Q2 2024 Welltower Inc Earnings Call
Thank you for standing by my name is Caitlin and I will be your conference operator today.
This time I would like to welcome everyone to the well tower second quarter 'twenty 'twenty four earnings.
All lines have been placed on mute to prevent any background noise.
Speaker Change: After the Speakers' remarks, there will be a question and answer session.
To ask a question during this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press the star in one.
Speaker Change: I would now like to turn the call over to Matt Mcqueen General Counsel you may begin.
Thank you and good morning, as a reminder, certain statements made during this call maybe deemed forward looking statements in the meaning of the private Securities Litigation Reform Act, Although <unk> believes any forward looking statements are based on reasonable assumptions. The company can give no assurances that its projected results will be at various factors that could cause actual results to differ materially from those forward looking.
Statements are detailed in the company's filings with the SEC and with that I'll hand, the call over to shop for his remarks. Thank you, Matt and good morning, everyone. I'll review second quarter business strength, and our capital allocation priorities John will provide an update on operational performance for our senior housing and medical office portfolios Nikhil will give you an update.
Nikhil: On investment landscape.
Tim will walk you through our Triple net business is balance sheet highlights and guidance update.
Speaker Change: We're very pleased to report another quarter of significant bottom line growth with normalized <unk> per share up 17% year over year.
Moreover, 19% adjusted for prior year subsidies quarter was once again led by our senior housing portfolio, but with notable contributions from all other areas of the business, including investments last night, we announced another $1 billion of acquisitions under contract since our last update on NAREIT conference in June.
Bringing our acquisition activity to approximately $5 billion year to date.
There continues to be no doctor capital deployment opportunities in front of us at extraordinarily attractive economics, which I'll get into shortly ultimately we're pleased to once again be able to raise our full year <unk> guidance as we continue to capitalize on the unprecedented internal and external growth opportunity in senior housing.
Before John goes into details I wanted to first provide some high level thoughts on the senior housing business and why we remain as optimistic as ever about its future prospects. This quarter marks the seventh consecutive quarter in which our sho portfolio has posted same store NOI growth in excess of 20% a truly remarkable feat.
Theres noteworthy bottom line growth was once again fall by flow through the combination of strong revenue growth and moderating expense revpar or you need revenue growth came in at five 3%. While exports are unit expense growth was up just 1% and near record low for the company.
What matters to us though.
Is the delta between the two which is ultimately what drives the bottom line.
Speaker Change: As we have elaborated in the past our focus is not on the absolute level of revpar or explore growth that different theres difference is what we're focused on and it remains historically high levels as shown on slide 18 of our business update presentation resulted in another quarter of substantial margin expansion.
290 basis points year over year to 27, 3% while margin remains well below pre COVID-19 levels I would note that we have made significant progress since hitting the trough levels of profitability in 2021 Y with further upside remaining through the scaling benefits achieved.
Occupancy at good operating leverage and as the operating platform begins to bear fruit.
Overall, while we're pleased with the results we achieved this quarter.
Speaker Change: We're much more excited about is the fundamental backdrop as fast to dramatically improve as we look forward to 'twenty five and beyond.
Speaker Change: It starts with end market demand.
Baby Boomers are just entering that eighties and pick up in demand, which we have recently witnessed will only intensify going forward not only is the 80 plus population growing at the fastest clip in decades, but what's even more compelling is the growth of this group of seniors will accelerate to 5% to 7% per annum as we close.
The decade, driving demand, even higher and there is plummeting new supply.
Second quarter construction start to I once again negligible falling well below trough levels, you're seeing even during GSE.
It remains extraordinarily challenging to secure construction financing as regional banks that served as the most prolific lender to the sector in previous cycles is effectively shut down all activity and despite the attractive gross box growth prospect of our industry. Most developers have thrown in the towel due to a lack of development economics, we think this will cause.
<unk> has returned or should I say lack thereof were made on other people's money no longer available as investors leaked out one from the last cycle.
While the beta of the senior housing business remains extraordinarily attractive what truly sets us apart.
All of our efforts to generate outsize alpha for our existing owners. This is reflected by the difficult but important steps that we continue to take.
To further amplify our long term growth trajectory.
This is not only includes the build out of our operating platform with John will get into in a minute, but also involves numerous capital light transaction such as operator transitions.
Russia and conversion of Triple net to RIDEA lease structures. We are confident that several uplink operating platform initiatives will start to impact occupancy and NOI next year.
Expanding on that theme of enhancing long term growth through capital light transactions, we announced transition of 89 holiday by atria assets to six water towers strongest operating partners with deep expertise and local scale in their regions.
We have experienced tremendous success with hundreds of translation effect you added in recent years and we expect similar outcomes from this most recent set of assets and more importantly, we hope to achieve over $70 million of additional NOI upside when new operators operate a stabilize these properties and.
And separately, we converted or agreed to convert 47 triple net leased properties to RIDEA structure in Q2.
Wowing us to directly participate in substantial growth of these properties that are poised to deliver in coming years. This was achieved in four different transactions, primarily with existing RIDEA operators that are growing with including story point, a new perspective.
His actions come with some short term dilution, but we're confident that it will substandard substantially enhance our growth in the back of up 25% and 26.
Assuming we only get to 92% occupancy we should achieve approximately $40 million of NOI for stabilization from today's level.
To illustrate that in new investment times, you need 2 billion also new acquisitions to achieve that level of NOI accretion, assuming 2% long term accretion of our investment model.
Speaker Change: That's how impactful the math is.
Our near to medium term growth.
And clearly our owners will capture all the upside from stabilization of this asset which should enhance our long term earnings growth trajectory as well.
Turning to investment activity last night, we announced additional investment activity that brings us to nearly 5 billion also transactions closed or under contract to close year to date.
The U S and UK comprised of the bulk of our recent transaction with virtually all transaction being completed in senior housing space.
Our investment teams remain busy as ever as the opportunity to acquire senior housing assets continue to expand.
Largely from resulted of the broken capital structure on other debt driven situations that Nikhil described on last call.
Notably, while 23 was a record year for us with $5 billion of investment we have achieved this level of transaction activity in just four seven months of 2024.
Our pipeline beyond these transactions remain robust visible granular and actionable.
Lastly, I would like to comment Tim and our capital markets team for their efforts to further strengthen our balance sheet.
Through the tactical capitalization of acquisitions, coupled with a dramatic rise in cash flow our balance sheet leverage has declined to 368 times another record low for the company. This balance sheet enhancement was recognized by Moody's and S&P with both rating agencies advising our credit rating outlook to positive during the quarter.
<unk>.
And yesterday, we announced the recast and upsize of our revolving credit facility to $5 billion, bringing near term liquidity to nearly $9 billion.
Our new revolver pumps at an improved pricing and extended time relative to our previous facility a testament to the strengthening of our credit profile and growth outlook of our business even in these challenging times.
Speaker Change: Real estate credit.
We will remain disciplined in our funding of our future opportunities, but as I. Previously mentioned, we have created significant debt capacity to tap into creating another lever for us to further augment our earnings growth with that I'll pass it over to John.
John: Thank you.
Our South mentioned, we reported another strong quarter.
With total same store NOI growth once again, achieving double digit levels led by our senior housing operating portfolio, which I'll provide more details on momentarily.
But I'll first touch on our outpatient medical business, we reported two 1% year over year same store growth, which is in line with our expectations leasing velocity remains healthy our retention rate remains strong at 93% and our <unk>.
Industry, leading occupancy continues to be stable at 94, 3%.
Turning to senior housing.
We continue to be pleased with the level of same store NOI growth being generated by this business, which is one which once again exceeded our expectations at 21, 7%.
Attaining 20 plus percent NOI growth for any sector is an incredible achievement, but seven consecutive quarters is truly exceptional.
John: I'd also note that the strength of our strengthening our business remains broad based with all regions and property types posting outside outsized levels of growth.
John: And the sharp described our confidence in generating and elevated levels of growth in future years continues to grow given the extraordinarily demand supply backdrop ahead of us.
And our focus on improving the operating business.
In terms of same store revenue in the quarter, we posted an eight 6% growth compared to the prior year's period with contributions from both occupancy and rates same store occupancy increased 280 basis points, the highest level of year over year growth. We've achieved in the second quarter of any year outside of 2022 when we.
We're coming up close.
John: For growth remains healthy at five 3% on expense for increased just 1%.
On the expense side, where we will see in a couple of different factors at play.
John: First we continued to see a reversal of a broader inflationary pressures, which impacted the business in recent years.
And second we are benefiting from the operating leverage inherent in our business as we experienced as we experienced slowing incremental costs as occupancy increases.
Another.
<unk> trends as growth in comp.
Our compensation per occupied room, which rose just 0.9% year over year, well below our historical average due to the operational scaling benefits would.
We are beginning to witness.
Overall as Sean mentioned, our focus remains on driving the delta between Revpar and explore substantially higher as part of our platform initiatives to give a real time example over the last few months, we've gone through an extensive review of different care levels across our assisted living portfolio in an effort to create greater simplification.
Patient for residents and their families.
As a result of this exercise we also made the strategic decision to focus our leasing efforts are lower acuity assisted living residents.
Speaker Change: Cross many of our communities with a lower acuity resident pays less than a higher acuity residents the same room.
Also consume far less human resources and tend to stay longer.
This creates a healthier retro over a longer period of time, leading to higher NOI.
We are pleased to report that these initiatives are paying off as we've been able to attract substantially lower.
A number of lower acuity residents during the summer leasing season.
Proud of what our team has been able to pull off in close coordination with our operating partners.
Beyond that we continue to make important strides in our efforts to optimize our portfolio and improve the reservoir from employee experience to the build out of the platform.
We're going live with properties in Q3, and anticipate rolling out the <unk> Tech platform to the first operator in the near term.
The excitement of the community and corporate team was palpable as truly streamline the visible integrating and digitizing the flow of information from the website to the CRM ERP and the care module as well as other modules.
Our communities will be able to eliminate most paperwork and materially reduce administrative time and simplify many processes, including their owners move in process.
Our objective of leveraging technology to improve the overall resident experience are enabling employees to focus more of their time on the reservoir is being realized.
Speaker Change: We continue to achieve success in other initiatives, including the creation of the kaps team at well tower, which enables well tailored to directly execute capital renovation of facility projects on our sites in partnership with our operators.
Speaker Change: The result is that we're dramatically driving down costs, 12% to 15%, while improving the execution and improving the customer value proposition and positioning well powered assets to drive compounding earnings growth for many years.
Since the start of the year, we have completed or are working on about 2000 separate projects with 17 different operators at over 150 sites in three countries.
As a result of the success of the teams well tower and our operators we have expanded our work more than originally planned which includes thousands of units taken offline.
Speaker Change: This important initiative will result in some near term disruption, but has the potential to meaningfully contribute to our growth in 2025 and beyond.
Speaker Change: This tremendous amount of work requires the highest level of collaboration ever attempted and accomplished at well tower between our operating partners our vendors at our corporate employees I am grateful for the support and teamwork by all involved people and most certainly the leaders of our operators who are standing side by side with me as we are.
Vision this business as we re envisioned this business focused on improving both residents and employee experience.
Inclusion.
Another great quarter, great demand supply dynamics technology platform is launching the cat team is executing and many other earnings drivers are in place to enable years' of compounding earnings growth.
Thank you and I'll turn the call over to Nicole.
Thanks, John.
It's hard to believe that we're almost at the end of the summer we.
We have worked tirelessly over the last three months since our first quarter call expanding on our investment activity by an additional $2 1 billion.
Since we have been working at such a torrid pace I thought it would be helpful to summarize what we have accomplished so far this year.
We closed on $200 million of transactions in the first quarter and announced additional transaction activity of $2 6 billion on our first quarter call.
We subsequently signed up and announced another $1 billion of transactions at NAREIT in June and last night announced an incremental $1 1 billion of acquisitions, bringing this year's total closed or under contract transactions to $4 9 billion we.
We are pleased to report that as of the end of the second quarter. We have closed on $1 six to $91 6 billion of these transactions and we are diligently working towards closing the remainder of our announced transaction activity by year end.
The incremental $2 1 billion of investment activity announced since our first quarter call is essentially entirely made up of seniors and wellness housing assets in the U S and UK and spans a total of 17 transactions with the median transaction size of $65 million.
These transactions comprised of 82 communities with nearly 7000 units an average age of seven years and a stabilized yield above 8%.
Through these transactions, we are growing our relationships with legend story point Q S. L. <unk> UK Aero senior living to name a few operators.
While towers stellar reputation permeates globally as we remain the counterparty of choice for sellers as evidenced by the unabated quality and pace of our investment activity.
I want to highlight an emerging new trend that we have witnessed recently.
Speaker Change: Inbound inquiries from Asia, and Continental European investors, who own seniors housing product in our target markets.
Perhaps driven by the strength of the dollar, but we are seeing direct inquiries to acquire senior housing assets from foreign Counterparties, who we have not transacted with before.
During this quarter, we had net loan funding of $349 million as we originated $486 million of new loans and received repayments of $137 million across 17 loans.
Vast majority of the new lending activity was with one high quality sponsor from whom we also acquired a portfolio of seniors housing assets.
Speaker Change: As I have stated before we are creative dealmakers with a problem solving mindset.
I spoke last quarter about the dirt of debt capital in the seniors housing space and I'm pleased to announce that we have been able to close on a creative win win transaction with a counterparty given that backdrop. We previously transacted with this counterparty last year, when we acquired 10 seniors housing assets for $469 million.
We re engage with them this year for a follow on transaction in this case for a subset of the portfolio spending roughly 1000 units, we were able to see eye to eye on upfront pricing of $271 million and acquire those assets outright at a greater than 35% discount to replacement cost assuming a maximum payout.
Speaker Change: On the performance based earn out.
For another subset of assets, we couldn't find alignment on the current valuation, but we were able to offer a creative that solution. This $456 million first mortgage loan carries a 10% yield and spans nearly a 1000 units across several newly built Marquis senior housing properties.
Speaker Change: We're the last dollar basis at approximately half of replacement cost of these like new assets. This low and reflects a 56% loan to value based on our underwritten stabilized values.
As with most of our loans there are several structural enhancements to potentially convert these shorter duration debt investments into long duration equity investments.
This entire transaction is underwritten to achieve an unlevered IRR north of 10%.
Moving onto capital light transactions as announced earlier, we are transitioning 89, former holiday assets from Adriatic six different regional managers 69 of these transitions are already complete and the remaining 20 are scheduled for later this week.
As was our business plan all along we have plans for significant capital investments across all of these buildings.
65% of these projects are either completed or underway with the remaining working through plans scopes and budgets to start soon.
With an inventory of over 900 modernized like new units the newly appointed regional managers are hard at work and training the sales teams to market the enhanced value proposition of these communities.
While we have been disappointed with the results achieved to date, we remain optimistic that we will soon recognized significant operational upside in this portfolio through our focused regional density strategy.
As part of these holiday transitions, we have been able to negotiate triple net to RIDEA conversion of 26 communities with two of the incoming operator's sorry point <unk> four.
Speaker Change: Four wall tower, it's important that as we grow our operating partners regional footprint, we have an aligned the ownership structure across the various communities in our market.
This resulted in our partners, giving up future cash flow upside in these triple net conversions, both from Dan its Torrey point and Brian Thats. The Gora are thoughtful entrepreneurs focused on the long term and have bought into the merits of our regional density strategy and the positive impact. It has on the lives of the residents and the employees that they serve.
Yeah.
As always we are squarely focused on executing both external transactions and internal portfolio investment decisions that create substantial shareholder value.
I'll now hand, the call over to attempt to walk through our financial results.
Thank you Neil.
Adeeb: My comments today will focus on our second quarter results performance of our Triple net investment segments, our capital activity, our balance sheet liquidity update and finally, an update to our full year 2020 core outlook.
<unk> reported second quarter net income attributable to common stockholders of 42 per diluted share and normalized funds from operations $1 <unk> per diluted share representing 16, 7% year over year growth or 19% year over year growth. After adjusting for early funds received in Q2 2023.
We also reported total portfolio same store NOI growth of 11, 3% year over year.
Adeeb: Now turning to the performance of our Triple net properties in the quarter.
As a reminder.
Our triple net lease portfolio coverage stats are reported a quarter in arrears. So these statistics reflect the trailing 12 months and a 331 2024.
And our senior housing Triple net portfolio same store NOI increased four 3% year over year and trailing 12 month EBITDAR coverage was one four times marketing new post Covid high and coverage.
In the quarter, we reached agreements to transition 36 properties operated by story, new perspective from Triple net to rodeo effective <unk>.
Bringing total year to date Riddick transitions to <unk> 47.
Adeeb: Consistent with our strategy over the past three years and conversions, despite being short term dilutive should prove highly accretive over time.
Well tower moves into the equity position. These assets continue to benefit from post COVID-19 recovery in fundamentals and the industry's long term secular growth trends.
Adeeb: In the case of these two operators. It also moves our entire relationship to where they're creating complete alignment across our portfolio of properties with them.
Next <unk>.
Same store NOI growth and our long term post acute portfolio grew two 7% year over year and trailing 12 month EBITDAR coverage was 147 times.
Which represents an increase from 123 times last quarter as more of the recovery in the Integra health care portfolio as reflected in our coverage metrics.
Moving on to capital activity.
We continued equity finance, our investment activity in the quarter raising $1 6 billion of gross proceeds at an average price of $96 64 per share.
Adeeb: This allowed us to fund $1 2 billion of net investment activity and debt Paydowns and end the quarter with $2 $9 billion of cash and restricted cash in the balance sheet.
In July our Treasury team led by Mac Harris refinance our revolving line of credit achieving increased capacity by $1 billion, resulting in $5 billion of total borrowing capacity for.
While reducing our borrowing costs by 75 basis points, the reduction facility fees and base rate to sofa, plus 72 five basis points.
Extending the maturity by two years.
I want to thank our banking group for the support they continue to provide well tower, we deeply value has long standing relationships.
In July we also issued 1.035 billion convertible note due in 2029.
The note bears interest at three 5% convertible to equity at $127 91 per share.
We intend to use the proceeds from a note to address our 2025 unsecured maturities coming due next June.
The combination of these efficiently priced refinancings increased the total duration of our debt stack to six years and brings our total current available liquidity to $8 7 billion.
Staying with the balance sheet. We ended this quarter at 368 times net debt to adjusted EBITDA.
Napa completing our incremental $2 $7 billion of net investment activity, we expect to end the year at approximately four five times net debt to EBITDA.
The resiliency of our business model trajectory of our future growth and strength of our balance sheet recognized by S&P and Moody's in the quarter as they both move their outlooks on our triple B, plus and <unk> credit ratings to positive during the quarter.
Lastly, as I move onto last night to update our full year 2020 for guidance I will remind you that we have not include any investment activity and our outlook beyond the $4 9 billion to date that has been closed or publicly announce.
Last night, we updated our full year 2020 for outlook for net income attributable to common stockholders to $1 52 to $1 60 per diluted share.
And normalized <unk> of $4 13 to $4 21 per diluted share or $4 17 at the midpoint.
This guidance increase represents an incremental increase in the midpoint of <unk> <unk> per share from our NAREIT guidance and eight five per share from our first quarter normalized <unk> guidance.
The eight and a half since the midpoint is composed of three.
Adeeb: <unk> and.
Improved NOI outlook, and our senior housing operating portfolio.
And second half cents from accretive investment and financing activity.
Offset partially by a penny and a half from higher G&A expectations and near term drag from Triple net to <unk> conversions.
Underlying this increase <unk> guidance is an increase in estimated total portfolio year over year same store NOI growth to 10 to 12, 5% driven by sub segment growth of outpatient medical 2% to 3% long term post acute 2% to 3% senior housing triple net 3% to 4% and finally.
Senior housing operating growth of 19% to 23%.
This is driven by the following midpoint of their respective ranges.
Revenue growth of nine 2%.
Our revpar growth of 5% quarter percent and year over year occupancy growth of 290 basis points and total expense growth of five 5%.
Adeeb: And with that I'll hand, the call back over to Sean.
Thank you Tim in an effort to give you our owners a bit more insight in how we're thinking about the war today wed like to share a few macro observations as.
Speaker Change: As we think about the last few decades over there were several factors that provided a strong tailwind for our investment and return to risk assets.
We have gone rates have gone from high to low.
We printed an awful lot of money.
With broad future demand forward through fiscal borrowing almost everywhere and the award, including U S Europe, Japan and China.
Speaker Change: We benefited from globalization that led to lower inflation.
And we benefited for the most part and you're a peace and cooperation after the Cold War.
Our management team has and continues to debate if some of this tailwind will turn into headwinds as we think about our investment time horizon.
At the very least cautioning if these factors become the lack of tailwind.
This is especially relevant in the context of that is few additional cautions first society. They didn't quickly in our markets.
Trend inflationary or deflationary.
Given the current sovereign debt levels in fiscal policy, what will happen to the long end of the rate curve, regardless of trade actions.
Now that the anchor of globally as Japan has overcome zero lower bound will than normal.
Speaker Change: We hire for U S rates, we have no idea how to answer any of these questions definitively.
Speaker Change: And to further complicate the picture is the interplay of this question against the backdrop of substantially reduce tailwind, which I've mentioned before we do acknowledge that they will have an impact on investments, we're making today some negatively some positively.
However, the beauty of our strategy and our platform is that we don't need these tailwind to work in our favor US let me expand would.
Would we benefit from a lower rate environment in which our assets we own will be what's more with certain environment turn our incredibly low levered balance sheet into a powerful acid that we prudently tap into to drive box share earnings absolutely.
Speaker Change: Would you be fine if not drive if we remaining award a high long rates for an extended period of time unquestionably as construction will remain subdued for foreseeable future and we will continue to help solve broken capital structure problems, let's consider another issue the aging of the population while we're extremely excited about the higher.
End market demand that this trend will drive for many years. It also begs the question is the demographic shift inflationary or deflationary in nature from a societal standpoint.
We are certain that the greening of our society is deflationary force then we would be investing in middle market <unk> product, which we are not west.
We're sticking to El product in micro markets, where we have conviction that we can achieve sufficient pricing power to pass on inflation and then some this.
This is especially important to us given over a lack of growth of caregivers common threat with an older population, hence our obsession with product market fit.
Most all of these uncertainties, we contend with on a daily basis, whether it be the direction of the economy rates are geopolitics what is certain that we are in the midst of.
One of the most pronounced demographic shift ever witnessed and it's operating at the same time at which the challenges for new construction remain extraordinarily high to put simply we believe that we are in the very early inning of an exceptional multi year growth for the industry.
Add into Johns and our operations to what our operations team is doing to drive digital transformation, all senior housing industry, which should result in higher employee and customer satisfaction, we're confident in our ability to compound on a partial basis over a very long period of time for owners.
We as capital Allocators, and long term investor will take compounding part share of earnings or speculation of macro all day long long term compounding is the only way we're out of this to create real shareholder wealth.
As Buffett tells us predicting rent doesn't count building an arc does.
I truly believe we have built an all weather compounding arc that will continue to reward our owners across different environment for the years into the future.
As proud as I am of the exceptional execution of the work our team in recent quarters.
I'm convinced the best days of this company are squarely in front of us and with that let's open the call up for questions.
Speaker Change: At this time I would like to remind everyone in order to ask a question press star and the number one on your California keypad.
Our first question comes from the line of Jonathan Hughes with Raymond James Your line is open.
Yes.
Hi, good morning, Thanks for the time.
Sure. Okay, I think I heard you say, there are $70 million and $40 million of future cash flow upside over the next few years from.
Recent triple net to RIDEA transition then about 75% of in place NOI is from seniors housing Triple net I realize that's going to decline as we see some of those announced transition to be completed but how.
How much of the 75% could we see or do you want to see convert to <unk> tower.
<unk> participated more cash flow and value creation upside. Thank you.
Yes, Jonathan.
We're focused on growing with.
Instead of operators that we find to be exceptionally good in their region at that price point for that product.
And there are there remains.
Portfolios in our triple net that fits that bucket and over time, you can expect us to continue to work through that and convert into India, and there will be assets and triple net debt will remain triple net.
We think though for those assets primarily mid market asset. That's the right structure. We got to think about long term, obviously as I mentioned last time I think our last call I mentioned that our underlying EBITDAR in our triple net portfolio is actually growing slightly faster than our RIDEA portfolio purely because of the geographic mix.
That's primarily U S and U K.
But it will not be prudent for us to think led just convert the whole thing because right now we have the growth rate. We have since I think about long term and think about the growth prospects beyond stabilization relative to what we think inflation will be over a period of time, but there are opportunities and you can you can imagine that we are hard at work continue to.
And our work through with our with our partners.
Speaker Change: Two structure win win deals.
And the next question comes from the line of Vikram Malhotra with Mizuho. Your line is open.
Good morning, Thanks for taking the question maybe just building on your last comment I mean, I don't know what.
We are in in terms of the recovery, but whatever fees. When can you just maybe elaborate give us color on sort of what gets you to this next phase of growth both.
Internal and external and then I just mean like get the components that drove internal expenses and better pricing power seems seemed sustained.
If you can comment on that as well as on the external growth just curious.
The acquisitions Youre doing like how much occupancy upside do they have relative to the portfolio. Thanks, Yeah, Let me.
Let me see if I can remember all the questions to us, let's just start with the.
Acquisitions, roughly you should think industries in low <unk> occupancy and Theres No reason to believe four.
Obviously in the aggregate amount that we are acquiring anything but in that sort of market rate occupancy call. It low 80 percents. So we think there is substantial occupancy upside and I've said, many many times.
Speaker Change: Really.
Speaker Change: The toughest part of the margin story is sort of call. It 80 to low 80% occupancy and majority of that flow through happens after that so not only occupancy upside you should see tremendous amount of cash flow upside into that when we have never been yield buyers and will never be yield buyers. We are total return buyers and thats et cetera.
How we think about investments.
So that's sort of.
One one aspect of.
Of the <unk> and the second question is harder to answer and I, absolutely do not want you to sort of take this as my forward looking comments I have no idea, but as we're thinking about.
Supply demand and more importantly.
Supply demand in our markets, but more importantly, my earlier comment that all the initiatives platform initiatives that John and his team has been building towards we should see impact starting 25. So if you just sort of think about that aspect of it I think occupancy can I am not seeing it.
Well, but can take a leg up as we think about 25% right, but we sort of but now we sort of look into the different strata of pricing in different types of occupancy in our own portfolio today I'll share an observation with you that above 90%. This ticket this quarter.
Speaker Change: Let's just obviously to make it a point not to specific numbers.
Just if we think about 90 plus percent occupancy cohort of our portfolio RIDEA portfolio Revpar.
Revpar growth was close to 7% right. So our goal is for US what we're trying to do is to get the portfolio to that level as the industry also fills up right. So is it possible that as we go into 'twenty six sort of summer of 'twenty six 'twenty seven we see a leg up in rates again, we absolutely we can.
But this is too early to comment.
But we'll see what market gives us we're so far very pleased with how this summer seasons, playing up July has been a very strong month for us and we hope that sort of the summer season play out strong, but it's too early to comment how next couple of years play out, but I wouldn't leave this question without answering the craft of what you asked what inning. We're in this.
Growth cycle very early.
Yeah.
And your next question comes from the line of Nick <unk> with Scotiabank. Your line is open.
Okay.
Thanks, Good morning.
Just a question first on the senior housing guidance.
Can you just talk about why you didn't.
Revised same store revenue guidance for the segment and then if we.
We look at the sequential occupancy growth.
In the quarter a bit lighter than it's been previously in second quarter. So just trying to understand that impact in the quarter and then for.
Speaker Change: For the back half of the year it feels like there's a bigger sequential ramp that's going to happen.
For the full year guidance, just want to make sure.
That's correct and maybe you had some commentary on July or anything else that gives you sort of confidence in that back half of the year occupancy ramp. Thanks.
Nick Let me try and.
Speaker Change: John and Tim you can jump in as you fit.
Speaker Change: Several question Im not sure I remember all of them. All first is the occupancy I think you'll hear John's comment that.
We have thousands of units that are under renovation that's going through a lot of units are actually offline.
That might have contributed as John said that will impact our has impacted some near term fundamentals Ive said this million times that we will always sacrifice short term for long term, we would expect.
John: That will augment our <unk>.
25 growth, but we're confident.
Moving.
Obviously, the NOI growth that we have put out otherwise we would not be raising that guidance on what was the other other caution second half.
Look the thing is as you think about the.
Summer selling season, I sort of think about that June July August September phenomena, we got one month obviously.
In the quarter, we're pleased with June and that sort of this is the second quarter is always a second half sort of a growth as we come out of the spring season, and it's really July August September that makes or breaks the year and we're very pleased with supplier no I have nothing more to add to that.
And your next question comes from the line of Joshua <unk> with Bank of America. Your line is open.
Yes, good morning, everyone.
Joshua: Jim just wanted to get your thoughts on how you plan to lean into the balance sheet as a driver of future growth.
Thank you.
Really taking our leverage down and just thinking about like the opportunity set as you go forward.
Hey, Thanks, guys. So I think the key point for US as there is no plan to lean into it.
As we sit here today it just represent.
Speaker Change: Optionality, alright, and so think about how where we're at from a leverage standpoint, and how we're still continuing to fund our investment pipeline.
It's all about what we can't plan for.
And at that point to provide you the backstop and the ability to continue doing what we're doing and the business model doesn't need to change and really any macro backdrop.
But joseph resistant pink about longer term basis, there is massive organic deleveraging that's happening and at the same time the free cash flow generation is significantly picking up.
Onto something as you think about the longer term.
Capital structure, we clearly don't think if we just stay away. It is an organic deleveraging continues to happen will be three times Levered. Soon right. We don't think that's where a company of our size and scale should walk yet. So there is definite date capacity to tap into to drive <unk> growth, but as Tim pointed out that is the optionality.
That's what we're focused on it's not a question of what we will in a given period of time do it's the question is what we can and as sort of as you think about what's the normalized earnings for this company to think about that in terms of normalized balance sheet not a point in time balance sheet, that's too highly leveraged or tools to lowly.
As we are.
Sure.
And your next question comes from the line of John <unk> with Wells Fargo. Your line is open.
Thank you and your opening remarks, you mentioned.
John F. Burkart: Operating leverages as inherited the business maybe you could you talk about run rate, where you think that that can take margins too.
Speaker Change: Okay.
Okay.
I think you are asking us to speculate on longer term.
I will just say that.
We are that depends on occupancy and all.
Some are sort of all that operating platform initiatives that John has been building towards but as we have said before that if we can take margin.
Higher.
Then pre COVID-19 margins that at the very least.
You can expect the significant G&A savings for both me and John stepping down.
Either way our shareholders should it should be making money either through that margin expansion all through our failure of getting to where we think we should be through G&A reduction.
And the next question comes from the line of Michael Griffin with Citi. Your line is open.
Great. Thanks, I'd be curious to get some more color just on the investment environment in acquisition opportunities Youre seeing out there has there started to be more competition.
The product that you are looking to acquire or our capital partners looking to come solely to you I think similar to what we've seen so far this year and then maybe if you can comment on the transaction market broadly are you seeing mainly stabilized product trade or some more of that value add component.
Yes, so I'll try to start.
Please jump in.
So we there is it depends on where in the product cycle you have availability of debt. So if you think about more stable product, which has in place significant occupancy and significant in place cash flow that still can be financed so if there is any competition there.
Competition is there we have no interest in buying that product.
We are total return investor you have to think about if you buy a 90% 95% occupied senior housing building no matter what cap cap rated by AD you will end up being at a basis that at least for most cases is not acceptable to us for us, it's always about basis and staying power that's how we invest capital.
Right. So if there is any sort of interest or it just purely on the availability of debt.
We play at its space, where we are much more interested in future upside much more in place interested in bringing our operators to change the operating platform and the operating environment and Thats why we don't we just obviously we have put up this kind of investment volume purely because people are coming to us directly.
<unk> before they go to market you will see things that go to market.
A lot of times, we have looked at it as that.
Decided thats not a fit to our portfolio. We are not this company is not designed to buy we're trying to invest capital and build our regional density. So we think about assets in one asset at a time, depending on what other assets we own in those markets with those operators and that's how we think about this business.
Speaker Change: Yeah.
And your next question comes from the line of Michael Carroll with RBC capital markets. Your line is open.
Yeah. Thanks, Neal I wanted to touch on your comment that you made in your prepared remarks regarding foreign Counterparties.
Now or I guess, how much seniors housing exposure do these parties have and why are they looking to exit or reduce their exposure. I mean are they just looking to completely get out of the business or are they just looking for a partner that can help them kind of capture some of the seniors housing upside that they might not be able to do themselves.
Yes, I think I'll start with the reason theyre looking to get out.
It's the same as domestic counterparties right, it's that pressure now.
Speaker Change: Obviously foreign Counterparties have the benefit that the net outcome in their local currency is not as bad given that the dollar the dollar is fairly strong but.
The reasons are the same and at least in the transactions that we're working on with a few of these counterparties. It has been to buy them out completely not not joint ventures or anything like that so we're looking to do.
Simple asset acquisitions like we have been in the U S.
And your next question comes from the line of one Santa Maria with BMO capital markets. Your line is open.
Hi.
A question for John or John you talked about platform investments starting to drive growth for the shop business and 25. So just.
So if you can make some general comments about.
What success would mean for you with regards to the platform investments in the growth contributions in 2025.
One I think I have already hinted about this too vikram cautionary Leah.
But.
We're very as I said, we're very pleased with the occupancy growth over.
Over the last couple of years, including this year, but if we all the initiatives that John has been building towards.
If that can enhance that growth will be very pleased.
We shall see.
Even this year is not over a year, it's hard to comment on next year, but we'll be very pleased if that happens.
Speaker Change: And your next question comes from the line of Mike Mueller with Jpmorgan. Your line is open.
Yeah.
Yes, hi.
Your development pipeline and commitments are about 75% senior housing and 25% outpatient medical I guess, how do you see these these dollars invested in the mix between the two trending over the next few years.
Yes, I think I just want to clarify when you said, 75% seniors housing in our development page we provide.
And this up we provide a breakdown by units and what Youll see is as predominantly wellness housing, which is age restricted or age targeted product low service. So it's not traditional seniors housing I mean, there is barely in the seniors housing in there in the U S. There's a couple of projects in the UK, but as John mentioned in his prepared remarks, we have not been able to make seniors.
Housing developments pencil and so it makes no sense to do something that doesn't work out.
And your next question comes from the line of Jim Kmart with Evercore ISI. Your line is open hi.
James Hall Kammert: Good morning. Thank you actually just building on that prior question. When you think about the wellness housing segment, what is the organic growth profile, there contrasted with let's call. It more traditional senior housing the IL al et cetera. Thank you.
I think I mentioned that two quarters ago, or maybe even last quarter, everyone recalls but if you can go back and check.
But since 2018, we have built this business too.
To about 25000 units.
That whole business through a pandemic compounded roughly between 8% to 10%.
So.
That's obviously as you know this.
Communities are highly occupied and despite that we have compounded at that level.
I hope that gives you a sense of why we're excited about the business.
And your next question comes from the line of Ronald Camden with Morgan Stanley. Your line is open.
Hey, thanks, so much so looking at the cash flow statement. It looked like you generate 1 billion of operating cash flow over a six month period, which is looks to me like a first for the company.
I know John is doing a lot on the operational side, which we'll see in 2025, but curious if there's any sort of thought either in sort of working capital efficiency.
Capex right as you're thinking about free cash flow as you sort of scale and continuing to grow. These businesses are there still sort of potential upside drivers to that.
Ron I would say.
We are in the very early innings of seeing upside I think John mentioned in his prepared remarks that for the exact same scope of work and exactly in places.
We're able to drive 25% to 50% lower cost on Capex initiatives in all.
And more importantly, we can drive at a much faster turnaround, yes, if you think through that.
The biggest portion that we have in front of us whats the frictional vacancy.
The time is much more important than even money right because turnaround time equals to occupancy equals to your higher NOI fundamentally sort of stabilized NOI. So if you just think about that we're super excited about it and there's a lot going on in the company.
But we are excited about at the end of the day about free cash flow generation. So that's.
Speaker Change: To answer your earlier question on balance sheet I mentioned that this thing through.
Speaker Change: Free cash flow generation will be.
When we get to your definition of frictional vacancy.
So we're excited about it we're driving cash flow at the end of the day, that's all that matters.
And we think we're in the very early inning of that there is a lot to come.
Sure.
And your next question comes from the line of Rich Anderson with Wedbush. Your line is open.
Thanks, and good morning, So I wanted to talk about the longer term growth potential of senior housing shop.
Assuming it's not 20% in just about everything that you said when you think about Revpar, a rough tour I know youre focus more on the spread so even if inflation subsides I think you still get what you want there, but then on occupancy gains.
Speaker Change: I Wonder if you would agree that it's harder to get from 85 to 90 than it is to get from 75 to 80, just generally in life is that last mile of occupancy harder than the first mile and so when you think about that but then you layer in the fact this is a very small industry right. It's 115 million units in the U S.
And I wonder if that.
Dispels Occupancies area. They have because there's so few options and if you can at the end of the day when you roll up all these thoughts.
<unk> is sort of the gross profile of senior housing long term still.
Speaker Change: Still approaching 20% when you think about all of this or is it something significantly less than that but still impressive. Thanks.
So first let's talk about where we disagree.
Speaker Change: Let's not take let's not take example of what exactly you said I'll tell you it's much harder to get to 95% and then actually stay at 95%. So your basic assumption that it gets harder as you go on the occupancy assumption is exactly opposite of what our assumption is.
So that's sort of the number one point number.
<unk> is what is the future growth.
Senior housing as a business.
We'll get we'll debate that when we get that our first goal is as I mentioned, you probably picked up on my earlier comments that as you stabilize assets.
Our ability to charge or your ability to get to higher revpar increases pretty dramatically right. So that's basic supply demand.
And so first our goal is to get the whole portfolio there and as you know we're constantly reloading the gun, we're constantly buying lower occupancy buildings and.
<unk> bought a bunch of billing this quarter that are 40% occupy 50% occupied so we have a few years of work ahead of us to get to the portfolio to where we believe frictional vacancy is and it sounds like you and we have a very different opinion of what the frictional vacancy is but let's just get there and after that we'll debate.
What the long term NOI growth of the business looks like however, I'll give you a hint to think about on your own pink aboard.
What operational leverage at different level of occupancy year.
The NOI growth is a function of.
At <unk> occupancy level, largely a flow through margins higher.
Speaker Change: And as you know flow through margins goes up as occupancy goes up purely that call operational leverage that this operating leverage once you think through that you can come to that conclusion yourselves, but we're not going to speculate we first need to get to the promised land.
And your next question comes from the line of Austin, <unk> with Keybanc capital markets. Your line is open.
Austin: Yes, Thanks, I wanted to hit on John's comments around focusing on lower acuity customers and I'm just curious how long the tail is to continue to draw upon that resident base and given the longer lifecycle that you reference how does that play into your ability to sustain kind of the Rev for export.
Spread that Youre focused on.
Yes.
Have.
A long runway here, but again just going back a step so we're all on the same page.
For myself coming from the multifamily world when you looked at it.
Brad effectively youre, looking and saying, okay bigger Reds are better because largely the expenses are baked irrespective of occupancy.
Speaker Change: When you switch into senior housing, it's a different story because higher rents are in part reflective of higher acuity higher acuity is requires higher care and therefore cost and therefore higher reservoir doesn't necessarily mean higher NOI and so my car.
And that's where in my script and what <unk> talked about is we're focused on optimizing NOI, increasing NOI and in doing so clearly.
Speaker Change: Targeting lower acuity residents coming in who have longer stays.
Lower care all goes toward in the Al World All goes towards.
Maximizing NOI and NOI growth over time, we're at the very beginning of that process and when we put a lot of work into it but obviously it takes time to work through all the different rent rolls all the different properties. So we have a ways to go and then.
That's completely obviously suffering from all the other operating initiatives, we have going on which have a positive impact in both areas were up four and exposed to export.
And your next question comes from the line of <unk> <unk> with Deutsche Bank. Your line is open.
Hi, Yes, good morning, everyone and again congrats on another standout quarter.
Curious about the shop portfolio again, the operating margin is still in the high Twenty's now and kind of curious.
So kind of go back to pre pandemic highs of margins in the thirties.
What has the kind of happen to kind of get there or is it still further moderation in labor costs.
Additional occupancy pick up even though occupancy is pretty high relative to pre pandemic levels. I'm. Just wondering how we kind of think about getting back to that kind of NOI margin over the next 12 months to 24 months.
Good morning.
So first I just wanted to clarify that we're not just thinking about going back to pre pandemic margins.
I said that if that's all we do we failed.
But what needs to happen to get to.
A higher level of occupancy at a higher level of margin is simply we need to get to a high level of occupancy so I.
I think theres a lot of businesses.
<unk> follow and covered in all and generally speaking.
Speaker Change: In our head that pre pandemic was good we have to remember that pre pandemic for senior housing business was actually pretty bad times right. We've got a few years of oversupply situations from call it 15% to 18.
Speaker Change: Pre pandemic wasn't good time, so we should not target to get to pre pandemic, but to answer your question.
Speaker Change: Occupancy needs to be higher.
Speaker Change: For us to get there and hopefully what you heard today.
We're excited about occupancy growth. This year excited about occupancy growth next year, and we hope that you know.
We will get to those margins as occupancy build.
Speaker Change: And your next question comes from the line of Wes Golladay with Baird. Your line is open.
Wesley Keith Golladay: Hey, good morning, everyone can you talk about what is the timeline to stabilize your wellness housing developments and how much does falling lumber impact the development cost.
It's about 12 to 18 months sort of we think about stabilization.
Just think about.
Kind of to summarize what it takes to lease up this.
Lisa.
<unk>.
I think on the lumber blend that has helped but overall cost of development is not come come down if you can put everything in the blender.
Wesley Keith Golladay: Different contractors different trades labor cost.
Wesley Keith Golladay: Function costs are still higher than it was a couple of years ago meaningfully.
Yeah.
And your next question comes from the line of Emily <unk> with Green Street. Your line is open.
Speaker Change: Good morning, guys.
Earnings call you mentioned the significant amount of just stressing housing opportunities in the market.
And then Jeff these at risk of default properties totaling roughly 16 billion inclusive of agency and bank loans outstanding would you consider about quality and price you'd be willing to buy.
Emily I am not going to try to speculate on.
What percent of that we would be willing to buy we as I've said that we don't have an amount in our mind that window by where investors will not blue junkies.
Our entire strategy is based on something very simple, which is one to build regional density and grow with our operating platforms.
Our operating partners and as we see one asset at a time and we think about how it fits to the asset that we own in that area, we will make a decision to acquire or not acquire at that price. So it's a very strategic decision deliberate decisions that has taken on one asset at a time you can see.
Speaker Change: <unk> said, we acquired 7000 unit two.
82 different communities and we made 82 different deliberate decisions. This is not let's go by senior living and by $81 million at Y percent spread that just exactly what we don't do.
So I am not going to sit here and speculate but I will tell you that we see a lot of motivated counterparties, who have who wants us to help them solve that problem and we're happy to do so.
And there are no further questions at this time. This concludes today's conference call you may now disconnect.
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