Q3 2023 Welltower Inc Earnings Call
Thank you for standing by and welcome to the Wall Tower third quarter 2023 earnings Conference call.
I would now like to welcome Matt Mcqueen General counsel to begin the call back over to you.
Thank you and good morning, as a reminder, certain statements made during this call maybe deemed forward looking 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.
<unk> that could cause actual results to differ materially from those in the forward looking statements are detailed in the company's filings with the SEC and with that I'll turn the call over to Sean.
Thank you, Matt and good morning, everyone I'll review, our third quarter results and capital allocation activities. John will provide an update on performance of our senior housing operating an outpatient medical portfolio and team will walk you through our triple net business is balance sheet highlights and revised guidance Nikita will also participate in the Q&A.
Section of the call.
Against the backdrop of increasingly uncertain macroeconomic outlook I'm pleased to report another strong operating results.
Which continue to exceed our expectations, our senior housing portfolio posted another quarter of exceptional revenue growth, which continues to approximate those double digit levels driven by both strong pricing power and occupancy build.
<unk> reported that occupancy growth not only accelerated through Q3, but also that September occupancy against marked the highest level, we have seen over last two years.
From a pricing standpoint, we continued to achieve outsized rate increases as reflected by nearly 7% growth in Revpar our unit revenue.
You May recall, we previously mentioned that last year, one of our largest operator pulled forward. It's typical January increase through September 2022. This year. The same operator elected to maintain its historical cadence of rate increases and will therefore wait until January of 2020 for the pass through rate increases.
As a result reported pricing of Q3 this year may appear lower than what we're experiencing in the business and it bears repeating that our operators pricing power remains strong.
The story on the expense side is similar to that acquired topline and result continues to outperform our elevated expectations. We reported two 4% expense per occupied room growth.
Expense growth the lowest reported export growth in the company's recorded history.
This is largely driven by a two 7% increase in compensation per occupied room would you presents a substantial step down in recent quarters. These.
This combination of strong revenue and controlled expense growth has generated 333 basis points of same store margin expansion yet another record for the company as it marks the highest level of quarterly margin improvement in our recorded history.
And our shop NOI margin up 25, 6% the highest level of profitability, we have achieved since pre COVID-19.
Why growth for the quarter came in 20, 611%, our fourth quarter and fourth consecutive quarter of 20 plus percent NOI growth and the second highest level of growth in the company's recorded history.
While we are pleased that margins are moving in the right direction. We're also mindful that our profitability remained significantly below protocol with levels and below where we believe the industry can attract external capital investment on a long term basis.
Our managers strive to deliver superior product experience and provide valuable choices for our retired seniors our product remains highly affordable at the high end, while we operate in the U S and the U K and this should continue to focus on highly differentiated services, even if that means rate increases need to remain at.
The elevated levels as I've said, many times cutting corners is not in our DNA, we recommend that our operating partner sorry.
Fewer residents well then serve more of more of them poorly.
Okay.
Result, one of our key items to focus is to work with the right operator to improve the customer and the employee experience. We believe that doing so will improve the experience of all small.
Most of all of our stakeholders clarity will be very disappointed if our operators take the path of least resistance, which ultimately will impact resident and employee satisfaction.
We continue to focus on the Delta of Revpar of minus exports as the single most important operating metric to optimize while it is too early to comment on anything specific related to 2024 as I sit here today I can't believe I believe that the delta of Revpar minus exports can explain.
Which we need to get to a sustainable level of margin from a product standpoint ale continues to outperform IL and from a geographic standpoint, Canada finally caught up to the level of growth that U S and U K we're experiencing.
We are farther retooling to doing a Canadian business with our new operating platform being launched in next few weeks and going forward. We believe both of our international businesses will be significant contributors to our earnings growth in 'twenty, four and 'twenty five.
From a capital allocation standpoint, we have never been busier.
Last quarter, we spoke about a pipeline of $2 $3 billion.
We closed $1 4 billion in Q3, and roughly another $900 million in October.
Additionally, we have another $1 billion.
Deals just about to cross the finish line beyond these billions of dollars of investments under contract our pipeline remains large at near term actionable, but the execution of these deals will depend on our access to capital.
Extremely challenged debt and equity market in this higher for longer rate environment suggests that this can trend will continue and perhaps we'll get better in 'twenty four.
Well continue to see credit evaporate from the our investment universe and are selectively pursuing create opportunities in both whole stack and med stack level with highly favorable last dollar exposure. These opportunities that have potential to achieve equity returns with basis and credit downside protection typically seen in low level.
Transactions.
We're seeing opportunities across product types and geographies with equity investments in the U S senior housing and credit investment on the sniff side, making up the large swath of opportunities that we're constantly being ping dawn.
I want to remind you that we have a three dimensional lens through which we measured investment opportunities risk reward in duration given the substantial rise a real rates over the last 90 days, we have recalibrated the thresholds of the three thresholds higher in other words for the same risk what we need.
Need higher returns today than we did 90 days ago. All we can do deals with a similar return profile, but with a much lower risk and so forth where student of history and markets and cannot find many times when a lot of good has come out of a period of highly sharply higher real rates if realized <unk>.
Q2 brought grind higher will continue to calibrate our three guideposts higher so far we have no problem in achieving this recalibration as sellers understand the markets have changed and we remain the best at many times the only hole for liquidity.
From a balance sheet perspective, amidst the growing macroeconomic Cisco and geopolitical uncertainty. We're pleased to have reduced our net debt to adjusted EBITDA to one of the lowest levels in a recorded history, which also represents nearly a two turn decline from just 12 months ago our.
Balance sheet strength and flexibility gives us opportunity remained on orphans or provides shelter if the economic environment meaningfully wash. This next week, we don't have a clue, which direction the window tableau, but I'm delighted that we don't need fair weather to meet our obligations our growth.
As you all know a wall of debt maturity in commercial real estate sector.
Is coming exactly at a time when that capital is operating from the market. We will not be surprised if significant dilutive capital is raised or otherwise a lot of kids will need to be returned to the lenders.
I'm, certainly grateful to Tim and our best our best in class capital markets team, but keeping US ahead of the cadence that nikhil and I can spend on as we look to capitalize on the best environment for investments that we have ever seen.
The R&D is shaping up to be extremely busy and Q1 also looks promising.
We continue to have access to growth capital at the risk of sounding like a broken record I want to reiterate that will only grow externally if and only if we can grow with value accretively on a partial basis for existing shareholders.
I hope that you as our shareholders Rx as excited as I am about our operating results and capital allocation activities.
But interestingly those are not the most exciting thing.
Citing areas inside wildfire today, what truly galvanized is ours.
Are the exciting prospects of Johns operating platform and especially the digital transformation of senior housing industry.
As we have discussed AD nauseum, we refused to accept the lack of 21st century business process and technology infrastructure of these primarily people driven business, where individual call me need communities are on their own island we.
We have made tremendous strides in last 90 days on the technology backbone of what was our three point rule may look like and how far we can raise the bar for our resident and employee experience while towers. The engine room is buzzing with pilots and scaling around traditional technology solutions like from ERP and <unk>.
Crem to advance technology solutions around robotics and artificial intelligence.
Our goal is to elevate the community experience by delighting, the customer and their families and simplify and enhance the employee experience all of which should lead to occupancy and NOI growth.
Then and only then do we have perhaps the shot and earning a long term sustainable returns for our owners, which has been less than satisfactory over last decade, My partners and I are truly inspired and I'm hopeful that we're turning the corner to achieve multiyear double digit compounded growth rate.
While supply and demand backdrop is squarely in our favor we're far more focused on the value add Alfa from our platform, which you as our fellow owners have funded to build with our blood sweat and tears and with that I'll pass the call over to John.
Thank you Sean.
I know that it sounds like a broken record, but again another great quarter.
Our total portfolio generated 14, 1% same store NOI growth over the prior year's quarter led by the senior housing operating portfolio with 26, 1% year over year growth. We are methodically moving forward focused on the customer and employee experience and that is driving results.
We started with brute force effectively relying on a raw labor to identify issues and opportunities we continue to improve the systems and processes and organize the data to make data driven decisions to improve the business.
And we're just at the beginning.
The medical office portfolios third quarter same store NOI growth was three 4% over the prior year's quarter same store occupancy was 95% while retention remains extremely strong across the portfolio at nearly 93%.
The 26, 1% third quarter year over year NOI increase in our same store senior housing operating portfolio was a function of nine 8% revenue growth driven by the combination of six 9% Revpar growth 220 basis points of average occupancy gain.
And moderating expense growth.
<unk> remain in control coming in at five 1% for the quarter over the prior year's quarter. The strong revenue growth and expense growth led to substantial margin expansion of 330 basis points.
As Chuck has mentioned many times the module increase in expenses as occupancy continues to grow over 80% is relatively low for obvious reasons. Many of the expenses are fixed each property has an executive director head chef maintenance director, regardless of the occupancy level the bulk of maintenance utility.
And many other costs are largely factored in at 80% occupancy.
As a result, our expense for ore expense per occupied room continues to remain low enabling the business to improve the margins as Sean mentioned, our export growth for the quarter was two 4% the lowest in our recorded history.
All three of our regions continued to show strong same store revenue growth starting with the U S at nine, 6% and Canada and the U K growing at nine 7% and 12, 9% respectively. The.
The strong revenue growth in each region combined with the expense controls have led to fantastic NOI growth in the U S, Canada, and the U K of $25 427, one and 37% respectively.
The management transitions continue to perform above expectations, we are grateful to our operating partners who.
Are working so hard to ensure that we achieve the.
Improved operations that we set out to accomplish in our journey to operational excellence.
Our operators continue to do an amazing job of managing through the complexities of the business to provide a superior customer and employee experience.
Many of our senior customers were born in the 19 thirties.
A depression.
They have worked hard and sacrificed all their life and now they deserve to enjoy the fruits of their labor the product and services remain very affordable to a large segment of the population who have purchased and paid off their homes years ago and are now at a point, where they can sell their home live off their assets enjoying a good quality of life during their golden.
Years, which they deserve.
Our focus with our operating partners on improving the customer and employee experience benefits all stakeholders.
For example, our focus on materially reducing agency labor improves both the customer and employee experience as both are benefited by permanent high quality employees compared to the random agency employees lacking relationships with our customers and knowledge of the communities systems and processes.
Additionally, eliminating the agency or middlemen enables us to ensure the hard working people at our communities receive a fair compensation package with vacation and benefits as well as competitive pay and our shareholders benefit from the reduced leakage to the agency company owners.
Care is the essence of the service provided and ensuring employees can deliver outstanding care is one of our top priorities are operating platform efficiencies will increase the time available for care and reduce the stress all our employees for example at one site one of my team members worked at the executive directors spends over.
<unk> three hours per move in in putting the documents into the antiquated systems.
The CRM roll in care modules are desperate systems. Our platform has all the documents and easy for them and the modules are fully integrated reducing the potential for errors and saving time, which enables the site leader to focus on our customers and employees not paperwork.
We continue to make substantial progress on our platform and the related rollout I'm grateful for the engagement and participation by the leadership of our operators who are actively working with us to ensure the success of the platform more to come in 2024, I will now turn the call over to Taylor.
Thank you John My comments today will focus on our third quarter 2022 results.
Performance of our Triple net investment segments in the quarter.
Our capital activity, our balance sheet liquidity update and finally, our updated full year 2023 outlook.
<unk> reported third quarter net income attributable to common stockholders of <unk> 24 per diluted share and normalized funds from operations of <unk> 92 per diluted share.
Running 10, 4% year over year growth of 16, 5% growth after adjusting for HHS and the year over year impact from changes in FX rates and higher base rates on floating rate debt.
We also reported total portfolio same store NOI growth of 14, 1% year over year.
Now turning to the performance of our Triple net properties in the quarter.
As a reminder, our triple net lease portfolio coverage and occupancy stats reported a quarter in arrears. So these statistics reflect the trailing 12 months and a 632023.
In our senior housing Triple net portfolio same store NOI increased three 9% year over year and trailing 12 month EBITDAR coverage was <unk> 93 times.
In the quarter, we agreed to convert 11 story point assets and Triple net leased to <unk>, which will bring the regionally focused managed portfolio up to 55 Midwestern properties in the fourth quarter.
Next same store NOI in our long term post acute portfolio grew five 3% year over year and trailing 12 month EBITDAR coverage was 144 times.
Turning to capital activity, we closed on $1 4 billion of acquisitions and loans in the quarter led by $618 million of senior housing operating investments.
As a reminder, the Rivera PSP joint venture on one that was announced last quarter will close by geography in three distinct phases.
The UK portion closed in <unk> in the U S portion close this quarter, resulting in $75 million of that investment.
Radian portion is expected to close by year end.
In the quarter, we continue to issued through our ATM to fund ongoing investments and position the balance sheet for future opportunities.
Raise gross proceeds of $1 9 billion at an average price of approximately $81 per share, allowing us to fully fund year to date investment activity and also distinguish $290 million of debt in the quarter.
This capital activity, along with continued growth across our business segments, including the continued post COVID-19 recovery within our senior housing operating business.
Drive net debt to adjusted EBITDA to five four times at quarter end, which represents one eight turns of deleveraging versus one year ago.
We expect net debt to adjusted EBITDA to settle in the mid fives and a pro forma basis post near term investment activity and the continued to trend downward in future quarters as the recovery in our senior housing operating portfolio continues to drive organic cash flow higher.
Additionally, fondness intra and post quarter capital activity, including $900 million of gross investments closed to date in October.
We have a current cash and cash equivalents balance of $2 billion, along with full capacity on our $4 billion revolving line of credit and $624 million in remaining expected proceeds from near term dispositions and loan pay downs.
Representing approximately $6 $6 billion in near term available liquidity.
Lastly, moving to our full year guidance.
Last night, we updated our previously issued full year 2023 outlook for net income attributable to common stockholders to a range of 91 to 95 per diluted share and normalized <unk> of $3 59 to $3 63 per diluted share or $3 61 per share at the midpoint.
Normalized updated normalized <unk> per share guidance represents a five and a half cent increase at the midpoint of our previously updated guidance.
This increase in guidance is reflective of.
A 3% increase from higher expected full year senior housing operating NOI.
Three and a half sending crease from capital allocation activity, which assumes no further investment in the year beyond what is closed to date.
These increases are partially offset by combined penny drag from increase in expected full year G&A and stronger dollar.
Underlying this ask about guidance is an increase estimate of total portfolio year over year same store NOI growth of 11, 5% to 13, 5% driven.
Driven by sub segment growth of outpatient medical two 5% to 3% long term post acute 4% to 5% senior housing Triple net one and a half of two 5%.
Finally increased senior housing operating growth of 23% to 26%.
The midpoint of which is driven by continued better than expected expense trends along with revenue growth of approximately nine 8% year over year.
Underlying this revenue growth and an expectation of approximately 240 basis points of year over year average occupancy increase in rent growth of approximately six 7%.
And with that I'll hand, the call back over to Sean.
Thank you Tim I want to conclude by turning your attention to three items that may not seem as important are exciting for our near term results on a combined basis. They may actually served as a drag on our Q4, but nonetheless, it's extremely important to underscore as far as our stabilized our run rate earnings is concerned.
First.
We have convinced our partner <unk> to convert 11 properties from Triple net to a RIDEA structure nine of these properties when the historic lease structure with other operators and two of them are recent acquisitions destroy point that is one of our best operators and our client <unk> operator has cleaned up these billings improved staffing service quality and invest.
The significant capital. These properties have gained 500 basis points of occupancy since beginning of the year to 70% in September <unk>.
<unk> is up 15% since the to go over Revpar of the new move ins in 2020 threes up another 12% from the average of 2023 numbers. This is setting up the stage for significant cash flow growth in 'twenty, four and beyond debt to equity conversion at the bottom of the cycle are perhaps the most value accretive transaction we can.
Today as we have experienced in our recent legend conversion, we can expect to breakeven in 12 to 15 months relative to our previous contractual rent and then our shareholders will get all the upside off towards.
This obviously will work only if you have great assets run by great managers, and we're right about the trajectory of the cash flow and that is a bad I'm willing to take at this point in the recovery cycle. We consider too we continue to seek additional opportunities to achieve similar outcomes when they check the boxes are great assets in Alberta.
Quality and when we can expand the pie with our partner so that we can attain a win win solution and outcome for a long term basis second <unk>.
<unk> one of our strongest operating partner measured by margin occupancy and other operating metrics recently merged with another one of our operators Balfour valve.
Balfour.
Now it gets to the affiliate of Kisco maintains a dominant position in the Denver Metro area also has trophy buildings nearing completions and Brookline in Boston MSA and Georgetown in DC. Both both properties opening in 2024, we think Michael Schoenborn and Susan's role for their partnership at Balco.
And wish them all the best for the next phase of their lives and welcome Andy Callback and his team to take over the stewardship and growth of these communities lifestyle communities above this transaction will be significantly accretive to our stabilized earnings and cash flow growth.
Last but not least when the final stages of project transformer that transaction, which I described to you last quarter with our teams working really hard with Matthew N. Fedrick at <unk>. Our brand launch is coming up in next few weeks and people on both sides of walking at a frenetic pace to achieve seamless.
This transition.
This is yet another transaction or transactions like the others above which will look back at in 'twenty four 'twenty five and feel really proud to have completed as they have added to our earnings and cash flow growth. Despite some near term friction and the tremendous workload for the combined team.
Speaking of earnings and cash flow growth I would like you to provide a report card on the previous large transactions to every and oakmont from signature and Sunrise that we discussed with you in Q2 boat every and oakmont have grown occupancy of approximately 300 basis points in transitions have began.
We at <unk> remain focused on the long term price of getting this business to an elevated level of customer and employee experience and generating earnings per share that is substantially higher than where we came from to sum it up the powerful recovery in senior housing operating business.
All out of our operating platform and a significantly accretive capital deployment are all setting us up for an accelerating earnings and cash flow trajectory for 24% and $25 with that I'll open the call up for questions.
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 will ask that you limit yourself to one question. Please we'll pause for just a moment to compile any questions.
Okay.
Again, if you'd like to ask a question. Please press star one on your telephone keypad now.
Our first question comes from the line of Vikram Malhotra.
Mizuho. Please go ahead.
Morning, Thanks for taking the question.
I guess.
The the sort of great opportunity on the external growth front.
We have you know yesterday, we saw two of your peers Marge.
I was hoping you could sort of give us a sense of.
And as that process was explored.
Are you being is that that's something that's been of interest to you or it could be of interest to you and can you compare and contrast that line sort of entity deal with your sort of more granular approach going forward.
So we haven't I don't comment on.
Other People's deal seems like it's a great outcome for both of them. We are not engaged and we will not be engaged.
In that process just to be specific.
As we've said many times what works for us.
Is.
One asset at a time transactions, even if we do when we do portfolios <unk>, finishing up a portfolio transaction right now of 10 assets.
That we have gotten we have picked from a collection of 80 90, plus asset. So it's sort of we're very very focused on going deep and going broad in our markets and we genuinely believe in small transactions with one asset at a time I believe that median size of asset transactions.
That we have done in last three years, which constitute this $12 million or so of assets were bought is like $30 million. That's what we like that works for us and that's what we'll continue we have no doctor of opportunities.
It's what we see today the market is I will not be surprised that you guys will recall that we had talked about few years ago. There would be potentially 30 billion also opportunities as we sit here today, we can see the Tam is actually bigger than that given how much.
Loan set coming due how much of floating rate debts are rolling over so we have no problem growing their company as long as we have access to capital and we can do it on a partial basis, but.
Large M&A is something that I've never liked I am not saying I'll never do it but frankly speaking, it's just out of much interest to us and specifically answer to your question, we're not engaged and will not engage in that process that you mentioned.
Yeah.
Okay.
Our next question comes from the line of Conor Seversky with Wells Fargo. Please go ahead.
Yeah.
Good morning out there thanks for taking the questions Ive got a three part one for you guys here, but ER on the kosher transaction can you offer a sense as to what occupancy levels look like in the properties earmarked to be managed by the operator of the future.
And then is there a way to quantify the NOI upside potential from this transaction and ultimately the transition of those properties.
And finally as that Regency case study outside of the deck. A good example to gauge what that NOI potential could look like for the broader codeshare portfolio.
Corner, you were talking about if I understand your question correctly.
The <unk> transaction, if youre talking about the properties that cautionary is taking over from Rivera the property occupancies roughly around 80%.
And.
We think that as you know cause year, obviously, Ron said properties well north of.
90% occupancy and 40% margin and I think we'll get there.
What was the other part of the question sorry, I missed that.
You outlined that a region PK study in the deck for those are I think they were in British Columbia.
Our Alberta is that a good example to use as a gauge for the NOI potential of the broader kosher portfolio.
Yes, I think you will see.
In this particular portfolio that we're talking about the transition portfolio.
<unk> portfolio regions, who was a very well run portfolio.
This school year still has been able to get the margins I believe from I'll call. It circa 40% to about 50% in this particular case I believe that the improvement will be better and we will go from margins will go from call. It pick up 20% to 40%. So I think we should see.
Better enhancement in this particular case then the Regency example.
Great. Thank you.
Our next question comes from the line of <unk> <unk> with BMO capital markets. Please go ahead.
Hi, good morning, Thank you.
Impressive occupancy acceleration into September just curious what the early indications are for revenue.
<unk> to existing customers I'm, assuming some of the late late rate letters apologies have gone out already.
Just curious have that year over year Delta is looking for rent increases to existing customers.
The one as you know, we're sort of finalizing that as we speak right.
That's the discussion away and as I've mentioned in my prepared remarks that we expect that to be very strong.
Like last couple of years, and and Thats, where we are we're not there yet from a purely finalization standpoint.
But I continue to believe that we will achieve it.
Customer is expecting an elevated level of service cost are not coming down any place that business overall for the industry not just for us.
And that is sub optimal level of margins, where you can attract capital to the business.
So all these things putting together I think you will see strong rate growth what exactly that is.
It is too early to say, but I continue to expect that will be very strong.
Our next question comes from the line of Jonathan Hughes with Raymond James. Please go ahead.
Hi, good morning, Thanks for the time.
Shock could you just clarify the any comments you gave in your prepared remarks, where you said thanks.
The kisco bout form merger might be a drag on the fourth quarter I didnt quite understand why that might be the case and then.
Maybe one more if I could sneak it in.
The sho portfolio outperformed that typical seasonality in the third quarter I think thats expected to continue into year end.
Is that driven more so by the U K.
Related changing same store pool something else just any.
The additional color there would be great. Thanks.
Let me try the first one so I did not say that specific transaction might be a drag on the fourth quarter I said, the three things that I described together could be a drag on the fourth quarter, but combined all of them should be a significant driver of growth on 'twenty four 'twenty five or just call it stabilized earnings.
That's the point I was trying to drive not specifically about gifts Glenn Boswell.
Not seeing.
The major differences between our transition portfolio as Chuck mentioned, we've actually seen.
Very strong occupancy gains in the transitioning portfolio.
Probably greater than what we're seeing in the core portfolio.
Jonathan just the core portfolio as you know sequential occupancy growth was down 150 basis points.
And the transition portfolio. The two I talked about which is the majority of the transition we did in Q2.
The occupancy growth in from signature to Avery and Sunrise to augment both portfolios achieved a sequential occupancy growth of roughly 300 basis points almost double of what the same store.
Our next question comes from the line of Nick <unk> with Scotiabank. Please go ahead.
Thanks, Yeah, I was hoping to get maybe a little bit of a preview about how G&A could trend over the next year and I know this year.
Yes, there was the build out of John's group and just trying to understand like how far along that is.
How that could affect <unk>.
G&A growth over the next year.
Nick as I mentioned early in the year I think if you go back to fourth quarter call. We have at least another year of elevated G&A increase is the build out of the platform. So you should we've come long, but we have a long ways to go so G&A versus NOI, just the geography of where you see our expenses versus revenues.
So we do believe that the platform Buildout is paying off as started to pay off in spades.
But from a purely just looking purely at <unk>, we would expect that either Europe.
Buildout.
At least another year of buildup.
Our next question comes from the line of Michael Griffin with Citi. Please go ahead.
Thanks for actually Nick Joseph here with Michael Shanghai, I recognize you said youre not engage won't be engaged.
Last year, you reported we got involved in similar public to public M&A situation within the medical office space.
You've talked in the past a lot about being in the IRR buyer and cost base focused in taking a look at everything.
So just curious in this situation or more broadly as it kind of the current valuation and underwritten returns aren't sufficient against the other opportunities that youre seeing.
Something about medical office, that's keeping you on the sidelines here.
So.
First thing I mentioned that I don't comment on other People's deals. So I have nothing underwritten so I can't even comment on what standard returns looks like.
But specifically to medical office I think I provided some color.
Last quarter that were onshore at this point, what the long term inflation land and because were onshore we are unsure of at this point to make a huge bet on.
On a <unk>.
Asset class.
We don't know what the growth profile versus the long term inflation looks like right. So that's a very important point, we're finding opportunities where we think we can small opportunities where we can do value add we're buying assets at 70% to 80% occupancy and leasing up and so that we can see the growth rate higher but from a stabilized.
95% call it.
Occupied medical office with a two 5% increase or whatever it is the traditional medical office, which provides a good long term stable growth for institutional investors is not interesting for us.
Thats, one reason and the second reason is it's always.
Relative opportunities is the question right. If thats the only thing that was available to us to be a different conversation we're easily picking off.
Low double digit.
<unk> online.
Unlevered IRR opportunities in the senior living side.
Assuming that we don't add much value and I am pretty positive will add value. So it just a question of relative opportunities are where we see where our wall today.
And that's why we have no interest by no means that suggests that we don't think it's a good deal or not good deal I have no idea what the deal is because they have not engaged in it.
Specifically mentioned will not because of the reasons I just pointed out to you.
Our next question comes from the line of Josh <unk> with Bank of America. Please go ahead.
Yeah, Hey, guys I've a question on the transitions shrunk you mentioned you've been very active in terms of proactive portfolio management and you've achieved a lot of early success recently with Avon and Oakmont.
These operators driven such strong results. So quickly and just how would you encourage us to think about future transitions in the portfolio.
Yes.
I'm not going to answer the first question, Josh obviously on a public call I mean the thing.
<unk> trade secrets that you don't want us to divulge.
The company called <unk>.
I will say that this doesn't happen like on the auto medically as I've said before we have large we have done a lot of transitions over the last call. It five years seven years that I've been.
Doing this that we have learned our lessons from frankly or.
All school way of losing money, we have learned what we have done wrong, we have gotten better than sort of learn how to stop bleeding and then finally you have got another side of how do we how we can make an impact what the prep work do you need to do on two students in process.
And frankly, that's why John taught us right. So it just it's an evolution. It's a process that we have gotten over last few years and I'm very very happy that we are there now.
Point of view.
Transitions is the last transition would we do more transitions. It just depends on the performance, we're trying to optimize our performance.
I've said it many many times that this is a business in our opinion.
Our humble opinion, its a business of optimizing location product price point, an operator.
So we will keep optimizing it until we think that we are done.
And that's kind of where we are it's a journey it's a <unk>.
<unk> I have written about that I'm willing to do even if we take short term hits.
And it appears at least from near term results no guarantee of the future that we have achieved how to even mitigate that short term hit.
Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead, hey, good.
Morning, everyone. So I want to talk and perhaps to John on.
The right number that you mentioned the revpar number of 7%.
And specifically the sustainability of that type of growth. It's always been my view that there was some sort of implied ceiling of of growing rents for people that are 85 years old and that at some point along the way that there's there's there's just a way of doing business and I don't know that there is.
A real.
Ceiling of some sort, but it always seemed to me that was the case correct me if I'm wrong number two though maybe it involves unpacking the rent maybe its rent between Brent and care and so that kind of muddies the conversation, but I wonder if you could comment at any level about how rate might grow in the future.
You're considering.
What I would I would think would be some pushback for the reasons I just described.
Rich, let me try to start that and then John you sort.
Sort of finish anything that I haven't added.
So I think your conversation.
That you have either reasonable.
If you think about a long term tenants in the middle of the market right. So there is there is and you have to think about the customer you were talking about.
We our rate increases because we have sold the majority of our mid market product.
UK and U S portfolio is primarily focused on very high end customer very wealthy customer and the product remains incredibly affordable to them.
And at that level, we haven't seen any pushback that second point you have to consider rich is.
We have never raised rates like you have seen in other asset classes multifamily storage, others, 20%, 25%, we have never raise that rate. So it was just sort of rates remains high single digit whatever eight nine and 10% is sort of what we have done. So it's much more sustainable than you think but put that aside just on.
Understand.
All of those comments in the context of average length of stay you were talking about an average length of stay of 20 months. So we might be here talking about for the <unk> increase of X percent, but just understand the person who got the first year of increase he or she is gone right and no longer in the community. So if you put all.
Those together you will see that if you provide the very important point, if you provide the differentiated services at the highest level.
Our customized willing to pay you know we are as I've said, many many times, we're not focused on an individual number call it revpar or rate right. We're focused on very much.
Of a delta between Revpar and export and Thats. What we are focused on I've said that last year and the year before.
And we shall see what the market gives us right I have no idea what the market will give us if there is a push back.
We will adjust but we haven't seen any yet.
Yes.
Fully agree it's the difference between Revpar and expense for.
I think you'd probably rich thinking about multifamily where people are there for years and years and years and it's a very different situation here.
Yeah.
Our next question comes from James cameras with Evercore ISI. Please go ahead.
Hi, Good morning. Thank you certainly appreciate the operating leverage embedded in the shop portfolio. I was just wondering if you could buy a little more color sort of regarding labor trends for the general staffing there and what conviction you have and the ability to really continue to sustain pretty attractive or capitate growth of those expenses I mean are you getting.
Longer tenures at a slower turnover and lower recruitment costs or just better labor talent pool, and again I'm just thinking more beyond the SaaS and the general manager.
What levers are contributing to it.
A nice profile in terms of growth on the expenses for labor.
Jim you are correct that we are seeing turnover is coming down significantly.
We are seeing in that overall availability of the employees, who wants to be part of our business and part of the communities is increasing significantly.
And we're seeing that our operating partners are getting better using technology and other resources to attract talent and keeping them in the business right so that sort of.
Whenever you get hit by a crisis people figure out ways to do things better every crisis makes a business better if it survives.
And Thats, what we are seeing and.
What conviction do we have that.
You know that the Revpar minus explorer Johnny can continue very significantly for a specific line item on a specific things on a specific quarter. We have no idea I said this many times our goal here is not to predict the future. Our goal is to see what market gives us and do better than market, we'll see what March.
It gives us.
Yes.
Just to add in my comments my focus is on productivity. So we want our employees to be paid well, we want to happy employees and happy customers. We also want to increase the productivity of the business. So that we can manage to accomplish all of that.
So thats really I think the take home point.
Our next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.
Yes curious how are you thinking about his senior housing development today, and how do you see starts potentially trending over the next couple of years.
Yes, Mike.
It's going to be repetitive here I was asked this question of the Nic Conference a week ago or 10 years ago whenever that was I'll repeat what I said on the panel I think for a debt provider in senior housing today, you have a better lot going to Vegas, and if an equity provided in senior housing development today, you have a better like buying lottery I hope that.
<unk> you.
My view of senior housing development is I don't even understand why there is any stock any like more than zero, because the economics doesn't make any sense, given where construction costs is what capital cost is.
And where the margin of the business is it should not have any starts and it seems like is going there.
Think any stocks that you are seeing people are still playing with other people's money.
And that and Thats coming down closing down pretty quickly and I think you will continue to see it's moving there.
Mike did I Miss any of any other part of your question.
No that was it thank you.
Our next question comes from the line of Michael Carroll with RBC. Please go ahead.
Yes, thanks, given the dislocation that we're seeing in the private market is it harder for operators that are having liquidity issues to provide the same level of care versus your operators that presumably don't have these issues.
Are you seeing that in the marketplace at all right now and if not do you expect that this will become a bigger storyline over the next several quarters.
I can't speak for other people Mike.
We'll tell you.
We have our operators operating partners are doing extremely well.
And we are getting head left right and center with new operating partner, who wants to be part of our story, so whether thats because theyre inspired.
To do what John is doing our data journey or we're trying to professionalize the business on the detailed transformation journey or theyre, having troubles on their own and are both I have no idea, but I could tell you that we have literally.
I mean, it's.
It is.
We have seen really good investment opportunities, but we have never seen anything like what we're seeing today, whether thats because of a pull or a portion I have no idea.
And we're seeing operators from all parts of the country in all three countries, we do business with.
He is calling us to be part of this well capitalized extraordinarily well capitalized platform, but also the part of being part of John's platform.
Okay.
Okay.
Our next question comes from the line of Ron Camden with JP Morgan Stanley. Please go ahead.
Hey, great.
A big picture.
What I was looking at the presentation. The NOI the incremental NOI build I noticed that you guys added a bar here.
Looks like another $172 million.
I would tie back to your comments about the focus on revpar versus exports clearly.
Our margin.
Benefit here. So I was wondering if you could talk about that why add that to the DAC.
Is this are we supposed to read into it just more confidence in the ability to get back to pre COVID-19 margins.
Is the question.
Yes, Ron.
We added that the DAC to conversations with both investors and analysts alike.
Looking at it in interpreting kind of a stabilized point to be reflective of 88% occupancy.
31% margins.
When in fact with the rent growth, we've seen since fourth COVID-19.
As you are ignoring that rent growth in our way.
We are baking in around 29% margin. So we wanted to do is just show.
Getting back to just the NOI level on today's rents.
Means that youre getting to margins that are 200 basis points plus below where we were a margin wise.
In fourth quarter, 19, and what that final BARDA is that just shows you getting back 88% occupancy at 31% margin and pre COVID-19 levels at todays third quarter 'twenty three realized rents were NOI would be.
And Ron I've said this before I'll repeat it again, if thats all we go back to.
<unk>.
Q4 of 19 level of pre Covid level.
I would be very very disappointed.
If you have done this in Q4 of <unk> 19, you remember those were not the greatest days of this business right. So we were getting hit for four plus years at this point in the story of supply cycle that is not a high point like a lot of other businesses are and we're very disappointed that that's all we get back to.
Okay.
Our next question comes from the line of Jamie Feldman with Wells Fargo. Please go ahead.
Great. Thanks for taking my question I'm here with Conor.
How should we think about funding assumptions for the next tranche of acquisitions and then also how does the quality of the assets Youre looking at compared to the quality of your existing portfolio.
It differently, how do you assure investors that you arent moving up the risk curve to chase a return profile.
I don't want to assure investors of anything.
I think investors are aware of our track record.
And you guys do a very good job or visiting our properties. So you can see it.
<unk> the risk curve to get investments might happen when things are really really tight it is and exactly opposite environment, Jamie and windows environments have our card in the past we were massive sellers of assets.
We don't see as risks to get return that's just not what we do know going back to our actual.
The crust of your question.
Is frankly speaking the initial part of Covid, what we're noticing was sort of a <unk>.
A lot of broken cash flows I'd assets, while 60% 70% occupied.
New development brand new asset three years four years.
Two year old assets.
But broken cash flow because that's normal for a business that had renal breaks even at 60% occupancy and your marginal sort of return if you will or your marginal or incremental margin sort of go hockey stick.
It is normal for that period of time, given how much occupancy we lost during COVID-19 to have those kind of as a great assets broken cash flow because of our the occupancy is and how margins walk into this business.
That was two years ago three years ago, that's what sort of we are seeing today, we are seeing broken capital structure assets are generating the cash flow that we should be generating at 80% occupancy, 82% occupancy where the industry is call. It 6% six 5% whatever it is our cash flow.
Yield that's not the problem the problem is the.
<unk>.
Underlying leverage which is now so far plus 300 5400 is at 9%.
That's the problem and those loans are coming to you are upside down on a cash flow basis, and your upside down on a leverage basis and those are the ones that transact in today.
Frankly speaking the number of trophy buildings number of high quality high high quality buildings, which core investor zone.
Core real estate owner zone that we have seen in last call. It six months EMEA last four months I haven't seen the four years before that right and so the quality of opportunities are going up pretty significantly, but it is up to you to decide.
What is the quality of assets, we're buying and we gave assets you can you can go and visit them.
Kind of a liquidity build and thats.
As of October 30, <unk>, we talk about $900 million investments just quarter to date closed in October $1 billion pipeline ahead of us to $2 billion in cash and $6 6 million in total available liquidity to fund that.
Our next question comes from Austin, <unk> with Keybanc capital markets. Please go ahead.
Great. Thanks.
You were crystal clear, what's your thoughts on why development doesn't make sense broadly in senior housing today, but.
You did expand the development pipeline I think it was up $600 million this quarter roughly half of that was in senior housing and clearly.
Do you have a cost of capital advantage today, but.
Is that what gives you the comfort moving forward with these projects and I am curious are developers coming to you to partner on on future projects that can sort of access.
Instructions financing and how does that opportunity set compare versus acquisitions.
So I think if I understand correctly nuclear correct me if I'm wrong.
All our development starts are either fully 100% leased.
Medical office developments that we have long term TL.
<unk> are long term contracts with our existing clients or their wellness housing development I do not believe that we have started any senior housing development I don't remember the last time, we actually started a senior housing development.
So because of the all reported in the same bucket Austin.
But theyre not senior housing development, there or what in the.
What we call women's housing, which is age restricted MH targeted apartments.
Our next question comes from Juan Sanabria with BMO capital markets. Please go ahead.
Hi.
Here with one still just a quick question on the investment pipeline could you give a breakdown of kind of what youre looking at and where do you think you see or where our stabilized yields there for what you're targeting in the major food groups.
Yes, so the pipeline today is as I said.
I don't know who killed was like 80% plus would be senior housing.
And mostly I would say.
Equity in senior living.
And probably.
Maybe 90% but.
Fast majority of senior living.
Core equity opportunities in senior living.
Just because of the size is just a lot of it is in.
U S.
And we just closed a large transaction in Canada.
Think about remember it correctly since almost not entirely but majority is U S senior housing.
And there are some credit opportunities and the skill set.
I don't remember any.
Any transaction our pipeline about any mlps, but do you know anything.
No nothing meaningful.
Okay.
And stabilized yields I would say in the senior living today, we're targeting.
Close to eight.
On a stabilized basis going in I think I said last call, we're seeing sort of opportunities that.
Starting at six ending at eight and given the rise of rail rates, we're seeing better than that today frankly, we have ratcheted our return expectations higher.
So that's sort of where we are transacting.
But we're not a yield buyer, we're still happy to buy.
1% yield if we think thats the right basis on the right assets, but generally speaking those are the kinds of opportunities we're seeing.
Our final question comes from the line of Vikram Malhotra with Mizuho. Please go ahead. Thanks.
Thanks for taking the follow up.
Sean can you just update us on the Integra process.
How are those assets performing and by extension is there.
The additional opportunities I, just thought that because you had earlier outlined upon stabilization you might look to sell some of that so would just be helpful to get an update on tegra.
Datacom. So we're pleased with the performance that we're seeing in the last quarter I talked about the first 133 out of the 147 buildings that are transitioned.
In the last quarter those buildings produced.
Roughly $70 million, a positive EBIT arm compared to.
Negative <unk> 90 for the three months prior to the transition now fast forward another quarter those same buildings in.
In the second quarter generated $127 million of EBITDAR. So in the six months since transition youre seeing our cash flow swing.
215 plus million dollars.
Honestly every months continues to be better than the prior month and so if you look at June and you annualize that you're roughly $170 million, which is north of the rent.
Here, we are six months in.
When we had underwritten as we thought it would take us much longer than 18 months give or take to get to this point. So we are incredibly excited with the performance, but we think there is still a long ways to go so your point about.
Exiting upon stabilization.
We're happy with the progress, but we're far from stabilization.
This concludes the World Tower third quarter conference call. Thank you for joining.
Okay.
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Okay.
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Sure.