Welltower Inc (WELL) — Q1 2022 Earnings Call Transcript

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 Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the Company can give no assurance best 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 SEC. And with that, I'll hand the call over to Shankh for his remarks.

Thank you, Matt, and good morning, everyone. I will outline our capital allocation priorities in this dynamic investment environment and discuss overall business trends before handing the call to John, who will explain operational trends in detail. A little over a year ago, our seniors housing operating business experienced a significant turning point with occupancy gains and sustained pricing power throughout the year, even with the challenges posed by the Delta and Omicron variants. This positive trend continued into the first quarter of this year, resulting in our first year-over-year growth in bottom line performance since the pandemic began. Our total portfolio revenue has increased by 32.7% year-over-year, driven by both organic growth and substantial high-conviction capital deployment over the past 18 months. On a same-store basis, revenue for our Senior Housing Operating portfolio rose by 11.2% year-over-year due to a 4.6% increase in occupancy and a 4.6% increase in rates. Notably, we recorded a sequential pricing growth of 4.3%, the highest growth in our history, even though only half of our operators implemented scheduled in-house rent increases on January 1. This led to an impressive 18.4% same-store NOI growth in Q1, exceeding our expectations. We are excited about the rapid increases in free trades. We anticipate that same-store NOI growth will continue to accelerate in the second half of the year, assuming there isn't another COVID spike; this positions us for a strong earnings recovery in 2023 and beyond. Before discussing the investment environment, I want to highlight two crucial points for our long-term earnings growth path. First, in 2018, when we transitioned our Brandywine Senior Living lease to RIDEA, I mentioned our goal to convert two other portfolios we had in a triple net structure, one being Legend Senior Living. After extensive discussions with Tim McCannon, the Founder and CEO, I am pleased to announce that we've successfully converted this partnership to RIDEA. Tim contributed a portion of his property company, five new assets, and agreed to a future development agreement, resulting in a strong equity partnership going forward. After years of discussion, we have demonstrated to him that through our data analytics platform, we can significantly expand the value, even if he owns a smaller stake. A partner since the 1990s, Legend has consistently paid all owed rent, regardless of daily coverage. Although this deal will be dilutive to our FFO in 2022 due to considerable agency liabilities today, we expect our cash flow relative to the previous rent will break even at the start of 2023, offering shareholders upside from that point on. We hope to maintain this exceptional partnership that has lasted over three decades for many more to come. This transition, along with our acquisitions and future development partnerships, underscores our commitment to enhancing long-term portfolio value and highlights the earnings potential we can realize through straightforward cap rate or multiple valuation methodologies. Second, historically, our Senior Housing Operating business focused on managing managers and assets. With our recent operational upgrades, including hiring John Burkart as our COO, we will align our focus in the SHO space with how we operate in medical office real estate and management services, similar to how an apartment REIT operates, recognizing our constraints in providing care services in qualified healthcare properties. This fundamental change in approach will significantly influence how we perceive our role in the operating sector, particularly regarding our technology staff, which is critical to our operational platform. John will cover this in detail, but we're excited that he is fully engaged in developing and implementing a robust operating platform at Welltower. He is collaborating with some of our best operating partners to launch what we tentatively call RIDEA, although this term hardly captures the scope and impact we expect this new approach will have on customer experience and value creation overall. We anticipate this multi-year initiative will greatly influence our earnings growth path and establish a long-term compounding effect at Welltower. Now, regarding capital allocation, my team is highly focused on deploying capital to enhance shareholder value for our existing shareholders. We prioritize our current shareholders who have supported us during challenging times, and we are committed to protecting their interests on a per-share basis, ensuring our actions create significant value for them. In an effort to maintain transparency, I will share that Welltower is the Party F referenced in the HR merger proxy a few weeks ago. We regularly reach out to asset owners to express our interest in purchasing at a specified price. I am disappointed that HR's Board and management did not engage with us, but that is their choice. It is up to their shareholders and the Board to decide how to maximize value. Given the rumors and media reports, I would like to clarify a few points before moving to more important matters. First, we offered to buy the company at $31.75 per share, plus a $163 million breakup fee, which we believe presents better value for HR shareholders than the HR merger. Our cash offer was fully financed and we were ready to act quickly. Although some research notes describe our offer as unfair compared to the market cap rate, please note that we proposed to acquire a company, not merely an asset, and our offer included a breakup fee to protect existing shareholders from potential dilution concerns. I hope this clears up any mischaracterizations regarding our intentions. Second, Welltower has always fulfilled its agreements with third parties, including HR. In fact, HR violated our NDA by disclosing it first to HR and then publicly in the joint proxy. Furthermore, our NDA does not mandate a standstill preventing us from making an offer for HR as a standalone entity; it only allows us to access information about HR and its properties. Our proposal was specifically contingent upon HR not proceeding with their merger with HD. Third, we have never pursued a deal without a fair price and our approach has been consistent; we buy and sell at determined prices. Although I was disappointed HR did not engage, I hold no hostile intentions. I have personally spoken to Todd and expressed our interest. We did not acquire shares in the public market or act unfriendly; they simply did not engage with us. Under these circumstances, we have no further actions to undertake. Fourth, contrary to some analysts' assertions, this deal would not have been dilutive to our senior housing growth. The equity, debt, or joint ventures involved would not affect that, and it’s a straightforward calculation to demonstrate that existing shareholders would benefit. We evaluate every investment with opportunity costs in mind, answering three critical questions: what are we driven by, what are the comparisons, and what is the expense involved. Lastly, we are neither disappointed nor concerned about our growth in the senior housing sector; on the contrary, we just reported an 18.4% same-store NOI growth and expect to see significant acceleration in the second half of the year. Having addressed these rumors, let's discuss the roughly 30 owners who have engaged with us to forge win-win partnerships. Year-to-date, we have successfully closed $1.2 billion of acquisitions across 21 different off-market or privately negotiated transactions, a remarkable achievement compared to last year's activity. While I hesitate to single out specific deals, I will share a few to provide insight. We acquired 700 units across three major communities in Washington State with Cogir to expand our partnership. We're also purchasing another property in Brentwood in the East Bay of Northern California, acquired at a considerable discount to replacement costs. For instance, the Brentwood asset, with larger units, was purchased for $320,000 per unit, while current replacement costs in the area exceed $500,000 per unit. Additionally, we are strengthening our relationship with StoryPoint by acquiring 33 communities across Michigan, Ohio, and Tennessee, purchased for an average price of $197,000 per unit, which is a significant discount considering current average occupancy is 63%. While this transaction will be dilutive to our 2022 FFO per share, we're confident in the substantial growth potential in occupancy, margins, and cash flow in 2023 and beyond due to StoryPoint's enhanced operating platform. This exemplifies our commitment to making sound long-term investment decisions to drive cash flow growth. In another deal, we’re expanding our partnership with Courtney and her team at Oakmont by acquiring seven new properties in prime California locations, and we are pleased to continue collaborating with them. Separately, in the medical office sector, we purchased a four-building portfolio on the campus of a top hospital in Birmingham, Alabama, at a 5.5% cap rate in an absolute net lease structure. We anticipate an unlevered IRR in the high single-digit range for this investment. Additionally, we are under contract to acquire two beautiful medical office buildings, one in the San Francisco Bay Area and another in the Sacramento market, at a high 5% going-in cap rate, also expecting a similar high single-digit IRR for both. Regarding the financing market, we have observed a major shift in recent weeks, with property-level leverage decreasing by 15 points, costs doubling, and interest-only options disappearing from the market for both seniors housing and medical offices. This shift is starting to significantly affect asset pricing. I am genuinely excited about our acquisition prospects as I haven't felt this optimistic since Q4 of 2020. Recently, an investor I respect inquired if I felt optimistic about our next $7 billion in acquisitions as I was about the last $7 billion since we pivoted to an offensive approach in Q4 of 2020. Initially taken aback, I reflected our value-driven strategy, not volume-based, which was interpreted as negative. Today, let me clarify—yes, we are just as excited about the upcoming $7 billion in acquisitions as we were about the previous $7 billion. Currently, we have a pipeline of approximately $1.5 billion in deals in progress across 20 different off-market or privately negotiated transactions. Some of these may involve operating unit transactions, which we believe will appeal to sellers. Our pipeline refers to transactions already under contract. In addition, we are actively negotiating an additional couple of billion dollars in acquisitions across various other deals. While we may not persuade sellers to accept our price, we are not dependent on any single transaction; price remains paramount. We recognize market shifts and concentrate on future trends rather than past conditions. This dynamic creates heightened demand for parties that do not overextend themselves or rely on debt. Our investment philosophy mirrors patterns in nature: regardless of an investment's size, our motivation remains consistent—seeking reasonable bases relative to replacement costs while aiming to enhance value through operational improvements. We are not short-term deal chasers; rather, we are dedicated, long-term investors and are optimistic that 2022 will prove to be one of our best acquisition years to date. With that, I'll turn the call over to John Burkart, our Chief Operating Officer. John?

Thank you, Shankh. My comments today will touch upon the performance of our operating business in the quarter and provide some elements of our vision for senior housing. Starting with our medical office portfolio. In the first quarter, our outpatient medical business delivered 2.7% same-store NOI growth over the prior year's quarter, while occupancy declined modestly to 94.5%. We continue to see strong retention rates in the first quarter of 92%, likely driven by rising construction costs, construction delays, and the related increases in new lease rents. Going forward, we expect occupancy to decline modestly as we continue to increase renewal rates in line with market increases. Now turning to our senior housing portfolio. The coiled spring, as Shankh has called it, is starting its expansion. Revenue in our same-store portfolio grew at 11.2% in the first quarter compared to the prior year's quarter. That's over 2x the growth rate experienced last quarter and the highest year-over-year increase since at least 2017. Our first quarter performance was led by our U.S. portfolio, which reported year-over-year top-line growth of 13.5%. Additionally, as we've described in recent calls, pricing power continues to strengthen as reflected by strong renewal rate increases and improving market rates. In fact, RevPAR growth in the first quarter increased by the highest level in years at 4.6% year-over-year and 4.3% sequentially. While expenses grew at a rate of 9.5%, the more insightful expense metric is expense POR or expense per occupied room, which only grew at a rate of 3%, and in the first quarter year-over-year basis, the lowest since at least 2017. The combination of higher rental rates, increasing occupancy, and improving margins led to an outstanding NOI growth rate of 18.4%. Our operators continue to report very strong demand with traffic above 2019 levels, which bodes well for the peak sales season ahead. If things play out as we expect, continued top-line strength and further improvement on the expense side should result in a meaningful acceleration in NOI growth in the back half of the year. Understandably, since taking over as COO at Welltower, I've received questions about my vision and areas of focus, both of which I want to provide some insight to on this call. I will outline the opportunity I see and highlight some key elements of my plan, which I believe Welltower is uniquely positioned to execute. As I evaluate the senior housing business, my perspective is a little different than the conventional wisdom that has developed as the health care REIT industry has evolved. The healthcare REIT industry, including Welltower, started with triple net leases for senior housing, giving the owners little to no say in operations and asset management. As the industry evolved with RIDEA, the historic reliance on the operators to run the business continued. The senior housing industry was founded by strong visionary leaders who saw that there was a much better way for society to provide quality lifestyles for its aging members, and they acted accordingly. Like so many industries that are started by small businesses, they are specialists in their core focus, in this case, providing quality living experiences for our aging population while being generalists in the many other important elements related to running a modern operating business. But as you know, I come to this business with a different perspective and have broken down the business into a few components. It's essentially the multifamily business that provides care with some hospitality. As Shankh alluded to in his opening remarks, although REITs are limited in providing care services, we can perform multifamily-type functions like revenue management, capital management, procurement, provide IT expertise as well as leverage our data science expertise. By doing so, we have the opportunity to fundamentally change the potential of this business by creating a full-scale operating platform and bringing operational excellence to the senior housing business. Overall, I have come to believe that Welltower has a substantial opportunity to improve the customer and employee experience and create shareholder value through leading the digital transformation of the business. More to come on timing, but I will say that we are actively working on this initiative, partnering with best-in-class operators, and we will deliver various components as they are ready. The addition of the world-class operating platform will continue to dramatically increase the size and depth of the Welltower moat. It will greatly simplify the business for our top operators, enabling them to focus on their core strengths, increasing their effectiveness and efficiency, and driving increased total returns. We expect that all our stakeholders, including our operating partners and investors, will emerge as winners in this next phase of the senior housing business.

Thank you, John. My comments today will focus on our first quarter 2022 results, the performance of our triple net investment segments in the quarter, our capital activity, our balance sheet liquidity update; and finally, our outlook for the second quarter. Welltower reported fourth quarter net income attributable to common stockholders of $0.14 per diluted share and normalized funds from operations of $0.82 per diluted share, which was above the midpoint of our $0.79 to $0.84 per share guidance. Despite our results only including approximately $600,000 of HHS funds versus the $6 million expectation we had previously forecasted as part of our guidance, this quarter represented our first with year-over-year normalized FFO growth since the start of the pandemic. Excluding provider relief funds received in the respective periods, or $0.82 per share represents 15% year-over-year growth versus the first quarter of 2021. We are also pleased to report that total portfolio same-store NOI growth turned positive in the quarter. With 8.9% year-over-year growth, which compares favorably to guidance of 7%. Turning to our triple net lease portfolios. As a reminder, our triple-net lease portfolio coverage and occupancy stats are reported on trailing 12 months ending 12/31/2021. In our seniors housing triple-net portfolio, same-store NOI increased 6.9% year-over-year and exceeded our expectations, driven by improvements in rent collections on leases currently in cash recognition and the early impact of rental increases tied to CPI. Trailing 12-month EBITDAR coverage was 0.82x and with a sequential improvement, mainly driven by the conversion of Legend Senior Living today in the quarter. As indicated last quarter, we expect coverages to continue to move higher through the rest of the year as the positive inflection point we started experiencing in our SHO portfolio in the first quarter will be reflected in our triple-net coverages on a one-quarter lag. Next, our long-term post-acute portfolio generated negative 1.8% year-over-year same-store NOI growth and trailing 12-month EBITDAR coverage was 1.3x. We completed $6.7 million of long-term post-acute sales in the quarter bringing our total sales in the last 12 months to $525 million, and a blended cap rate is 7.5%, with an additional $202 million under contract for sale at quarter end. As a result, our long-term post-acute portfolio represented just 4.8% of total in-place NOI at year-end versus 10.1% at the end of 2020, a 530 basis point decline driven largely by the exit of our Genesis relationship. Lastly, health systems, which is comprised of our ProMedica Senior Care joint venture with ProMedica Health System, had same-store NOI growth of positive 2.75% year-over-year and trailing 12-month EBITDAR coverage was 0.02x. As a reminder, this lease is backed by the full corporate guarantee from ProMedica Health System. Turning to capital market activity. We continue to enhance our balance sheet strength and position the Company to capitalize on a robust and highly visible pipeline of capital deployment opportunities by utilizing our ATM program to efficiently fund those near-term transactions. Since the start of the year, we have sold 21 million shares via forward sale agreement at an initial weighted average price of approximately $89.9 per share for expected gross proceeds of $1.9 billion. We currently have approximately 19.5 million shares remaining unsettled, which are expected to generate future proceeds of $1.8 billion. Additionally, we are seeing significant interest from potential sellers to accept OP units as consideration, providing further investment capacity. Taken together, our unsettled ATM proceeds, potential OP unit issuances and $352 million of expected property disposition and loan payoff proceeds provide ample capacity to fund our current investment pipeline. During the quarter, we issued our second green bond comprised of $550 million of 10-year unsecured debt maturing in 2032, with a coupon of 3.85%. Following a similar discipline in our equity funding strategy, this is our fourth unsecured issuance since March of 2021, bringing total debt issuance over the span of $2.3 billion with an average duration of 9.5 years and average coupon of 3%. At quarter end, factoring in cash and restricted cash balances, our liquidity position exceeded the $4 billion of borrowing capacity on our line of credit. When combined with the previously mentioned $2.1 billion of unsettled ATM proceeds and expected disposition proceeds, we remain in a very strong liquidity position. Lastly, moving to our second quarter outlook, last night, we provided an outlook for the second quarter of net income attributable to common stockholders per diluted share of $0.20 to $0.25 per share, normalized FFO per diluted share of $0.82 to $0.87 per share or $0.845 at the midpoint. This guidance takes into consideration approximately $6 million of HHS funds expected to be received in the second quarter. Guidance represents a $0.025 increase at the midpoint from our $0.82 per share number in Q1. This $0.025 increase is composed of a $0.04 sequential increase in our Senior Housing Operating portfolio NOI, a $0.01 incremental increase in HHS funds, and is offset by $0.025 of increased interest expense, lower foreign exchange rates, particularly the British pound, and dilution from development deliveries. Underlying this FFO guidance is estimated in second quarter total portfolio year-over-year same-store growth of 8% to 10%, driven by sub-segment growth of outpatient medical 2% to 3%; long-term post-acute 2% to 3%; Health System, positive 2.75%; and senior housing triple net 7% to 8%. And finally, senior housing operating growth of 15% to 20%, driven by revenue growth of 11% and underlying this revenue growth is an expectation of approximately 500 basis points of year-over-year average occupancy increase and continued robust rate increases. We continue to be pleased by the momentum of the top line recovery in our senior housing operating portfolio, driven by a combination of rate and occupancy growth, setting the stage for a multiyear recovery to average occupancy in the portfolio at 76.4% at quarter end, nearly 1,100 basis points below pre-COVID levels and nearly 1,500 basis points below peak occupancy levels. We've described this recovery in the past as a coiled spring with both secular and cyclical tailwinds behind it. When we started to see the spring release in the core portfolio, we consciously decided to steadily allocate capital to distressed, under-operated and often initially diluted properties, along with high-quality development projects. While this capital allocation has the effect of offsetting some of our core growth today, we will sustainably amplify it in the years to come. In short, we're working hard to keep that spring coil even as we start to realize the power of the earnings growth it can drive. And with that, I'll hand the call back over to Shankh.

I want to sum up the call by stating that I am very pleased with the internal and external growth prospects of the Company. We have faced many challenges over the years to reach a point where we believe we are ready for long-term growth, which is the best way to create significant shareholder wealth over time. A great investment has three characteristics: high returns, low risk, and long duration. While we are successful in finding high returns in off-market opportunities, we are also focused on minimizing risk and ensuring longevity. This is why we are dedicated to acquiring assets at reasonable prices compared to replacement costs to reduce risk. In terms of longevity, our business update will detail the approximately 30 mutually beneficial contractual partnerships we have established, through which we aim to deploy over $30 billion of capital in the next decade and beyond. We see significant growth opportunities within our defined area of confidence, where we can allocate capital with households instead of relying on our predictive analytics platform. The combination of significant internal and external growth has created a unique situation known as the Leaping Emergent Effect, or as Munger describes it, the Lollapalooza effect. As our owners, you can be confident that we will not make poor capital allocation decisions that could jeopardize these rare conditions we have achieved through years of hard work, luck, courage, and a committed culture. With that, operator, please open the call for questions. Thank you.

I'm going to try to clarify one. But just first, Shankh, you talked about pricing power or rent growth accelerating. Can you maybe expand on that? What does that mean for the second half and maybe sustainability into '23 on shop pricing power?

Sure, I'll address both questions separately. First, regarding the MOB question, we see value across all asset classes at certain prices. I mentioned this a couple of quarters ago, highlighting that it didn't make sense for people to invest in MOBs with high cap rates of around 4%. Given the changing financing market, I'm surprised that there's any astonishment about this situation. Now, financing costs are exceeding the return on equity at those levels, which indicates a troubling trend for asset pricing. It's puzzling to me why anyone would purchase at such prices with growth tied to inflation. Our recent acquisition of an MOB on a triple net lease at a rate of 5.5%, which might approach 6%, makes sense to us, as well as two others in California with high 5s, where we anticipate an unlevered high single-digit IRR. Thus, pricing, not just exposure, defines investment success. Regarding pricing power, we've indicated that we expect in-house pricing increases to be necessary to counter all the recent cost escalations. I'm particularly encouraged by the movement in street rates, which have shown high single-digit growth in the first quarter, with some operators experiencing double-digit increases in April. Additionally, since about half of our residents aren't scheduled for annual rate adjustments until later in the year, we anticipate sustained strong pricing power throughout the year, which excites us greatly.

Shankh, I was hoping you could maybe just expound a little bit on the distress that you're seeing in the transaction market. And I realize that you're not necessarily focused on initial cap rates, but I'm curious, when you look at your underwriting, have the unlevered IRRs that you think you're going to achieve change at all? And just trying to get a better flavor for the activity levels and just maybe how return hurdles might be going up for you?

Yes. So Steve, in the early stages of this pandemic, we conducted several transactions that yielded low double-digit unlevered internal rates of return. As the market started to recover, these rates transitioned to high single-digit unlevered IRRs. However, in the past month, the financing market has completely collapsed. Leverage is down, borrowing costs have increased significantly, and interest-only options have disappeared. This situation has fundamentally disrupted our leveraged IRR model. I've observed more deals being withdrawn from contracts within the last month than at any point in my career. We're beginning to see deals returning to the market. We've always maintained that a price is a price; we provide people with a price and evaluate deals on an unlevered basis. For us, this doesn’t substantially alter our approach, and we expect to see those prices return. While I'm cautious not to get overly optimistic, I'm noticing the early signs of low double-digit unlevered deals starting to emerge again.

Just on the agency expenses down 10% sequentially. Can we get a sense of month-by-month improvement especially since Jan and even Feb likely had pretty high Omicron cases seems that agency utilization could have improved each month as we've moved through the first quarter. We're just hoping you can quantify the monthly utilization trend and where agency stands today versus expectations?

Derek, we prefer not to discuss monthly details, but your perspective on the question is accurate. We have observed consistent improvement throughout the quarter, and we have seen significant enhancement after the quarter as well. This trend gives us confidence that we expect continued progress in the second quarter and the latter half of the year. I must reiterate, we are not in the business of predicting COVID. Any major COVID spike would change everything. However, in normalized market conditions, we are seeing rapid improvements. Tim, do you have anything to add?

No, I think that's right. We gave color on our last call when we do January results, we spoke to seeing a 10% decline from December to January. We gave similar color to seeing a little better than that as a trend for the full quarter. So I think it gives you a read, we kind of saw consistent decreases relative to the counterpart in the fourth quarter.

I wanted to ask about the expanded partnership with Oakmont, what's so attractive about the Oakmont partnership? And then maybe could you also touch on the CCRCs that you acquired with them?

Yes. What’s most appealing about Oakmont is that it's one of the top operators in the industry. Their portfolio performance is impressive, especially considering the challenges posed by the pandemic. Additionally, we announced a long-term development partnership with them a few quarters ago, which we believe will generate substantial value for both Oakmont's principals and Welltower shareholders moving forward. We did not bring Oakmont to the CCRC; rather, they developed it and are currently involved in its operation. This facility includes not only entry-level units but also a significant number of rental units, and we think they excel in this area. It’s important to view these as large campuses rather than being limited by labels like CCRC or RIDEA triple; the core business remains unchanged. We acquired these assets at a favorable basis and cash flow, which we believe will be highly profitable. We also purchased four traditional rental models together, which we expect will drive substantial growth as well. Many of these assets opened in 2021, so while you may not see a major earnings contribution in 2022, we anticipate a significant impact in 2023 and beyond.

Shankh, I wanted to go back to your comments about no intention of going hostile on HR. Forget HR for a moment, I'd just like to better understand your philosophical views on hospital takeouts broader than HR. So if the price is right, are you interested in going to hospital or do you have philosophical opposition to it?

I'm not going to comment philosophically what I think on being hostile or not; frankly speaking, it's inappropriate for us to do that. I can guarantee you that we will not go hostile. That's not how we do business. We believe that we're win-win people, and we like to deal with people who actually believe in mirror reciprocation or we can do win-win transactions with people. We have zero desire to go hostile on HR or anybody.

If I could use HR as an example, how are you considering the investment horizon? If your offer price reflects a low 5% implied cap rate on that stock, would it be sensible to adopt this distressed model? I don't see much distress, but generally speaking, would you sell the premium assets, retain the older ones, and support redevelopment to achieve your IRR target? Is that the mindset for HR, and are you approaching it with a somewhat contrarian investment strategy where you're initially dilutive but expect to be more accretive in the long run? Specifically, are you currently just waiting to see how things unfold? Is there no further activity on that front? Lastly, the $163 million break fee would not be paid to HR if something were to occur, correct?

Okay. You asked three questions. I'll see if I remember all of them. First, we invest when two conditions are met. One, we believe the investment is reasonable compared to replacement cost; two, we believe we can significantly enhance value on the operational side. These two factors must align for us to invest capital, regardless of the specific asset. My perspective on this remains unchanged. I'm not going to delve into specific buy or sell recommendations as that's not suitable for this discussion; it varies based on the asset in question. However, as I noted in my prepared remarks, regarding the price we offered, we believed HR shareholders would be better off compared to the HTA merger. That was our view, and the price took into account not only the assets but also releasing them from a potential transaction, which the market perceived as significantly dilutive. So it's important to consider both assets and liabilities; overlooking this is a common misconception. Nonetheless, as I mentioned, our focus is on engaging with 30 or 40 other owners who are keen to explore potential win-win transactions. I don't have anything further to add to that.

It's Adam Kramer on for Rich. And congrats on a really strong quarter here, and I appreciate all the commentary. I'll kind of keep this aside from HR and kind of ask about April occupancy trends within SHO. Anything you can add about kind of sequential trends in April or second quarter to-date that I think would be really helpful?

We are encouraged by the April as well as early May trends. And we're also encouraged very much with where the pricing is going. Remember, John's focus is on revenue maximization and frankly, NOI maximization. But we're very encouraged by both occupancy and rate trends and I'm assuming you're asking regarding senior housing, so in the senior housing portfolio.

This is Mike Griffin on for Nick. I'm curious, what do you need to see before being comfortable issuing full-year guidance?

We need to be comfortable to see that COVID is not around us.

I wanted to stay on, I guess, or touch on the seniors housing pricing power topic. How much higher can RevPOR trend? RevPOR growth trend, particularly when the occupancy gets back into the high 80s or even the low 90% range. I'm assuming there's only so high you can push rates on the existing residents, but would this dynamic help push street rates higher and then that could drive RevPOR higher? How should we think about that?

Yes. Mike, you inquired about a topic I find quite interesting and asked me for my thoughts. This is purely speculative on my part. Starting from the perspective that I don't know of any other sector where pricing power exists with occupancy in the 70% range, it's encouraging to see the current developments. Currently, pricing is driven by the need to maintain service quality, as I've mentioned in previous calls, and costs are rising, including labor. We are committed to not reducing services. This is the current situation; however, there will soon come a time, likely when occupancy reaches the high 80% range, where we will have no available rooms to sell, leading to a different pricing increase. These two factors provide a very favorable context. If we consider upcoming development deliveries over the next couple of years, it takes considerable time to bring new supply to the market, especially given recent circumstances. The funding costs for development projects have soared, contributing to this challenge. Costs have been increasing by 1.5% to 2% each month, and it's difficult to secure guaranteed maximum prices for more than a week under the current conditions. Despite this, pricing power could remain strong in this demand-supply scenario for an extended period. Regarding street rate discussions, I'll provide one example, which may not represent the entire portfolio. In April, some of our operators raised street rates by 15%, while in-house increases were 8%, 9%, or 10%. We're beginning to observe that for some operators, street rate increases are exceeding in-house rate increases, a trend we haven't seen since around 2013 or 2014. We're quite optimistic about this development and believe we have significant potential for ongoing pricing increases. Ultimately, our residents have high expectations, and as they are investing substantially, it inevitably costs more.

Just wanted to go back to the Senior Housing operating segment and how we should think about sequential monthly occupancy gains. I wanted to see if we can get actually the specific number for April. And then also as we think about moving into May through September, third quarter, right. I mean you did make the comment that you expect your year-over-year same-store NOI growth to improve meaningfully in the back half of the year, which would presumably factor in higher sequential occupancy growth than what you're seeing in the second quarter. So just trying to understand about how we should think about the monthly pace, occupancy gains that could happen, maybe even in relation to last year?

Yes. If you refer to Page 12 of our business update, you'll get an overview of how seasonality tends to unfold. We anticipate significantly better-than-seasonal trends in the second quarter. However, the substantial growth is expected to take off in the third quarter. While I won’t go into specifics month by month, I want to emphasize that the summer selling season has just begun, and we’re seeing very encouraging signs that should continue to improve moving forward. Additionally, it’s important to note that typically, each year starts with a dip in occupancy from Q1 to Q2. This year, however, we did not experience that dip as we actually increased occupancy, which will greatly affect revenue as we progress through the year. Tim, do you have anything else to add?

Yes, I'd just add that from an average occupancy perspective, kind of speaking to that same point John just made, but because 1Q is historically negative, but even in this case, a small gain, average occupancy, which is kind of built off of the prior quarter and the current quarter recovery will accelerate into Q3 and does so historically. So when we think about kind of sequential, the part of it that's driven by occupancy will be its highest in the third quarter.

So sticking with SHO and based on that move in street rates you mentioned, were up in the double-digit range. Are you considering pushing rate increases even higher on future renewals through the balance of the year? And then I'm curious if you have a sense of how below market your in-place rents are today relative to market? And does this acceleration in fundamentals make you more upbeat about future shop acquisitions and more willing to take on the initial dilution that you talked about in your prepared remarks?

Three questions there, but we will welcome to our call. I will try to remember everything you want. First is, no, it doesn't excite us more or less; investing is about price. It's not about exposure. I cannot say this million times enough, and if we call for you guys to understand how we allocate capital. It is all about price. We own more senior housing than anyone. We bought more senior housing than anyone even in the last 18 months. So senior housing is going to do significantly better. There has been no other beneficiary more beneficiary than us, right? So having said that, you think about the point, I also want to make sure you hear me. I said for a specific operator, I don't want you to think street rates are going up 15%, right? So everywhere, that's not what's happening. But we see broad momentum of increasing street rates pretty much everywhere with every operator, okay? So let's just put that in the context of understanding how senior housing works. Remember, you have an acuity creep as people age in place or age in a community, okay? So you will always have the portion who is living versus the person who is coming in; there's a gap, right? There's a gap because of that to decrease, the frailty and the acuity creep. What we are seeing, this rapidly rising street rate is closing that gap pretty meaningfully. And we hope that we'll see at some point that gap is going to come together. But at the same point, I understand, as we sort of get to the next year, right, there's going to be a significant in-house rate increases again. So, you create another gap and you chase that gap again, right? That's how you build revenue. So, we're pretty optimistic. Generally speaking, the tone of your question is the right one, which excites us very much this moving, obviously, rates that we are starting to see, we'll see that will be sustained, all things being equal through the year and will show up in our top line growth as well as the NOI growth that Tim and John talked about.

Just on the agency expenses down 10% sequentially. Can we get a sense of month-by-month improvement especially since Jan and even Feb likely had pretty high Omicron cases seems that agency utilization could have improved each month as we've moved through the first quarter. Just hoping you can quantify the monthly utilization trend and where agency stands today versus expectations?

Derek, while we prefer not to discuss month-to-month details, you are correct in your thinking about this question. We have observed consistent improvement throughout the quarter and even more significant progress after the quarter ended. This gives us confidence that we anticipate continued positive trends in the second quarter and into the latter half of the year. I want to emphasize again that we are not in the business of predicting COVID. Any forecasts could change dramatically in the event of a large COVID spike. However, under normalized market conditions, we are seeing rapid improvement. Tim, would you like to add anything?

No, I think that's right. We gave color on our last call when we do January results, we spoke to kind of seeing a 10% decline from December to January. We gave similar color to and seeing a little better than that as a trend for the full quarter. So I think it gives you a read, we kind of saw consistent decreases relative to the counterpart in the fourth quarter.