Q2 2025 Welltower Inc Earnings Call
Thank you for standing by my name is Jamie and I will be your conference operator today at this time I would like to welcome everyone to the wall Tower's second quarter 2025 earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad if.
If you would like to withdraw your question Press Star one again.
We would ask that you limit yourself to one question and requeue. If you have any further questions. Thank you.
I'd now like to turn the call over to Matt Mcqueen, Chief Legal Officer and General Counsel. Please go ahead.
Thank you and good morning, as a reminder, certain statements made during this call maybe deemed forward looking statements in the meaning of the private Securities Litigation Reform Act, Although <unk> believes any forward looking statements are based on reasonable assumptions. The company can give no assurance that its projected results will be attained.
Factors that could cause actual results to differ materially from those in the forward looking statements are detailed in the company's filings with the FCC and with that I'll hand, the call over to Sean for his remarks.
Thank you, Matt and good morning, everyone as usual I'll review business trends and our capital allocation priorities and the team will follow the usual cadence.
Second quarter marked another period of solid execution across the board. It was dark from operations to investment activity and a further strengthening of our balance sheet. We also made significant progress on the rollout of our operating platform, which John will discuss shortly.
Ultimately, we're pleased to have delivered another quarter of strong central part share growth of 22% exceeding our already high expectations.
These results coupled with increased conviction for the back half of the year has enabled us to once again raise the midpoint of our full year guidance. This time by 13 cents to $5 10 per share.
For the quarter, we reported 23, 4% same store NOI growth for our seniors housing operating portfolio.
<unk>, the 11th consecutive quarter in which the growth has exceeded 20%.
Organic revenue growth came in at 10% driven by 420 basis points of occupancy gains the highest level of growth. We have achieved outside the post COVID-19 recovery, notably our U K portfolio posted a 600 basis points of pick up in occupancy and 27% same store NOI.
Reflecting strong end market demand and a favorable positioning of our purpose built portfolio in highly selective in attractive micro market.
Royalty and Brainport reflective of pricing power was approximately 5% and remained healthy across all regions.
We expect a further strengthening our revpar in coming years as portfolio and industry wide capacity continues to diminish I will also highlight the spread between Revpar, our unit revenue and export or you need expense remains at historically wide levels driving additional 330 basis points of <unk>.
Arjun expansion ensure our consistent pace of growth has allowed us to achieve two significant milestone this quarter as both in place annualized NOI for shop assets have surpassed $2 billion and overall annualized company revenue I'd be clubs $10 billion for the first time.
While the demand supply dynamic remains attractive for the industry. We do not believe that the fundamentals alone will drive durable long term performance in Sochi operationally intensive business.
As in the past, we will continue to leverage insights from our industry, leading data science platform and whilst our business systems to drive additional portfolio and asset management initiatives efforts. We believe have been key contributors to our historical outperformance or.
For example from a capital allocation standpoint over the past five years, we have completed roughly $29 billion of investment activity through the scale achieved from our data science platform, but it's often forgotten that we also sold $16 billion worth of assets over the past decade.
Prove the quality and growth trajectory of overall portfolio as we enter the perceived golden age of the industry.
We have painstakingly transitioned hundreds and hundreds of properties over the past few years, the best in class aligned regional operators.
The full operational potential of these communities. This includes the transition of 10000 units holiday by Atria portfolio, which we announced last summer the largest portfolio of transition to date for background holiday was acquired in 2020 one at a price we believe to represent an extraordinary value.
But so far it has turned out to be our biggest capital location meant mistake by yours truly.
We have increasing conviction that our initial execution plan and structuring was flawed, but regardless of the reason we considered the deal it failures, so far and our biggest disappointment over the past decade.
As we have so far been unable to make money for you our fellow shareholders. As we have come to know we do not take that shortcoming slightly and as always prepared to take decisive action when outcomes fall shy of our high standards. So in middle of last year, we announced the transition of the portfolio to six of our existing retail offer.
This was not an easy feat given the size of the portfolio geographic disruption and the challenge in Hinton any operating operator transition coupled with the value added nature of the original business plan, while we have a long way to go we are encouraged by the early results since the beginning of this year this portfolio.
<unk> has delivered a 560 basis points of improvement in occupancy, which you are not seeing that benefit us in our reported numbers as these properties are not yet in same store.
I would encourage you to take a look at the slides 13, and 14 of our business update presentation for more details while the NOI has yet to recover as operators tweak. The service model. We are optimistic about the momentum in occupancy and estimate that the NOI will turn the corner in Q4.
We believe that substantial upside remains not only from this portfolio, but also other transitions, we have announced over past few years I am grateful to the west our team for a best in class and our best in class operating plot arc nurse for their tireless efforts and I look forward to providing further updates in future quarters.
Shifting to capital deployment, even after announcing a historic level of investment activity in the first quarter, which exceeded the level of acquisitions completed in all of 2024, our investment team has never been busier Nikhil will provide you more details but year to date, we have closed or under contract with <unk>.
Rose approximately nine $2 billion, what the highly attractive acquisitions across all of our regions. We remain pleased with the state of our pipeline, which remains robust visible actionable in all three countries that we do business in and.
And lastly, turning to our balance sheet. Following the credit rating upgrade we received last quarter from both S&P and Moody's to aid our balance sheet as trend than even farther in another quarter of strong cash flow growth, coupled with prudent funding of our balance sheet as driven debt to net debt to adjusted EBITDA below three times.
And interest coverage of our six times and listed our total liquidity to $9 5 billion.
Our upcoming debt maturities remain modest and we have created significant flexibility to fund future investment activity.
Overall, it has been an incredibly active first half of the year and I'm proud of what we have accomplished however, our work is far from being complete this year. Our team shows up every day to win and we have a long journey ahead of us with that I'll pass it over to John.
And good morning, everyone.
We delivered another strong quarter, reflecting the ongoing momentum across the business in Q2 total portfolio same store NOI increased 13, 8% year over year led by another standout performance from our senior housing operating portfolio.
First I will touch on the outpatient medical business, which remains stable delivering year over year same store NOI growth of two 6%.
Seen velocity remains healthy and our retention rate remains consistent at 94, 2%.
Same store occupancy, which continues to lead the peer group also remained steady at 95%, reflecting the high quality nature of the portfolio.
Turning to the senior housing operating portfolio performance continues to be outstanding with the 11th consecutive quarter of same store NOI growth well in excess of 20% a remarkable feat.
The broad based strength witnessed across the regions and property types resulted in another upward revision to show for portfolio guidance, which Tim will detail shortly.
Topline growth remained resilient at 10, 1% year over year supported by positive trends across all three regions, Canada delivered eight 5% growth, while the U S and U K posted increases of $10 to $11 five respectively.
We're particularly pleased with another quarter in which occupancy growth surpassed 400 basis points, reflecting healthy end market demand for our needs based product in terms of rental rates reservoir growth remained strong at 5%.
We're pleased to report that expense pressures remained subdued with year over year growth in export or unit expense, reaching the lowest level in our reported history and just 0.2%. This.
This is largely a function of the scaling benefits received from the rapid increase in occupancy.
We're also encouraged by trends within the labor market with agency labor and employee turnover well below pre COVID-19 levels.
From a margin perspective, the continued historically wide gap between Revpar and export growth resulted in another leg higher in operating margins up 330 basis points year over year to 37%.
And as Sean indicated while we have essentially returned to pre COVID-19 levels of margins, we still expect significant upside.
Going forward driven primarily by three factors first as we've noted before given the high fixed cost nature of seniors housing business flow through margins are expected to rise alongside further occupancy gains said another way the operating leverage inherent in the business will be recognized in a more meaningful way going forward.
Second continued benefits from the ongoing realignment of our portfolio increasing our.
Our portfolio of concentration with our key growth operators and continuing collections of assets, creating collections of assets, allowing us to increase efficiency by sharing various employees contractors and marketing similar to what's been done in multifamily.
Finally, the impact of WPS, well tower business system, our end to end operating platform, which is benefiting from the synergistic partnership with our operators as we continue to improve our existing systems and add to a robust WPS roadmap.
As I've said, many times talk doesn't give out the recipe nor do I give out the proprietary details of our business.
That said.
I will say that we were touching many parts of the business via WPS in partnership with the operators and finding both opportunities and successes, which will translate to years of improved operations and margins tangible evidence of our work this quarter can be seen in utilities, we have bent the curve with an increase of only two 8% overall on a year over year.
Year basis, and utilities actually declined two 1% year over year on a per occupied databases.
Yes, even a line item.
There are many people believe cannot be improved such as utilities have opportunity for improvement and we're all over it.
Working with our partners, we're finding numerous opportunities in every aspect of the business WPS is transforming all aspects of the senior housing business and although the path is never smooth I continue to have confidence in years of margin expansion as we continue to improve the customer and employee experience in this business.
While we're encouraged by our results and the initial rollout of the operating platform. The team is running very hard we've trained over 8000 site employees, who are now benefiting from that using WPS onsite.
The more time, we spend with our operating partners going through the details of the business the more opportunities we identify to improve the customer and employee experience and address numerous inefficiencies which exist in the industry.
And even after bringing significant operating expertise into the company in recent years, we continue to seek and attract high caliber talent from outside the industry, who bring their experience and share our vision of disrupting the senior housing business a vision that we share with our best in class operating partners for working shoulder to shoulder with Welsh our team.
To implement the platform, while continuing to deliver exceptional care and support to our residents and their families. We continue to be grateful for their unrelenting efforts and the quality of care they are delivering.
More to come in the coming quarters, and with that I'll now turn it over to Nicole.
Thanks, John and good morning, everyone.
Since our first quarter call in April we've expanded our investment activity by an additional $3 billion.
Bringing our year to date closed or under contract volume to $9 2 billion.
As of late July our 2025 activity already exceeded all of 2024 by 50% and that was the most active transaction year in our company's history.
While volume is notable it's never our measure of success.
We remain focused on the quality of assets the basis efforts, we acquire them and most importantly, our ability to execute the business plan and deliver attractive risk adjusted returns.
As many of our friends family and theaters spent the summer on lakes, our golf courses <unk>.
Our team was out pounding the pavement.
Gauging in the our old school Dealmaking.
Looking people MDI shaking hands, and operating with honor and integrity.
During first class business in the first half.
Our $9 2 billion and year to date activity.
<unk>, three 7 billion and close transactions through the first two quarters with the remaining $5 5 billion under contract unexpected to close in the coming months.
While we have already discussed the $3 2 billion Amiga transaction. The remaining $2 3 billion spans 26 separate transactions, 90% of which were privately negotiated and are predominantly focused on our seniors housing businesses.
It speaks to the depth of our sourcing network and the trusted relationships, we have built across the industry and continue to unlock high quality off market opportunities.
During the second quarter, we closed on $1 billion of transactions on our balance sheet.
Excluding the pro rata portion of our investments and develop our U S Senior housing fund.
Our on balance sheet activity spend and transactions covering over 2500 units.
Notably, 90% or $900 million of this activity was also source on an off market basis.
Underscoring our ability to uncover and execute on differentiated opportunities.
The blended occupancy of 76% and a median at that age of just three years. This newer vintage portfolio is well positioned to deliver strong cash flow growth and compelling as we execute our business plans alongside our best in class operating partners.
This quarter's investments also reflects an expansion of our relationships with several key partners, including storage blended per year among others.
While strong industry fundamentals, Kevin certainly make it more challenging to uncover high quality opportunities with tremendous upside.
Investment activity. This year demonstrates that there is no shortage of attractive opportunities.
Willing to work hard and dig deeper and that's exactly what we're building.
The transactions that I've described.
Negotiated in conference rooms around the globe. They were also fortunate in living rooms in Canada at a pub on a street corner in Paris.
On a rooftop terrace in London, and even at the bar at the Citi Conference at the diplomat Hotel in Hollywood, Florida.
These moments and the people behind them are what make this business model.
And there are a big part of why we continue to find and create value.
Others might not be lumpy.
This is also what makes us what sort of order.
As I reflect on our activity this year as generally cherished many moments, where we sat across from Counterparties and shook hands on deal built on trust and mutual respect.
In a fragmented industry with our opportunity set Vance three countries and tens of millions of micro markets with significant variations in operating outcomes across owners and operators. Our team continues to identify opportunities to enhance the value of assets under our platform.
This was made possible by our exceptional operating partners.
Ever expanding operating mode powered by the manpower business system.
I want to take a moment to express my deep gratitude to our team and our operating margin.
The unity of purpose.
Or do you envision and mutual respect that define our culture are what make this that virtual session.
I'll take the responsibility of being fiduciary seriously and it shows in the care discipline and passion with which our team approaches every opportunity.
We often reflect internally on the quality of the opportunities to continue to unlock.
In out years from now we'll look back on this period as one that meaningfully enhanced the strength of our business and the quality of our portfolio.
The actions, we're taking today are laying the foundation for long term compounding of earnings and cash flow and we couldnt be more excited about what lies ahead.
With that I'll turn the call over to Tim to walk through our financial results and updated earnings guidance.
Thank you Neil.
My comments today will focus on our second quarter 2025 results performance of our Triple net investment segments, our capital activity, our balance sheet liquidity update and finally, an update to our full year 2025 outlook.
<unk> reported second quarter net income attributable to common stockholders of <unk> 45 per diluted share.
And normalized funds from operations of $1 28 per diluted share representing 21, 9% year over year growth.
We also reported year over year total portfolio same store NOI growth of 13, 8%.
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 ending 331 2025.
And our senior housing Triple net portfolio same store NOI increased five 1% year over year and trailing 12 month EBITDAR coverage increased to $1 one nine times.
Next same store NOI in our long term post acute portfolio grew two 7% year over year and trailing 12 month EBITDAR coverage was one nine times.
Moving on to capital activity, we continue to capitalize our investment activity with equity raising $2 billion of gross proceeds in the second quarter.
In addition, we re entered the bond market for the first time in three years with our first issuance as an a rated credit.
Raising $1 25 billion in senior.
Tiered notes across two tranches for a blended coupon of 485%.
This capital along with retained cash flow allowed us to fund $1 billion net investment activity repay our $1 5 billion June bond maturity and ended the quarter with $4 5 billion of cash and restricted cash on the balance sheet. We.
While driving net debt adjusted EBITDA to 293 times, the lowest leverage level recorded in <unk> history.
As a result of our current capital position and the improvement in outlook for full year operating results announced last night.
We expect run rate net debt to adjusted EBITDA to end the year at approximately three five times.
Well, having added $7 2 billion to our planned 2025 acquisition activity since our initial balance sheet guidance was provided in February.
Note that a substantial portion of our acquisitions under contract are expected to close in the fourth quarter, including the previously announced $3 $2 billion Amoco transaction.
Okay.
Sticking with positive cash flow trends, we announced a 10, 4% increase to our quarterly dividend last night.
The decision reflects the board's confidence in the durability of our cash flows and our continued growth trajectory.
At the same time, we are continuing to improve our cash flow retention profile, giving us greater flexibility to reinvest in high return value accretive opportunities.
Lastly, as I turn to our updated 2025 guidance I want to remind you that we have not included any investment activity and our outlook beyond the $9 $2 billion that has been closed or publicly announced to date.
Last night, we updated our full year 2025 outlook for net income attributable to common stockholders to $1 86.
To $1 94 per diluted share.
And normalized <unk> of $5 six to $5 14 per diluted share or $5 10 at the midpoint.
Our normalized <unk> guidance represents a 13% increase in the midpoint from our prior normalized <unk> range.
This increase is composed of three.
<unk> increased from higher NOI in our senior housing operating portfolio.
Seven increase from accretive capital allocation activity.
<unk> from increased FX income taxes, offset slightly by higher G&A.
Underlying this half above guidance is an estimate of total portfolio year over year same store NOI growth of 11, 5% to $13 two 5%.
Driven by subsea segment growth of outpatient medical 2% to 3% long term post acute 2% to 3% senior.
Senior housing Triple net three five to four 5% and finally senior housing operating growth of $18 five to 21, 5%.
This is driven by the following mid points of their respective ranges revs.
Revenue growth of nine 2%.
Driven by increased expectations for both full year, Revpar and occupancy growth now at five 1% and 360 basis points respectively.
And expense growth of five 5%.
And with that I'll call I will hand, the call back over to Sean.
Thank you Tim.
We start the Q&A I want to highlight two things done a top on my mind.
<unk> talent management and incentive design and to a refined focus on re imagination of our technology data and innovation ecosystem.
Over the past few months through.
Through our <unk>.
January 2nd press release, and whilst shareholder letter and our new website.
Written extensively about talent culture and incentive design now we are in the implementation and expansion phase of many of these ideas.
Both internally and well tower and externally with our operating partners.
Accordingly, we're engaging with leaders across our key operating partners to achieve the same goals that I outlined previously for our internal stakeholders.
Personally I am focused on integrating these work streams guided by the same basic design tenant.
As I described in my most Enbrel letter.
We believe that there are five pillars, a well designed incentive systems are the following.
One simple <unk>.
Two significant three non gaming will either by pair or pay.
For Orange.
And as a team and five duration matched <unk>.
I envision a future where these five pillars shaped the incentive structure for everyone from executed leadership and regional management throughout well tower and our operating partners to critical care Givers and frontline service in our communities. We're excited about award where everyone is fully aligned and all in to create an all.
<unk> win win equation.
While I continue to be told that vision is a utopian and perhaps even foolish I remain convinced that it is achievable.
If we make the resident and employee experience our highest priority. This is why I believe the most important pillar is matching duration.
We anticipate providing you more in this area as we begin to rollout our sixth generation of aligned partnership agreement and incentive programs in coming quarters.
Moving to the next topic.
As we continue to ramp up our investments in <unk> our business systems.
We realize that we need to rethink we need to take more boldly and more holistically our technology ecosystem.
Software and hardware both at site level and enterprise level once tower, along with data architecture and innovation all required the same level of focus leadership and talent that we have invested in past decade in building our data science platform.
And the fastest way to move the dial is to narrow our focus over the past year, John Tim and Nikhil had been pushing me very hard to concentrate on the re imagination of our broader technology ecosystem as admittedly I have historically focused more on the data science side of the house offer.
After having immersed myself in this area during the summer I see enormous potential in the interconnection of many of the initiatives, which are currently underway as well as identifying new opportunities to explore next you can expect a handful of new leadership appointments in the coming months.
Maximum growth and maximum gain in this area all following the principle of big bringing the hottest source to the court of zinc that I spoke about couple of quarters ago.
To sum it up while our recent performance has been somewhat satisfactory we're never satisfied.
But our confidence continues to grow.
As demand supply backdrop for senior housing business continues to improve the implementation of Walter's, whilst our business system bears fruit and our capital deployment opportunity set remains robust.
And as I have outlined just outlined.
We remain focused on rethinking the critical areas of our business, including talent incentive management and transformative potential of technology information data and innovation.
We remain intensely focused on pure execution in all facets of our business and have never been more excited as we are today about our future prospects, while our momentum is strong we are.
Still in early stages of a long journey of delivering compounding our share cash flow growth for our existing owners are northstar. Thank you for your support operator, please open the call for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. Please limit yourself to one question and re queue for further questions.
Your first question comes from the line of Jonathan Hughes with Raymond James. Please go ahead.
Hi, Good morning, Thank you for the prepared remarks and commentary.
I wanted to ask about future growth potential at the start of 2022 you outlined.
An opportunity to deploy $30 billion of capital.
Over the next 10 years, you've done nearly that in just three years to now achieved a market cap over 100 billion.
Following the success and what's next for well tower from a growth standpoint. Thanks.
Thank you Jonathan.
Success is a relative term.
While we are suddenly proud of what we have achieved.
I wouldn't call it a success.
Young organization.
Is working progress and into the startup ward I'm deeply worried about frankly Bernardo bought.
Any perceived noted notion of success because that create complacency I think its Rockefeller, who said that if you go to sleep on it when you will wake up with a loss.
When an organization.
Young and its on the way out presented generative characteristic of a dynamic organization. It is on the hunt playing to win.
<unk> been forward looking unified and pop us nimble focused responsive opened to risk and most importantly willing to look foolish.
But the organization perceive itself to be successful degenerative characteristics in March.
We made it mentality brings huddling in storm cellar slaying not to lose a prs at Barrington be foolish culture.
<unk> began perversive, where people look in the rearview mirror become risk averse.
And bureaucracy sets in and I think I talked a lot about this with you guys for a long period of time.
Maybe maybe with size and maturity some changes are appropriate as we go from sprint to marathon. Nevertheless, the positive Jared a feel of a young organization is something an organization should never lose.
You can you can define that generally the feeling is a shared by romanticism annuity doing whatever it takes stretching enriching and making dream come true for US we're still in the spring more Jonathan steels printing still have an audacious dream of transforming this industry.
<unk> 30 billion <unk> 30 billion previous $100 billion next test to $100 billion. Just a means to an end it is easier for a team to do really hard things that matter than do easy teams that do not matter as I truly believe that audacious dreams, what events people as I've said this before when this game for the love of the game.
We'll see what the market gives us, but I really appreciate the question but success.
Defines the destiny of destination.
We for US. This is a journey, we will see what where we get to the thanks political shift.
Okay.
Your next question comes from the line of Nick <unk> with Scotiabank. Please go ahead.
Thanks. Good morning, So just had a question in terms of the senior housing operating portfolio. You know you now have I think more than half the NOI is actually in the non same store.
Can you just talk a little bit about the performance of non STAM store.
Sort of in the last year versus some of the same store metrics and how we think about it going forward because clearly it looks like there is more some more occupancy growth potential in that portfolio, some more margin benefit but.
Last year, realizing that pause has changed it a little bit in terms of some of the metrics you reported it feels like the occupancy growth and the margin expansion actually wasn't as strong in some of the non same store versus same store assets. Thanks.
Yeah I'll start that next so.
When you look at the non same store pool portfolio is really important to think about what we're buying and let me keel as highlighted on these calls we continue to buy.
On your occupied under optimize assets. We also continue to have developments come online both those things come into that pool, and they come into that pool to quarter required or.
They come online. So that's part of what continues to keep the margin and occupancy profile below what the same store portfolio. It looks like in that that makes sense, you think through kind of what same stores supposed to represent as being.
The more stabilized piece of it so that being said on an aggregate basis, where it looks very similar to our same store portfolio.
There is different pieces of that but overall there has been pretty pretty similar bottom line growth network.
Nick when you said that it appears that it wasn't as strong youre comparing with last quarter's number and we don't restate those numbers.
So you have a lot of new assets come in including elements and we are sort of comparing apples to oranges.
Your next question comes from the line of John <unk> with Wells Fargo. Please go ahead.
Good morning, Thank you.
Your most recent annual letter and on your website you spent a lot of time on this decade long journey, and harnessing technology and data, but mostly in the context of using your data science platform to inform capital allocation decisions and micro market selections.
But based on your comments. This morning, it sounds like your views are evolving with an opportunity to apply the operating technology to improve the customer experience could you elaborate on this said strategically what you are trying to accomplish.
Yes so.
I think I think John look could you just kind of ticket step back and.
And think about that.
And industries, you think about the real economic industry say industrial companies say real estate company save people like us right.
These companies have real customers.
We have touch points in the physical world.
You tend to see is that Tam rich and the tech.
That's what we see if you look at technology companies.
We'll come up with at the frontier of changing the Technology Award.
<unk> Tec rich and that handful.
What we have been trying to do.
To have a company that we have are by definition is extraordinarily Tam rich and we're trying to be tech rich and the tech as I pointed out is sort of the opportunity set which we have spent obviously a decade on the data science side. John has been focused last four years and the operational technology side, and we are sort of now putting even more.
Focus on thinking how do we expand that and from <unk>.
Enterprise technology to site level technology and integration everything in between as the technology ecosystem evolves. So as I mentioned and then there is going to be more.
<unk> talked about this in next six to nine months.
More to be seen but appreciate the question, but there is a lot lot going on in our organization and I'll tell you. After Tim has posted a very very hard over the last 18 months on finally focused on it.
Youre going to see some significant changes in this area.
Your next question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead.
Hey, just quick ones last.
Last quarter, we talked about sort of the gradient of the portfolio 90, plus versus sort of 80 and below I just love to get an update on how those are performing in your conviction on the potential for Reacceleration here, which you got a little bit this quarter, but reacceleration going forward as occupancy build thanks.
Yes.
Really hasnt changed as we sort of think about.
Not below 80, OSA sort of below 75.
I saw a revpar growth was roughly call it 1%, 75% to 80 call it sort of same but on the other hand, if you look at above 90 to stay at 90% to 95 was roughly $5 seven above 90, 567, so call it above <unk> six that's sort of the gradient.
And I'll sort of call. It below 80% occupancy you don't have pricing power you have 90, plus percent occupancy up significant pricing power and it sort of scales inventory right, which makes sense. It's just basic demand supply and Thats, where the excitement is as you know, it's just not us with getting more and more towards.
90, plus percent occupancy, but also the overall industry is getting there I think you will see.
At some point hopefully.
I think I'm on the record, saying it should have been after.
Summer leasing season next year, we will see whether that happens whether that happens.
But sometimes in next 18 24 months, we should see.
Pricing power, probably probably gets better, but we shall see what the market gives us.
Your next question comes from the line of.
Cusano with Deutsche Bank. Please go ahead.
Yes, good morning.
And in your openings and again first of all congrats on another solid quarter.
In your opening comments, you talked quite a bit about just.
Aligning incentives and.
You mentioned quite a few times and I guess I'm just curious again, when we kind of take a look at your company in particular I think since your team has been in place you guys have increased insider ownership I can't recall any stock sales.
In recent times, just kind of curious as you kind of think about just the overall philosophy around.
Incentives.
You already kind of going to be moving in the right direction.
The additional kind of you know.
That we are trying to take in that regard and what you ultimately hope to achieve from that and he wants to.
In regards to.
Increasing additional whether its insider ownership or again more people across the company.
Hide into the stock.
Yep.
This is a very important it's a very very important observation entitle actually our management team we have never sold one stock in this company.
Neither I have Mike <unk>.
Nice job.
And.
It's hard for me to comment on People's personal personal financial situation I understand sometimes you buy a house you do this wedding or whatever these things come up and live events.
But we haven't.
I've never told explicitly to my partners, they can but they haven't because at the end of the day.
I have trouble with companies.
It sort of tells you that there's a.
Besting signed slides Brad.
And every opportunity to get their own liquidate their ownership in the company to do I'm, just kind of it just seems at least it doesn't particularly worked well with how I think about the world as I have written in our foundational document.
Many years ago.
Whether it's look we all pretty much all my partners my entire team comes from little or no.
Strong financial background, they're all settlement people.
The issue is not demand the issue is how much of your personal network. There is on the line. That's what we have promised that.
In all of our shareholders stand to benefit from diversification.
But we don't because I don't believe in that that should be the case and that's the way you takeaway started the agency problem. This is a very important problem.
Important thing to think about as we're thinking about how we do.
How do we design incentives think about what we're trying to do we're trying to be all in I. Just described how with aligned that you think about.
Sort of what are what we expect from our operating partners.
They are not diversifying there we now have a tremendous amount of respect for our privately owned enterprises in this country and many of those do you think about what my operating partners to build their companies right. We expect them to continue to run their company right through.
Through this tough time, so you think of it I was yesterday.
With one of my strongest operating partners Torrey point until we know where we are now.
We're talking with Dan and his team and talking about how difficult last five years have been.
All the investments they have done in the company and where that money came from their own pockets you didn't come from someone else right. If thats, how they I expect them to believe.
Thinking about the comment is thinking about five years ago, I sat down with Oakmont and story points.
Yes.
With caught me and we're thinking about what we want to do the next five years, whereas the all this investment in <unk> came from it came from coatings pocket right. So why would it be okay for me to expect car to be all in but not for us to be all right. So that's sort of the whole point is what we are trying to do.
And the incentive perspective from everybody from execute if that one hour today executing side, our operating partner to all the way to the people who work in the communities that defined by the same structure that defined by the same shared success.
And I think thats possible its complicated, but it's possible if we prioritize resident experience and employee experience is a top priority and if we can do that I think will take this industry a level that has never been seen before but remains to be seen.
Your next question comes from the line of Juan Sanabria with BMO capital markets. Please go ahead.
Hi, good morning, Thanks for the time.
Just talk big Chunky, <unk> talk a little bit about the competitive dynamics for investments a lot of what you are buying.
It seems to be newer product under leased just curious on the runway for that type of product as the industry kind of approaches pre COVID-19 levels were 90% next year or shortly thereafter.
And just the financing environment.
More broadly just for seniors housing.
Yes, I think one really it comes down to.
<unk> occupancy or other aspects of the business plan.
Is there an opportunity to find transactions and assets, where we can improve the cash flow.
But I think there is no shortage of opportunity there.
Everything that John and the team are working on to optimize cash flow.
Some others occupancy authorization of rate optimization or other aspects of the business plan that is given how fragmented the industry has given how varying outcomes.
Outcomes are under different operators and owners.
We don't think there is any limits to finding opportunities to enhance cash flow.
And so.
As seen by our activity.
We continue to fight the setup you have to work harder.
Look in places.
I haven't looked at it in the past, but there is no shortage.
Well I'll just add one.
Obviously.
<unk> is a very important one.
Look at the end of the day.
Investing capital and making money is not the same thing we're focused on obviously finding opportunities where we can make a strong risk adjusted returns.
Making money is hard right allow.
Now let me tell you what it's harder making money at scale is much harder.
And we believe that that is making money at scale is not just a function of capital allocation acumen, which is important right, it's a necessary, but not sufficient condition.
As necessary on top of that what is an asset worth in your own hands right. So all of these investments that for last decade, we have made from our data science platform to what our business systems is all designed to do just that.
So far it seems like we have no darko opportunities, we'll see what market gives us.
Your next question comes from the line of Nick Joseph with Citigroup. Please go ahead.
Thanks.
You talked about the run rate of three five times.
That range and kind of the debt offering this year reentry in the debt markets and obviously the equity. So how do you think about the optimal capital stack going forward, particularly given the amount of acquisition that investment opportunity that youre seeing today.
We believe a company that operates with this notion.
That you do handshake business and never walk away from a handshake needs to operate with low leverage and that's the business model. It's not the balance sheet strategy is different from.
On one side of the balance sheet within the liability side of the balance sheet that you are talking about and is different from the left hand side of the balance sheet. This is our business model. So you should expect us to continue to have very strong liquidity very strong balance sheet all the time.
And that's and so that no counterparty ever a portion if we make a promise whether it will come through that just sort of business model, having said that look how we fund and investments or a series of investments.
It just a function of why we think the best risk adjusted sort of capital is a source that could be that right. Obviously, we think.
As we think about we've got a more and more conviction on what the growth prospects of our company is the downside of that that our internal view of our equity cost of capital continues to go higher right. So that cost of capital is pretty obvious you know its fixed for next two years seven years 10 years 12 years whatever tenure of debt raise.
Raising so you saw that we're back to that we got back to the debt market and Jim and his capital market stimulated terrific execution.
So it remains all open rate its debt its equity is asset sales and most importantly, most importantly, it's massive return free cash flow right. So thats sort of all four were thinking about and depending on what the combination of capital.
Assets, we see and how much.
<unk> capital, we need you will see us execute different tap different points of the market at different points in time.
Okay.
Your next question comes from the line of Robert <unk> with Bank of America. Please go ahead.
Hi, good.
This is Paul granite.
My question is around potential margin expansion, you've outlined now a lot of them.
The focus that you have on expenses and individual line items and I'm kind of curious when youre looking further out how far can margins go.
Hi.
<unk>.
Said numerous times that there's not an exact number we're going to give up but at the same time chalk I said clearly as I said the shock I will not be here, unless we expand margins pretty significantly the opportunity substantial again realize that we're talking about a business that has been created by numerous different operators and they're very small.
As a general rule.
Havent had the resources to invest in all the various areas that a company like ours can invest it so as we step into it and partner with our with our operators we find it.
All kinds of opportunities that I, just pointed out that one item on the utility of this every line item of the GL as opportunities across the board and we're just methodically going after them, so where exactly it ends up I can't tell you I can tell you in multifamily margins expanded dramatically when that business was professionalized and can look that up and look at other businesses.
For comparison sake.
I'll just add one thing from your caution.
Maybe you didn't mean it this way that you think margin expansion is a function of expense management.
Well I would say the bigger impact will come from the revenue side, obviously expenses matter and.
We're intensely focused on every single line item I think we have 50 people team.
We're focused on.
<unk> shared between John students Nikhil steams and.
Tim's team now about 50 people are focused on this every single line item on how to think about how to optimize cost but.
And really remove excess that you might see and I can give you a million examples right sitting right here and I don't want to warn you that would that but just understand that margin expansion whatever it might be we're clearly optimistic about where it can get to.
<unk> will be a function of I will not be surprised significant more contribution comes from revenue than expenses, particularly comfortable.
Your next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.
Yeah, Hi, I guess generally speaking does the pace of occupancy gains increase or decrease materially once a property crosses 90%. He is on the way to what you see is full in the mid nineties.
Yeah. So.
At defense, Mike, but I think I have said this before I think John has said this before.
It's harder to get.
Get on asset to 95% then stay at 95% right. So you just sort of think about it.
The occupancy growth.
Again, it depends on the area depends on how what units you have or not have and others, but just remember do you have if you have same amount of demand in a rising demand environment lower inventory will be easier to lease, but its not that <unk> in that sense that if you have say a building.
<unk> is leased but.
Demand for <unk>, but you have only IL units. So it's hard to generalize, but generally speaking in a rising demand environment less inventory will give you a easier pays off.
Easier pace of lease up but on the other hand, you sort of have to think about what product do you have versus what the demand of that so.
Kind of hard to generalize that statement in that way.
Just wanted to add anything to that yes, I think thats.
Spot on but again I stay focused on the total revenue.
And so whether its occupancy increases or increases in market rent.
They're all available.
Your next question comes from the line of Austin, where Schmidt with Keybanc capital markets. Please go ahead.
Hey, good morning.
For many years now senior housing developments been very difficult to pencil continues to be the case, which you guys have talked a lot about I guess at some point that dynamic like.
Change in and just curious what you think what part of Youre doing strategically to develop the moat you talk a lot about should help well withstand any future pickup in construction activity.
The fact of the matter is we want to be in <unk>.
Highly affluent more difficult to build and takes a long time to bill right. That's the environment, that's where we want to be.
Portion of purity return of construction as I've talked about this several times on calls I don't want to go and repeat all the comments I made you can go back and see it.
I think there is you need to sort of think about this.
Future construction will come if the economics is there to sort of think about that.
My team is described in several ways how to think about that from the standpoint of replacement cost standpoint, and a brand and everything else I'm, just not going to go into that.
But.
But your.
Part of that statement I, just want to sort of re Orient you in last decade, where do you saw a supply.
Situation, we talked about supply purely because demand was flat.
So there was the conversation was purely about supply I would like you to think about economic way, which is excess supply and think about what the demand growth is versus where the supply growth can be could be and obviously all of these happens if the economics is there which doesn't exist, but anyway reorient your thinking just don't.
In terms of what happened in the last decade, when demand is flat, which it was last decade subject the decade of the silent generation if you well.
You only have to think about supply.
Next decade, when you think about supply you've got to think about excess supply as demand has rapidly rising.
Your next question comes from the line of George You didn't call with Mizuho. Please go ahead.
Hey, this is <unk> on for Vikram, just under occupancy cadence through the year you increased the year over year guide by 10 basis points are you still baking in normal seasonality in the fourth quarter.
So we continue to see seasonality in the business I think that's been one of the things that we've certainly talked to investors about is it the <unk>.
There's no seasonality left the business there is still seasonality still seasonality to volume of move ins and also seasonality to the move outs. The absolute level is almost lifted and so in the shoulders youre seeing occupancy is still gain.
And in the move in seasons Youre seeing.
Greater amount of gains that <unk> seen historically, so as we've seen the last few years, we still continue to think there will be.
Slowdown in move ins from seasonal trends towards end of the year and.
And that's reflected in guidance.
Okay.
Your next question comes from the line of Wes Golladay with Baird. Please go ahead.
Hey, good morning to everyone can you give us an update on the private fund business. It looks like you have about $280 million invested to date have you deployed the capital and do you have any debt at the fund level.
Whereas we have talked about that will give you update after the fund has closed we just said that will happen by the end of the year.
And then we will give you.
On that we can talk about the fund.
The progress in fundraising mode.
Yes, I think generally speaking everything for Archrock deploy capital growth capital.
Your next question comes from the line of Mike Carroll with RBC capital markets. Please go ahead.
Yeah. Thanks, John I want to circle back on your comments about the AWS, our WPS platform I mean, how should we think that this platform will drive margin expansion are the benefits more unique to each individual community as well tower needs to collect the data and figure out the best way to create value at that specific.
Accumulated bose, it's difficult to kind of put it all in one bucket and say you can drive margin expansion. This way just because it's so unique depending on what operator youre working on.
Yes.
Good question.
Really more commonality across the properties.
The system Youre right on the date of the more data we get the more effective we are and the more we get into the processes. The more effective we can make them.
Yeah. It does rapidly build on itself, but there is a lot of consistency across the board.
As we're looking at.
How we are executing so.
Challenges come in in the sense of.
We're working with a lot of people as I said over 8000 people, we brought onto the platform which is truly stunning.
Okay.
Okay.
Your next question comes from the line of Emily <unk> with Green Street. Please go ahead.
Good morning, Thanks for the time.
We see a slowdown in leasing in your wellness housing portfolio, given the softening of the housing market.
Emily I wouldn't say we're seeing.
Slow down because the growth sort of still has continued.
Up 10, plus percent, but I will say that if you look at some of the.
Sequential occupancy growth it was.
Dragged down by some wellness housing sequential emptor purely talking about.
In the quarter that was because last year, we had a bunch of where a lot of new openings from the prior year, which hit the quarter.
Sort of hit the same store, but this year we didn't.
But frankly speaking that business continues to amaze me.
The age restricted and age targeted communities we own.
Neutral.
NOI continues to grow at.
Low double digit 10, 12% Euro cvr's out frankly, it just really have been pretty resilient pretty consistent but but we haven't really seen.
A change in any form or fashion.
But our.
Our reported metrics do have some slowdown just because of how the openings will be some new openings of the communities came into last year. This year. If we look at sequential occupancy growth for the traditional senior housing because business has actually been better than last year, but overall a metric <unk> Sim.
And the slightly lower just because of the points you made but that was a function of new openings.
Not a slowdown in the business.
Your next question comes from the line of Jim Cameron with Evercore. Please go ahead.
Hi, Good morning. Thank you I was thinking about the persistent supply demand imbalance in the seniors arena does that translate to financially meaningful opportunity set from well tower sort on the redevelopment front and your data says this is in any location from a demographics and other attributes, but inventories are kind of key assets.
That math work is that a meaningful market opportunity. Thank you.
Yes, that's a great question and there's no doubt strategically we've seen an opportunity in our portfolio I've talked about it previously our assets or roughly 17 years old which is really the sweet spot. The infrastructure is in good shape and we can.
True.
The value proposition for the customer and get a wonderful win win situations wonderful return.
What we're doing is providing like new experiences at a time when there really are very limited if any new product that's online or coming online. So yes. It is a tremendous opportunity.
Built a team to lean into.
Catch the last portion of your question, which is.
Can you can you make a C product.
Put capital and making a product there.
Answer is almost in all cases now.
In the product market fit is not right. The bones of an asset is not good. There's nothing you can change too right. So we're sort of focused on.
So the value add opportunities.
I don't have to go for.
Sort of.
Beyond sort of what improves the customer experience and the front end, but.
Maybe it is possible maybe some people will do it at some places that.
Frankly speaking I do not believe that you can't on SCS it into it yes. Thank you Chuck I missed that comment is I agree 100%. This is about well located quality assets and just improving the.
Value proposition.
There are no further questions at this time. Therefore this concludes today's call. Thank you all for joining you may now disconnect.
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