. And as I kind of noted in my guidance outlook, that's largely what's moving our outlook for the year is just a better trend coming out of Q1 on expenses with that being the main piece.
and the assumption revenue kind of holds, given that we're moving into the revenue building month as we speak. And then on the MOB, you know, as I mentioned in my prepared remarks, we're expecting our guidances between two and 3%, and so that is a timing issue for Q1, and it'll reverse as we go through Q2, three, and four. Thank you, and ladies and gentlemen, that will bring us to the conclusion of the Well Tower first quarter 2023.