Q3 2024 Welltower Inc Earnings Call
Brianna: Thank you for standing by. My name is Brianna and I will be your conference operator today. At this time I'd like to welcome everyone to the Well Tower 3rd Quarter 2020-4 earnings conference call.
Brianna: Please note that this call is being recorded. At this time, all participants are in a listen-only mode. After the speakers are marked, there will be a question and answer session. If you would like to ask a question, please press star, followed by the number one on your telephone keypad. To withdraw your question, press star one a second time.
Speaker Change: I will now turn the conference over to Matt McQueen General Council. Please go ahead sir.
Matt Mcqueen: Thank you and good morning. As a reminder, certain statements made during this call may be deemed forward looking statements in the meaning of the private securities litigation reformer. Although wealth power believes any forward looking statements are based on reasonable assumptions, the company can give no assurances as projected results will be attained.
Matt Mcqueen: and the factors that could cause actual results to differ materially from those in the fore looking statements are detailed in the company's violence with the SEC. And with that, I'll hand the call over to Shankh Mitra remarks.
Shankh Mitra: Thank you Matt, good morning everyone. I'll review thought-quadour business trends and our capital allocation priorities.
Shankh Mitra: John will provide an update on operational performance for our senior housing and medical office portfolios. Nikhil will give you an update on the investment landscape and Tim will walk you through triple net businesses, balance sheet highlights and guidance updates.
Shankh Mitra: I'm once again pleased to report another very strong quarter across the board at Worldtower, from operations to capital deployment.
Shankh Mitra: A father's trending of our balance sheet continued progress on our operating platform rollout. The result was a 21% increase in FFO partnership and our fourth guidance rates for the year. This time by 13 cents per share reflecting the extraordinary strength of our platform.
Shankh Mitra: This quarter also marks the first time in our company's history, in which our quarterly revenue exceeded $2 billion.
Shankh Mitra: In terms of the senior housing court operating portfolio, results continue to surpass our already high expectations.
Shankh Mitra: Year over year, same story and why growth came in at 23%, 8th consecutive quarter in which the growth exceeded 20%. And despite McRekanovagan's certainty and heightened political potentials,
Shankh Mitra: Top line growth on a same store basis remain resilient at 9% driven by another quarter of outside occupancy growth of 310 basis points coupled with strong rate growth.
Shankh Mitra: Particularly noteworthy is the 160 basis points of sequential spot to spot occupancy growth that we experience.
Shankh Mitra: A reflection of both strong tailwinds of our business and especially our operating platform initiative which will continue to bear fruit in the coming quarter ten years.
Shankh Mitra: Not only were placed with the sequential growth, but the occupancy run rate exiting the quarter solidly exceeded the prior year and early fourth quarter results have been positive as well.
Shankh Mitra: Additionally, I would be remiss not to mention that the spread between rep or unit revenue and export or unit expense remains at historically wide level. This trend resulted in another 300 basis points of year over your margin expansion of our shop portfolio.
Shankh Mitra: If as we have discussed in the past, we remain focused on the delta between rapport and export, not the absolute levels.
Shankh Mitra: Overall, we are delighted with our results and believed that we are carrying significant momentum into 2025 as tailwinds which we have lifted our business over the past couple of years continue to strengthen.
Shankh Mitra: As I have described in a recent calls, the backdrop of our senior housing business is only getting better as growth of 80-plus population picks up from here.
Shankh Mitra: Starting next year, 5,000 Americans will turn 80 every day. And remember that we are only at the front end of this trend with the crest of the Silver Sonami, not being seen until well into the future.
Shankh Mitra: and what is also irrefutable is the favorable supply outlook.
Shankh Mitra: Construction starts continue to drop and in the third quarter reached the second lowest level on record after the second quarter of 2009.
Shankh Mitra: Banks continue to wind down their cine housing loan exposure and when they locked them to reluctant to put new capital to work.
Shankh Mitra: and given the extended timeline to build a senior new senior living community in our market, which we detailed on slide 19 of our business update, we may not face the impact of new supplies in our markets for years.
Shankh Mitra: Frankly, in today's construction cost and financing cost environment, it makes no economic sense to build.
Shankh Mitra: We have had a couple of years of solid growth, but we believe that we are still in the very early stages of an extended period of extraordinary growth for the senior housing sector.
Shankh Mitra: And without stealing John Thunder, this end-market demand growth will be amplified by the rollout of our operating platform. I'm delighted to report that during the quarter we and live with a tech platform.
Shankh Mitra: At our first set of properties, along with preparing to broaden and accelerate the rollout in the near term. Beyond the technology rollout, we expect our broader operating platform initiatives, including our hands-on asset management, to have a compounding effort on effect on our portfolios' out performance.
Shankh Mitra: Shifting to capital deployment, the only change we have observed since a last call is that the opportunity set has expanded further.
Shankh Mitra: We announced another 1.2 billion dollar transaction completed or under contract since our last quarterly update bringing our total year-to-date investment activity to over $6 billion.
Shankh Mitra: Nikhil will provide you more details, but as with the past few quarters, most of our investments have been bolt on acquisitions within senior housing sector, improving and benefiting from our already established regional density.
Shankh Mitra: Our goal remains to go deep in our markets, not broad.
Shankh Mitra: While 2024 is shaping out to be a record year for World Tower, in terms of capital deployment, we continue to unart compelling opportunities across all property types, geographies and capital structure and expect a busy queue for Nikhil One.
Shankh Mitra: Luckily.
Shankh Mitra: I will quickly reiterate that through the exceptional cash flow growth we have achieved this year.
Shankh Mitra: and Food and Funding of our investment activity, our balance sheet has trend and meaningfully. With leverage at 3.7 times and nearly $10 billion of liquidity, we remain well positioned to address all near-term obligations and capitalize attractive investment opportunities.
Shankh Mitra: and as we have created flexibility to lean in, to the balance sheet to drive farther growth at opportune time.
Shankh Mitra: To sum it up, we're starting to see the Lalapalu's effect of cyclical, secular and structural growth driven by our operating platform, which will be far that enhanced by bolt-on acquisitions and balance sheet optimization to drive meaningful partial growth.
Shankh Mitra: We are singularly focused on this long-term compounding of our partial earnings growth for existing owners, our true North Star. We cannot be distracted, discouraged or dissuaded. With that, I will turn the call over to John.
John Thunder: Thank you, Shankh Mitra and good morning, everyone. At the risk of sounding like a broken record, we posted another order of fantastic results with no lead-up and momentum which can continue to build across the business.
John Thunder: Before getting into the details, I'll echo Shankh Mitra that we're looking forward to closing out the year on a strong note and excited for the other period of solid growth in 2025 and beyond.
John Thunder: During the quarter total portfolio, St. Stuart N.O.I. increases 12.6% versus the year of Opuurya. Once again, led by your senior housing operating portfolio.
John Thunder: First, I'll provide an update on our Outpatient Medical Business which posted year over years, saying, store N.O.I. growth of 2.2%. The consistency of the business remains evident with healthy leaking activity during the period and another quarter of strong tenant retention.
John Thunder: St. Stuart Oxensey remains stable at an industry-leading 94.5%.
John Thunder: That's for the senior housing business.
John Thunder: Support the business continues to deliver exceptional results.
John Thunder: Demand for needs-based product is clearly on the rise and our proactive, AFT Management Initiative which all get into shortly, or unquestionably, delivery health.
John Thunder: In the third quarter, portfolio achieved Europeer, same store NRI growth of 23%.
John Thunder: Once again, exceeding our expectations and allowing us to yet again to raise our full year out love, which Tim will describe shortly.
John Thunder: The strength in our senior housing business was brought based with solid occupancy games experienced across all our geographies and property types.
John Thunder: It's worth repeating that while the summer months typically represent the most active period of leasing during the year.
Speaker Change: RC Financial St. George, Oct. 10, if 120 base is point.
Speaker Change: and Spot to Spot Game of 160 basic points are well above typical seasonal trips. In fact, this quarter-tied record for sequential same store-oppensive growth when excluding the second half of 2021 as we were coming out of the building.
Speaker Change: On a year over year basis, same store occupancy increased 310 basis points.
Speaker Change: Also amongst the highest levels ever achieved in our history.
Speaker Change: Great growth across the portfolio also remains strong, with same-store rep for growth increasing 4.9% year every year.
Speaker Change: Well, our budgeting process for next year is just starting. We believe that great growth should once again remain favorable as portfolio vacancies decline further and our pricing initiatives begin to bear fruit or to come in the coming months.
Speaker Change: In terms of expenses, we continue to be encouraged by trends within the labor market and further moderation of broader inflationary pressures.
Speaker Change: Expoor or Exzets for Occupy Room increased just 0.7% year-over-year second lowest level in our history.
Speaker Change: Most importantly though, as Shankh Mitra, the spread between Rev 4 and X4, growth remains historically wide, contributing to another quarter of substantial operating margin expansion.
Speaker Change: At 26.5% the NOI margin for our same store portfolio remains below pre-coated levels, but we expect to continue to improve them going forward as the operating leverage inherent in the business is recognized.
Speaker Change: The other big driver, the future margin expansion, will be our operating platform.
Speaker Change: Our operating platform includes a technology platform and other site-level technology, an internal capital team, which are referenced last quarter, our data science capabilities and more.
Speaker Change: I continue to recruit top-challel and build out various capabilities that we leverage with our operators. And our asset management team across our portfolio to deliver Alpha.
Speaker Change: During our last call, I mentioned that we would soon be going live with our first technology platform in 23. Launching an end-to-end tech platform with our first operator.
Speaker Change: and please report that.
Speaker Change: Through the dedicated efforts of the Well-Tower team and our operator, it has been a very successful for all stakeholders. The customer experience is a modern digital experience substantially simplifying and shortening the moving process for the family and the residents by eliminating paperwork.
Speaker Change: The employee experience has improved dramatically, as we have simplified and were automated, the processes, as well as providing employees with important real-time data, ensuring top care for our customers.
Speaker Change: As a result of the technology platform, the executive directors are saving five hours per move in and enabling them more time for leadership and to focus on our customers.
Speaker Change: Additionally, potential errors are being avoided due to the singular database for the various modules, meaning that data is only input once, so there are no inconsistencies in the spelling of a customer's name or other critical information.
Speaker Change: And finally, we deliver the technology platform at a lower cost than the combined disparate systems being replaced.
Speaker Change: At this point, we're preparing to roll out the Czech platform to additional operators in the near term.
Speaker Change: Well, we have a long way to go. We're excited by our initial success, which would not have been possible without the hard work and by and from our best in class operating partners. And the many well-tower team members who are working tirelessly on this effort.
Speaker Change: To sum it up, there's another strong quarter with poor well-tower between solid operating performance and our accomplishments on various operations and asset management initiatives.
Speaker Change: Well, it's too early to speak to the outlook for 2025 with any detail. We've remained as optimistic as ever on the growth prospects of our business, as the demand supply back to our senior housing is only strengthening and the benefits of the operating platform began to be realized in a more meaningful way.
Speaker Change: We continue to execute on our mission to improve the experience of senior housing residents and employees. With that, I'll turn it over to Nikhil.
Nikhil One: Thanks John and good morning everyone. I am pleased to report that our investment activity in pipeline remaining incredibly robust, visible and actionable.
Nikhil One: Over the past three months since our last call, we have either acquired or entered into agreements to acquire an additional $1.2 billion of assets.
Nikhil One: This is a fraction of the 15-plus billion of opportunities that be considered during this time frame.
Nikhil One: These incremental transactions bring our year-to-date investment activity to record setting 6.1 billion.
Nikhil One: This growth underscores the strength of our market position and the abundance of opportunities we're pursuing.
Nikhil One: As always, our focus and excitement are driven by the expected, attractive risk adjusted returns of our transaction activity, rather than the deal volume.
Nikhil One: Applying quality assets at a reasonable basis with significant cash flow growth prospects remain at the core of our investment strategy.
Nikhil One: In the third quarter, we closed on 2.15 billion of transactions.
Nikhil One: Our activity remains granular with two three closings spanning 15 different transactions across 13 different operating partners and the medium transaction size of 56 million.
Nikhil One: Our Q3 transactions were heavily focused on our seniors in wrongly housing businesses, where we added 40 properties and more than 5200 units.
Nikhil One: We acquired these assets which have an average age of just over 5 years at 244,000 dollars per unit at a significant discount for replacement cost.
Nikhil One: We expect our transactions that close this quarter to stabilize in the mid to high 70s and generate an unreliable IRR in access of 10%.
Nikhil One: Our team's reputation, expertise, and network continue to drive our success.
Nikhil One: An impressive 94% of our investment volume by dollars this quarter was acquired through off market transaction.
Nikhil One: This approach has allowed us to source opportunities from a diverse range of sellers, including six transactions from developers facing the major construction loans.
Nikhil One: 3 from foreign counter parties including 2 from Asia and 1 from Central or from Continental Europe. 4 transactions with the repeat counter parties, highlighting our reputation as a fair and reliable partner.
Nikhil One: I'd like to quickly reflect on the macroeconomic trends we have witnessed recently.
Nikhil One: Despite the 50 basis point rate cut by the Fed, the 10 year treasury yield has increased by over 60 basis points since the announced cut at market participants are now wrestling with the likelihood of long rate staying higher for longer.
Nikhil One: We laid the case out for this scenario in detail on our last call.
Nikhil One: The impact of the Redcut to Barrowers.
Nikhil One: The floating-grade debt is diminimous as the still-based death maturity challenges as banklander's continued to reduce their senior housing exposure. The three Q-ordnings result from many banks that have historically been active in the senior space focused on highlighting their desire to continue to reduce their exposure to our sector.
Nikhil One: Agency for Dancing Alter remains challenging due to limited stable product and elevated DSDR requirements and higher long term rates.
Nikhil One: It's not surprising that with this backdrop, Penny May and Freddie Mac's origination volumes are down 91 and 71% respectively versus their pre-pandemic peaks.
Nikhil One: This constrained lending environment continues to create attractive investment opportunities for us.
Nikhil One: On the back of this environment, we are engaged in direct bilateral conversations with eight of our highly respective private peers to value the significant portions of their portfolios for potential acquisitions.
Nikhil One: We are also seeing an increase in interest from sellers requesting to take well-power OP units in Transaction Consideration in lieu of cash.
Nikhil One: This allows those exiting their assets level positions to have a mechanism for continuing to participate in the strong tailwind of our industries but in a manner not constrained by an unforgiving capital structure and without a robust and business operating partners, backed by all time, or operating platform.
Nikhil One: This proactive and collaborative approach underscores our commitment to continuing to unlock interesting opportunities while conducting business in a first class and mutually beneficial manner.
Nikhil One: In conclusion, in this volatile capital markets environment, who remain focused on leveraging our expertise and data science platform, with our operating partners and peer relationships, to capitalize on attractive opportunities to create long-term value for our shareholders.
Nikhil One: Thank you for your continued support and confidence in our team.
Speaker Change: On now hand the call over to Tim to walk through our financial results. Thank you Nikhil. I'm Kamit today, we'll focus on our third quarter results.
Speaker Change: Performance of our temple that invests in segments.
Speaker Change: Our capital activity, a balance sheet and a liquidity update, and finally an update to our full year 2020 Core Outlook.
Speaker Change: Well, Cow Report is third quarter-ninning come a trip into the common stockholders of 73 cents per litre chair. In no-relyce funds reparations of $1.11 per litre chair.
Speaker Change: Rapper attending 20.7% year of year growth. We also report year of year to report play of same store in a wide growth of 0.6%.
Speaker Change: Now, I'm sharing this performance of our triple net properties in the quarter.
Speaker Change: As a reminder, our Triple Nutlete's portfolio coverage stats are reported in a quarter-and-a-rears. So these statistics reflect the Trilling 12 months in a 630-2024.
Speaker Change: In our senior housing triple net portfolio, the same store in the line increased 5.8% year over year, and truly 12 month EBITDA coverage was 1.09 times, marking a new post-COVID high coverage.
Speaker Change: Coverson is portfolio continues to improve up pre-pandemic levels. In greater than expected growth, this portfolio is being driven mainly by improving underlying fundamental diseases current new cash bases.
Speaker Change: Next, same Serenoline or long-term post-uportfolio of group percent year every year. In trailer 12 on BBDR covers 1.7-4 times.
Speaker Change: Moving on to Half-Life Timothy, in July, we should have 1.035 billion dollars in verbal note doing 29. We intend to use the proceeds for the note to address our 2025 on secure returns. Coming to you in the second quarter next year.
Speaker Change: We continue to equate finance our investment activity in the quarter, raising $1.2 billion in gross pros, even average price, but $122 per share.
Speaker Change: It's allowed us to fund $2 billion in that investment activity, and I'm the quarter of a $3.8 billion cash worth of cash in the election.
Speaker Change: Staying with a Balaji, running this quarter with 3.7 three times net-desk from Justice Eveida. And Eveida, for completing a billion and a half in criminal net investment activity, we expect to end the year, although four times net-desk Eveida.
Speaker Change: which will represent over a one-turn improvement relative to the end of 2023.
Speaker Change: This level of deep leveraging is being achieved despite deploying a record amount of capital. Our capital capital is a capital capitalization of acquisition, the significant increase in our cash flow generation. To allow us to build a powerful asset, it allows us to permanently fund future investments and hands our GoFore cash flow for shared growth.
Speaker Change: To illustrate this substantial increase in balance for pasty.
Speaker Change: The shock mentioned earlier, earlier, our annualized revenue is 8.2 billion dollars per
Speaker Change: The signify of the 3.2 billion dollar increase compared to the end of 2019.
Speaker Change: Well, our net debt has decreased by $2.7 billion during that same period. Reflecting a 20% decrease from pre-COVID levels, concurred with a 60% revenue increase over that same period.
Speaker Change: There's no worthy that our current death stack includes $2.1 billion you can verbal dose that are in the money.
Speaker Change: The seat leverging should be amplified through the embedded upside within our senior housing operating portfolio. Further bolstering balance sheet capacity to provide increased flexibility in optionality.
Speaker Change: Lastly, as I turned to our update at 2024, God news.
Speaker Change: I wonder if I do that we have not been through any investment if you're out look beyond the $6.1 billion today that has been closed or publicly announced.
Speaker Change: Last night, we got to dinner at our pulling year 2024 outlook for net income attributable to common stockholders to $1.75 to $1.81 per deluded share. And normalize up about $4.27 to $4.33 per deluded share.
Speaker Change: 4 dollars in 30 cents a midpoint.
Speaker Change: Our updated Norma and Fogadans represents a 13-cent per share increase the midpoint, more previously issue guidance.
Speaker Change: The thing crisis composed of six cents from an improved vanilla outlook and our senior housing outbreak portfolio. One and a half cents from taxes, netfax.
Speaker Change: 1 cent from performance in our triple-letton OMS and 4.5 cents from a creative capital activity.
Speaker Change: to
Speaker Change: Under line, the Syncree Suffolk for shared guidance is an increase in estimate total portfolio year-we-year same-store growth to 11.5 to 13%.
Speaker Change: Drifted by Sub-Sightman Growth, Top Outpatient Medical 2-3%
Speaker Change: Long-term post-2 to 3% Senior Housing Triple Met, 4 to 5% and finally, increase Senior Housing Operating Growth of 22 to 24%.
Speaker Change: This is driven by the following midpoint to the respective ranges.
Speaker Change: Rob new girls of 9.2% made up of report growth of 5.4%
Speaker Change: and neurobundry occupancy growth of 300 basis points.
Speaker Change: Next Benchcroft of 5%.
Speaker Change: and with that we'll hand the call back over to Shankh.
Shankh Mitra: Thank you Tim, as many of you my fellow shareholders now.
Shankh Mitra: of my team and I are true believers that compounding is the only way to create substantial long-term value. Compounding, not just in the context of middle school math, but in everything in life.
Shankh Mitra: We define compounding as dogged, incremental and continuous progress over a very long period of time.
Shankh Mitra: and for this team, it has been close to a decade since we took our predecessor company down to a start by turning over roughly 60% of the portfolio, changing out 95% of our human capital in middle management and up.
Shankh Mitra: Evolving our operating partners while creating greater alignment through win-win structures and so on.
Shankh Mitra: More importantly, we change this company's culture.
Shankh Mitra: As we build what you know as wealth art today, great by brick.
Shankh Mitra: We founded a culture of owners not managers with agency problems, a culture of shared value with our operating partners to deliver real value for customers and site-level employees. Shoulder to shoulder no matter what.
Shankh Mitra: A culture of resilience having endured four different crises over last past decade, crises included over supply, crippling pandemic, labor shortage and the worst inflation in 40 years.
Shankh Mitra: A cultural extreme excellence to build and create true residual alpha for our owners, not defined by Wall Street's view, a real city industry which has a checkered history of creating value. We're focused on creating alpha, not levered data for existing owners.
Shankh Mitra: Over the past decade, we have built a unique data science platform. The first of its kind in real estate industry powered initially by machine learning, then deep learning and finally by AI, well before many of these terms got into the folklore.
Shankh Mitra: and finally with Hutspa and perhaps Nivetae. We launched an operating platform initiative by attracting John and hundreds of our new colleagues who followed him from a deaths in industries of higher standards during a pandemic no less when we didn't even know if the business would survive.
Shankh Mitra: I sat down this past weekend to reflect on our Q3 results and for the first time since I arrived at Worldtower, I felt a sense of satisfaction in that the compounding of our efforts over the course of many years is beginning to pay off.
Shankh Mitra: Not because of the strong results we posted in the quarter, but because of a feeling that our audacious rim of transforming this industry is finally coming together and what that may potent for next few years.
Shankh Mitra: and having said that this feeling lasted for about five minutes as my usual health
Shankh Mitra: We have a long journey ahead and frankly that our pursuit of doggy, incremental and continuous progress will never be over
Shankh Mitra: Media, Critty and Complicency have no place in our culture. Like Navy SEALs, we believe the only easy day was yesterday. Well, occasionally, in moments like this, looking at the scoreboard may not be so bad.
Speaker Change: Where in this game because of a laugh for the game and with that will be back to the game. Operator, please open the call-up for questions.
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Speaker Change: We ask that you please limit yourselves to one question and re-cute with any additional or follow-up questions.
Speaker Change: Our first question comes from the line of Jonathan Hughes with Raymond James. Please go ahead.
Jonathan Hughes: Thank you for the time and great to see the strong results.
Jonathan Hughes: Hoping you could talk more about the historically wide gap between Unirrevenue and Unid expense and margins and specifically trying to understand the incremental margin at today's 86% occupancy and where.
Speaker Change: and the American Mental Margines go as one's occupancy surpasses 90% or even higher since we are able to cost at that point. Amen.
Speaker Change: Thanks, Jonathan. So you're writing highlighting that the way that kind of rep 4x4 math is expressed through our financials isn't that slow through margin. So last quarter we noted that slow through margins.
Speaker Change: had gone above 60% for the first time since the kind of post-COVID recovery. Again, this quarter, we're at a low 60s with low through.
Speaker Change: Important note in that we had one operator making about 1% of our same store pool that through some changes to their operating model and planning and higher expenses right now and we'd expect. So, X-Set operator wrote through margins what have been close to 67%.
Speaker Change: So we can sit in what we've said in the past. We should see Plotoo Martin moving to the mid-60s and approach 70% as we start to re-approach, kind of pre-cova-blows a black-up-n-c of 88% and then from there on improved.
Speaker Change: Our next question comes from Michael Griffin with City. Please go ahead.
Michael Griffin: Thanks, Nick Chaudhri, with Michael Chaudhri, made the comment that it makes no economic sense to build and I know it's hard to generalize and obviously it's regional but I'm just trying to get sense of kind of how far off we are before it does make economic sense either from a rent growth perspective or cost coming down, you know, just trying to quantify that a bit. Thank you.
Speaker Change: Nick's really good question is hard to say, you know, in a general matter, because cost is a function of local situations, labor, etc.
Speaker Change: We haven't seen construction costs come down. You have seen the material costs have come down, which has been surpassed, obviously taken up, more by insurance and labor costs.
Speaker Change: So if you just want to sort of have a jail rule of thumb, remember, Rand Groot will not get you there.
Speaker Change: Rendgroth relative to labor costs, operating labor costs growth will get you there, right? So, you need, in March, is 25, 30 percent increase of rape for minus x-four where construction will start to make sense. I always believe people will do what make economic sense.
Speaker Change: and we have tried to make it work in the best.
Speaker Change: Location where pricing is not a question and when you are struggling with that. That's the best location such as Palm Beach and Cooper T-Nows of the world. Imagine your question is an average of the industry where this makes no economic sense whatsoever.
Speaker Change: [inaudible]
Speaker Change: Our next question comes from Ronald Camden with Morgan Stanley. Please go ahead.
Ronald Camden: Hey, just a quick one from me. So I've been sort of reflecting over this top-line growth of 8%, where you've got over 300 basis points occupancy gain.
Ronald Camden: percent pricing growth, which is basically the fastest out of any rates that we cover. I think we're all trying to figure out what that number is going to look like in 2025. I guess my question would be, as you reflect on that number, maybe a little bit more color of what drives that. Is there anything sort of one-timey?
Ronald Camden: and not putting words in your mouth, but is there a reason that we should expect that to decelerate as we flip the calendar? Thanks.
Speaker Change: Ron, very good question. We're not gonna sit here and try to speculate.
Speaker Change: what 2025 will look like. I'm going to point out a couple of things. John made a specific comment in his prepared remarks about how he is feeling about pricing.
Speaker Change: We'll see what the market gives us. I will tell you that we would get, we would have market share increase, but at the end of the day everybody is subject to market.
Speaker Change: We are focused on REBPOR minus export, not REBPOR. Having said that, you can focus on what John said in his prepared remarks. I will remind you from an occupancy standpoint, remember, revenue is a function of pricing and occupancy.
Speaker Change: I'm going to refocus you on what I said on the last call.
Speaker Change: and I said occupancy.
Speaker Change: Can not necessarily saying it will but can get growth can get better next year
Speaker Change: and hopefully after this record sequential occupancy change in third quarter of this year that gives you you know probably gives more credence to the comment I made. I'm willing to say about that much hopefully that's helpful but just understand it's too early to say we'll see what market gives us.
Speaker Change: Our next question comes from Nick Ulico with Scotiabank. Please go ahead.
Nick Ulico: Thanks, yeah just just following up on the topic of occupancy maybe Shankh or John, can you just talk a little bit about what you saw in the quarter in terms of you know traffic trends maybe you know year-over-year sequentially and and also how if there's if you feel like you're getting an even bigger benefit right now from lower turnover in the portfolio?
Speaker Change: Yeah, I'll jump in. Traffic is up. Additionally, what we saw is higher closing ratios. In other words, our execution is improving, which is important and it's a function of the operating platform there. As it relates to turnover, that's...
Speaker Change: Been consistent no no issues there, but the bigger issue is we're executing and taking market share
Speaker Change: Thank you.
Speaker Change: Our next question comes from Austin Werschmitt with KeyBank Capital Markets. Please go ahead.
Austin Werschmitt: Great, thanks Shankh. You highlighted that you're carrying significant momentum into 25 and kind of the tailwinds in the business continue to strengthen. I assume speaking kind of the demographics, but at the same time I think absorption has been stable in recent quarters across the sector. So just curious if you think we're at the cusp of absorption re-accelerating and that being kind of the...
Speaker Change: better next year.
Speaker Change: Yeah, I'm not going to comment on what may or may not happen in the macro.
Speaker Change: Absorption is a macro industry-wide phenomena.
Speaker Change: As John just mentioned that we are focused on market share, you can see what our sequential occupancy growth is relative to the industry.
Speaker Change: You will see that we're entirely focused on using our operating platform and our best-in-class operators' hard work to get market share. If we can get improvement in absorption, that'll be a gravy. That's just not something we can control. That's not something we're focused on.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Vikram Malhotra with Mizuho. Please go ahead.
Speaker Change: Hey, this is George Young for Vikram. So you have highlighted...
Speaker Change: Unexpanded Visible Acquisition Pipeline, can you just provide more color on how much of the flow is non-U.S.? And then as a follow-up, what percentage of the deal flow do you pass and say no to? And has that percentage changed recently?
Speaker Change: Georgie, you know, on the second question, in my prepared remarks I talked about how of the billion two of incremental activity we announced this quarter, the universe of opportunities we looked at was 15 billion, so from the 15 we acquired 1.2.
Speaker Change: The number fluctuates up or down every quarter depending on what we look at, but generally speaking it's roughly a 10% hit rate. And then your second question about geographically, I think Shankh said it in his remarks, but we've got active transactions we're looking at at all three countries.
Speaker Change: Thank you.
Speaker Change: Our next question comes from John Polosky with Green Street Stewart. Please go ahead.
John Polosky: Great, thanks for the time. Questions on CapEx for the senior housing business. It's been running, you know, 30 to 45 percent of NOI over the last year and change. I'm just curious, over the next two to three years, I know there's kind of unstabilized NOI in that denominator, but over the next two to three years, where do you expect CapEx, the percentage of NOI for the senior housing business, to start to stabilize at?
Speaker Change: Yes, I'll step in. John, the question is, let me give you a broader answer here. So, as I mentioned last time, we've created an internal team
Speaker Change: Reducing the cost by 20-50% on say a unit basis and speeding up the timeline.
Speaker Change: We're also changing the fundamental way we do things. Historically, this business is really, the operators function kind of like on the PE model, where it's very short-time decisions. So, for example, you might have an asset that has three buildings, and they'll do one roof.
Speaker Change: and then the next year following roof and the following year following roof. What that's doing is driving up costs dramatically because of smaller projects, because of three mobilizations and then you have all kinds of other stuff flowing through like the roof leaks impacting the customer experience and all the issues along those lines.
Speaker Change: What's happening right now is we're doing things correctly.
Speaker Change: with a long-term life cycle cost in mind, lowering the long-term run rate. So that means we're pulling some things forward and it won't change, it will lower the long-term run rate, but right now there's some stuff that's elevated because in that example, we'd be doing all three roofs.
Speaker Change: Avoiding the future roof leaks and getting the project behind us and moving forward.
Speaker Change: There's a little noise that's going on right now, but it's all for the efforts to lower the long-term run rate. And the unit costs are dramatically lower. So it's just absolute execution, great execution by the team.
Speaker Change: Our next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll: Yep, thanks. Can you guys provide some color on the the tech platform rollout that you mentioned? And I know that you have other initiatives that you're working on, but how does this work out financially? I'm assuming Welltower's made the initial investment to build out these platforms. I mean, are your operators paying a recurring fee for this, or just does it get reflected into significantly better financial results for you as these get rolled out to your operating partners?
Speaker Change: Yeah, Mike, the goal is clearly the latter part of your question, so significantly better financial results.
Speaker Change: How I would describe kind of the flow of the cost is, you're right, the initial investment is coming through Welltower.
Speaker Change: There's a bit of duplicative cost up front because we kind of transition into this. You have the legacy technology systems of operators moving over to our own.
Speaker Change: In the end, this isn't intended to be a cost-savings exercise, but the tech stack will be less expensive because it will be scaled across our entire operating platform rather than sub-scaled across all of our operators.
Speaker Change: That will come through over time, but beyond the investment, the initial thought should be there shouldn't be an uptick in costs.
Speaker Change: Mike, just remember one of the things we have to think through.
Speaker Change: just in addition to what Tim said, that software cost is already.
Mike: Part of the shop margins, right? So there is cost flowing through our P&L and it's duplicative in nature today because obviously you have to make a lot of initial Or upfront cost but just as a run rate cost Remember that technology cost is part of the shop expense tax
Speaker Change: Our next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.
Juan Sanabria: Hi, thank you. Maybe a question for Nikhil. You mentioned talking to eight private peers. Just hoping you can maybe add a little color on that. Is that larger scale transactions or more of the singles and doubles you've been doing to date?
Speaker Change: You have one, you know, as you would imagine, right, when you're talking to eight different groups.
Speaker Change: From some of those, you might not look to buy any assets. Either you don't like the asset quality or the valuation. And with some, you might see eye-to-eye on a lot, right? So it's hard to generalize, but just given the numbers, we're talking about a different range of outcomes with everyone we're speaking with.
Speaker Change: Our next question comes from Joshua Dunerlein with Bank of America. Please go ahead.
Joshua Dunerlein: Hey everyone, thanks for the time. I guess I was looking at your business presentation update, the path to recovery slide on page 21. The bridge assumes you go back to pre-COVID occupancy and margin at today's rate. It seems like it's a little kind of...
Joshua Dunerlein: Unrealistic, just given the forward-looking backdrop, I guess, how should we think about what else gets layered in beyond this to kind of get to like a bridge, and then maybe tying that into the tech cost you flagged as being part of the shop expenses, like how should we think about that influencing this bridge?
Speaker Change: Yeah, Josh, it's a good catch that if you just look at that page of what we're trying to give you a sense of what occupancy growth, how that impacts obviously.
Speaker Change: our NOI, embedded NOI growth, going back to pre-COVID. I've said this before, if we only go back to pre-COVID, at least John and I are stepping down.
Speaker Change: We consider that a complete failure, so we expect that occupancy growth, occupancy will go substantially higher than where the pre-COVID is. However, the most important point is what you made is at today's rate.
Speaker Change: Remember what should be added if we are just trying to understand what's a normalized earnings for this company. What you should add, not just whatever you think is a frictional vacancy of our portfolio should be, that's obviously one add.
Speaker Change: You have to decide how long it takes that to get obviously get to that frictional vacancy and Meanwhile in those years, what's your rep for minus export because our rates are growing faster
Speaker Change: Then our expense growth right that adds to that and just also point out that we will see that our first
Speaker Change: set of numbers we gave you a few years ago when we started giving you the disclosure.
Speaker Change: That pool of assets, our NOI, is actually $33 million higher than pre-COVID. Occupancy is significantly lower.
Speaker Change: yet it is $33 million higher. You will see that in, I believe, the fourth bar on that page. And that's because rates are much higher, right? So you have REF4 minus X4 got you.
Speaker Change: to that higher NOI despite lower occupancy and that same thing follows through as you are thinking about whatever to whatever your definition of
Speaker Change: Frictional Vacancy Years
Speaker Change: And that's how you sort of get to the number. We're not going to sit here and try to quantify what technology costs may or may not come down. That's not the focus.
Speaker Change: We think we're after the big ball, which is revenue. There is a lot of opportunity on the expense side as we implement, you know, systems and processes and have site-level employees focus on why, to what they have signed up to do, which is providing care.
Speaker Change: That's the compassionate care is why they have signed up to be in this industry. So we want to try to make people's life easier. As John pointed out, just for one example, our tech suite rollout, it's saving about five hours.
Speaker Change: of, you know, effort, power move-in.
Speaker Change: from an executive director's perspective, right? So that she can focus on what she signed up to do, which is leading people and providing care to families, right? Care to residents and focusing on the residents and the families.
Speaker Change: So, you think about it.
Speaker Change: This is not just a question of cost. When we talk about margins, I don't want you to think about cost.
Speaker Change: I want you to think about how we improve overall resident and employee experience and what that means for resident's willingness and ability to pay. Thank you very much for the question.
Speaker Change: Our next question comes from John Kilchowski with Wells Fargo. Please go ahead.
Speaker Change: and John Burkart.
John Kilchowski: Alright, thank you. Just one on the transaction market. It feels like you're competing on your own with some of these deals. Could you talk about what you're seeing in the way of capital flows and when you expect composition to start to pick up? Just trying to understand the likelihood of you being able to maintain this sort of cadence on investment activity.
Speaker Change: Let me start and Nikhil you jump in. First, we're not trying to maintain the level of activity. I have said this before, our company is not designed to buy stuff. We're not a bunch of deal junkies. We're trying to invest capital.
Speaker Change: to further strengthening our market position and drive partial earnings and cash flow growth.
Speaker Change: So, if the market opportunity is there, we'll do it. If the market opportunity is not there, we'll not do it. If we believe the market prices have gone to a level where somebody is willing to pay more for assets than what we are willing to pay for, we'll sell. Like you have seen pre-COVID, we have sold $15 billion worth of assets.
Speaker Change: The focus is on value creation on a partial basis for existing shareholders.
Speaker Change: is in a privately negotiated bilateral transaction. So you have to compete with one person in that situation, that is yourself, if it gets in your head what your cost of capital is.
Speaker Change: Our cost of capital is much higher than you guys believe.
Speaker Change: purely because we believe our normalized earnings is much higher.
Speaker Change: Are we increasing the growth rate and terminal value for existing owners who are our investment partners today? That's how we make capital allocation decisions.
Speaker Change: Our next question comes from Richard Anderson with Wedbush. Please go ahead.
Richard Anderson: Thanks, that's a perfect segue to my question. So far this year, you've grown the portfolio by 7%.
Richard Anderson: 6 billion to 90 billion of an enterprise value. You've grown FFO guidance by 7% That's probably coincidence, but I but I I noticed that four and a half cents of the 13 cents this quarter was attributable to external investing
Speaker Change: So, of that, how much of that was driven by the, you know, this sort of spread investing phenomenon of a seven yield and your, you know, low cost of capital? How much of that was...
Speaker Change: previous year outperforming, to your point, better growth profile of the company. You did $5.9 billion last year at a 7.1% yield. I imagine that's a higher yield today. So is the $0.045 purely from activity this year or outperformance from previous years?
Speaker Change: Thanks.
Speaker Change: Thanks, Rich. I would just note that four and a half cents is capital activity, right, so that's how we're financing things and that's also what we're acquiring.
Speaker Change: and the bucketing is representative of incremental changes in guidance. So that is all from incremental capital activity since we last provided guidance.
Speaker Change: The move in our kind of senior housing or outpatient or triple net, that'll be like fundamental performance. And so things we acquired last year, outperforming underwriting are showing up in kind of fundamentals, whereas
Speaker Change: When I give the guide and talk about capital activity, it's really just incremental from last time we updated you what's being driven by the new acquisitions, the timing of acquisitions.
Speaker Change: and the way we finance.
Speaker Change: It's an extraordinary question, Rich, because if you think about...
Speaker Change: The activity, which is obviously what we talk about quarter to quarter, but what impacts your number is when you close. And majority of the closings are obviously happening in Q3 and Q4.
Speaker Change: So, the impact of that closing, you're not going to entirely feel this year, but you're going to feel it next year.
Speaker Change: especially with a focus on growth.
Speaker Change: We are growth investors
Speaker Change: were not, I've seen enough.
Speaker Change: companies have been destroyed by chasing yields. You can be assured that that's not what we're doing. So A, you have a timing issue of obviously how that flows to the number and B, assuming that we are actually buying what we're telling you buying, which is growth, your impact and a move forward basis will be higher. So it's a really, really good question.
Speaker Change: Our next question comes from Wes Goloday with Baird. Please go ahead.
Speaker Change: It's been across the board given the wellness housing portfolio is, you know, extremely highly occupied you should assume that that's a drag on growth and majority of the Growth that's flowing through a number overall is coming from assisted living, you know and independent living
Speaker Change: and John Burkart. Thank you.
Speaker Change: Our next question comes from James Taylor. Sorry, on the export question, let me finish the question. And on the export side, go back to and focus on what John said.
James Taylor: on his prepared remarks, you know, seems like labor cost is moving in our direction.
Speaker Change: We have no sense of, we can't give you right now what that may or may not be for next year, but directionally, it's moving in that direction.
James Taylor: Thank you
Speaker Change: Our next question comes from James Cameron with Evercore. Please go ahead.
James Cameron: Good morning, thank you. Looking at the shop portfolio, obviously the same store portfolio exhibits a little bit higher occupancy and margin versus the total, implying obviously the non-same store is a little lower. Is there a reasonable expectation on cadence as to how fast the total portfolio sort of catches up to the same store, if you will, in terms of occupancy and margin? Is it two to three quarters?
James Cameron: as you apply your operating platform, or is that too short, too soon?
Speaker Change: Let me take the first part. I mean, Tim, you can provide some guidance on how sort of non-same-store flows into same-store. But frankly speaking, Jim, we don't really care about same-store, non-same-store. All we care about is bottom line FFO growth.
Speaker Change: But there is no question that the non-same store, given its lower occupancy, will be growing faster. And that's a function of, remember what I said on the last call,
Speaker Change: that were buying assets, and I think Nikhil mentioned this as well.
Speaker Change: That's a drag to our earnings today, but that gets you to higher earnings tomorrow and gets you better growth.
Speaker Change: Yeah, Jim, so that...
Speaker Change: My total portfolio, probably the biggest difference is...
Speaker Change: You've got...
Speaker Change: Deliveries on the development side the pre-opening cost plus just
Speaker Change: Our next question comes from Mike Mueller with J.P. Morgan. Please go ahead.
Mike Mueller: Yeah, hi. In terms of the tech rollout, can you give us a sense as to what you think the annualized margin improvement could be at the property level based on what you've rolled out just so far?
Speaker Change: Mike, we're not going to...
Speaker Change: We're not going to get on a call and try to speculate what our margin improvement will be. We will tell you that focusing on what we said before
Speaker Change: which is we believe that we're going to get this platform at a higher level margin than pre-COVID.
Speaker Change: and that is due to a function of where we think operating platform is taking us, where we think the operating platform initiative will take the occupancy to.
Speaker Change: It's just an inappropriate, you know, sort of a venue to try to speculate what will happen in the future. But we're optimistic we'll get to a better place in the future than it was in the past.
Speaker Change: Our next question comes from Omotayo Okusanya with Deutsche Bank. Please go ahead.
Speaker Change: Yes, good morning everyone. Good quarter, great outlook.
Omotayo Okusanya: In regards to the short portfolio, and again, of late you have been converting
Omotayo Okusanya: some portfolios from triple net to shop. Obviously it is kind of improving or increasing the overall growth profile.
Omotayo Okusanya: of the company as you kind of get more accurate with the shop. I guess, ultimately, just kind of given what you were seeing in regards to demand-supply fundamentals and how you expect senior housing to evolve over time, should we still be expecting that the shop portfolio could be...
Speaker Change: Do you see a good percentage of your NOI going forward or at a certain point do you start picking up again? Well, the downside when you do have supply or when fundamentals get softer suggests that maybe the optimal exposure is some percentage of NOI, too sharp.
Speaker Change: Very good question. Tayo, I'll point out to you, let me answer the easiest question you asked, which is, will SHOP continue to grow as a percent of the overall portfolio? The answer is a resounding yes.
Speaker Change: As you see that our shop portfolio is, you know, obviously low-occupied.
Speaker Change: majority of the margin flow through is just starting to come if you just think through what that means even if we don't buy another asset you will get to a much higher place than where you are today. So just think through that from a portfolio composition for what exists today and obviously you can see that's what we are buying mostly.
Speaker Change: The second question is an even more important one as we think about long-term portfolio management.
Speaker Change: Volatility is not risk, right? You're talking about, okay, what happens in a year or two or whenever, you might get a downside volatility of owning equity versus debt. That's where your question is. I'm okay with that.
Speaker Change: That's what we have a balance sheet for to, you know, adjust for that risk. Just remember volatility in our opinion is not risk.
Speaker Change: The probability of losing permanent capital, in our opinion, is risk. So you are asking a question that is near and dear to my heart. I wrote a lot about this topic. I think you will get a kick out of reading the end section of the letter just focusing on this topic.
Speaker Change #100: We have no further questions at this time. This will conclude today's conference call. Thank you all for your participation. You may now disconnect.
Speaker Change #100: [music]
Speaker Change #100: [music]