Welltower Inc (WELL) — Q3 2023 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 assurances 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 SEC. And with that, I'll turn the call over to Shankh.

Thank you, Matt, and good morning, everyone. I'll review our third quarter results and capital allocation activities. John will provide an update on the performance of our Senior Housing Operating and Outpatient Medical Portfolios. And Tim will walk you through our triple-net businesses, balance sheet highlights and revised guidance. Nikhil will also participate in the Q&A session of the call. Against a backdrop of an increasingly uncertain macroeconomic outlook, I’m pleased to report another strong operating result which continues to exceed our expectations. Our Senior Housing portfolio posted another quarter of exceptional revenue growth, which continues to approximate double-digit levels, driven by both strong pricing power and occupancy build. We are delighted to report that occupancy growth not only accelerated through Q3, but also that September occupancy gains marked the highest level we've seen over the last 2 years. From a pricing standpoint, we continue to achieve outsized rate increases as reflected by nearly 7% growth in RevPAR or unit revenue. As you may recall, we previously mentioned that last year, one of our largest operators pulled forward its typical January increase to September 2022. This year, the same operator elected to maintain its historical cadence of rate increases and will therefore wait until January of 2024 to push through rate increases. As a result, reported pricing of Q3 this year may appear lower than what we are experiencing in the business, and it bears repeating that our operators' pricing power remains strong. The story on the expense side is similar to that of our top line and results continue to outperform our elevated expectations. We reported 2.4% expense per occupied room growth or unit expense growth, the lowest reported expense growth in the company's recorded history. This is largely driven by a 2.7% increase in compensation per occupied room, which represents a substantial step down in recent quarters. This combination of strong revenue and controlled expense growth has generated 333 basis points of same-store margin expansion, yet another record for the company as it marks the highest level of quarterly margin improvement in our recorded history. And our shop NOI margin of 25.6% is the highest level of profitability we achieved since pre-COVID. NOI growth for the quarter came in at 26.1%, our fourth consecutive quarter of 20% plus NOI growth and the second highest level of growth in the company's recorded history. While we are pleased that margins are moving in the right direction, we are also mindful that our profitability remains significantly below pre-COVID levels and below where we believe the industry can attract external capital investment on a long-term basis. Our managers strive to deliver a superior product, experience and provide valuable choices for our retired seniors. Our product remains highly affordable at the high-end while we operate in the U.S. and the U.K. and they should continue to focus on highly differentiated services, even if that means rate increases need to remain at the elevated levels. As I've said many times, cutting corners is not in our DNA. We recommend that our operating partners serve fewer residents well than serve more poorly. As a result, one of our key focuses is to work with the right operator to improve the customer and the employee experience. We believe that doing so will improve the experience of all our stakeholders. Conversely, we will be very disappointed if our operators take the path of least resistance, which ultimately will impact resident and employee satisfaction. We continue to focus on the delta of RevPOR minus ExpPOR as the single most important operating metric to optimize. While it is too early to comment on anything specific relative to 2024, as I sit here today, I believe that the delta of RevPOR minus ExpPOR can expand, which we need to get to a sustainable level of margin. From a product standpoint, AL continues to outperform IL and from a geographic standpoint, Canada finally caught up to the level of growth that the U.S. and U.K. were experiencing. We have further work to do in our Canadian business with a new operating platform being launched in the next few weeks. And going forward, we believe both of our international businesses will have significant contributors to our earnings growth in '24 and '25. From a capital allocation standpoint, we have never been busier. Last quarter we spoke about a pipeline of $2.3 billion. We closed $1.4 billion in Q3, and roughly another $900 million in October. Additionally, we have another $1 billion of deals just about to cross the finish line. Beyond these billion dollars of investments under contract, our pipeline remains large and near-term actionable. But the execution of these deals will depend on our access to capital. The extremely challenged debt and equity market in this higher for longer rate environment suggests that this trend will continue and perhaps will get better in '24. We'll continue to see credit evaporate from our investment universe and are selectively pursuing great opportunities in both whole stack and med stack levels with highly favorable last dollar exposure. These opportunities have the potential to achieve equity returns with basis and credit downside protection typically seen in low leverage transactions. We're seeing opportunities across product types and geographies with equity investments in U.S. senior housing, and credit investment on the SNF side, making up the large portion of opportunities that we're constantly being presented with. I want to remind you that we have a three-dimensional lens through which we measure investment opportunities: risk, reward and duration. Given the substantial rise of real rates over the last 90 days, we have recalibrated the thresholds of these three criteria higher. In other words, for the same risk we need higher returns today than we did 90 days ago or we can do deals with a similar return profile, but with a much lower risk and so forth. We are students of history and markets and cannot find many times when a lot of good has come out of a period of sharply rising real rates. If real rates continue to grind higher, we'll continue to calibrate our three guideposts higher. So far, we have no problem achieving these calibrations as sellers understand the markets have changed, and we will remain the best, at many times, the only hope for liquidity. From a balance sheet perspective, amidst growing macroeconomic, fiscal and geopolitical uncertainty, we're pleased to have reduced our net debt to adjusted EBITDA to one of the lowest levels in our recorded history, which also represents nearly a 2x decline from just 12 months ago. Our balance sheet strength and flexibility give us the opportunity to remain on offense or provides shelter if the economic environment meaningfully worsens. We don't have a clue which direction the wind will blow, but I'm delighted that we don't need fair weather to meet our obligations or growth. As you all know, a wall of debt maturity in the commercial real estate sector is coming exactly at a time when debt capital is evaporating from the market. We will not be surprised if significant dilutive capital is raised, or otherwise a lot of keys will need to be returned to the lenders. I'm certainly grateful to Tim and our best-in-class capital markets team for keeping us ahead of the cadence that Nikhil and I can spend on as we look to capitalize on the best environment for investments that we have ever seen. Year-end is shaping up to be extremely busy. And Q1 also looks promising if we continue to have access to growth capital. At the risk of sounding like a broken record, I want to reiterate that we will only grow externally if and only if we can grow value accretively on a per share basis for existing shareholders. I hope that you as our shareholders are as excited as I am about our operating results and capital allocation activities. But interestingly, those are not the most exciting areas inside Welltower today. What truly galvanizes us are the exciting prospects of John's operating platform, and especially the digital transformation of the senior housing industry. As we have discussed previously, we refuse to accept the lack of 21st-century business process and technology infrastructure in this primarily people-driven business where individual communities are on their own islands. We have made tremendous strides in the last 90 days on the technology backbone of what Welltower 3.0 may look like, and how far we can raise the bar for resident and employee experience. Welltower's engine room is buzzing with pilots and scaling traditional technology solutions from ERP and CRM to advanced technology solutions around robotics and artificial intelligence. Our goal is to elevate the community experience by delighting the customer and their families and simplifying and enhancing the employee experience, all of which should lead to occupancy and NOI growth. Then, and only then, do we have to have a shot at earning a long-term sustainable return for our owners, which has been less than satisfactory over the last decade. My partners and I are truly inspired and hopeful that we're turning the corner to achieve a multiyear double-digit compounding growth rate. While the supply and demand backdrop is squarely in our favor, we're far more focused on the value to be gained from our platform that you, our fellow owners have funded to build with our blood, sweat, and tears. And with that, I'll pass the call over to John.

Thank you, Shankh. I know that it sounds like a broken record, but again, another great quarter. Our total portfolio generated 14.1% same-store NOI growth over the prior year's quarter. This was led by the senior housing operating portfolio with 26.1% year-over-year growth. We are methodically moving forward focused on the customer and employee experience, and that is driving results. We started with brute force effectively relying on our raw labor to identify issues and opportunities. We continue to improve the systems and processes and organize the data to make data-driven decisions to improve the business, and we're just at the beginning. The medical office portfolio’s third quarter same-store NOI growth was 3.4% over the prior year's quarter. Same-store occupancy was 95%, while retention remains extremely strong across the portfolio at nearly 93%. The 26.1% third quarter year-over-year NOI increase in our same-store senior housing operating portfolio was a function of 9.8% revenue growth driven by the combination of 6.9% RevPOR growth, 220 basis points of average occupancy gain and moderating expense growth. Expenses remain in control coming in at 5.1% for the quarter over the prior year's quarter. The strong revenue growth and controlled expense growth led to substantial margin expansion of 330 basis points. As mentioned by Shankh many times, the marginal increase in expenses as occupancy continues to grow over 80% is relatively low for obvious reasons. Many of the expenses are fixed. Each property has an Executive Director, Head Chef, Maintenance Director regardless of the occupancy level. The bulk of maintenance utility and many other costs are largely factored in at 80% occupancy. As a result, our Expense POR or Expense Per Occupied Room continues to remain low, enabling the business to improve the margins. As Shankh mentioned, our ExpPOR growth for the quarter was 2.4%, the lowest in our recorded history. All three of our regions continue to show strong same-store revenue growth, starting with the U.S., which grew at 9.6%, and Canada and the U.K. growing at 9.7% and 12.9%, respectively. The strong revenue growth in each region combined with the expense controls have led to fantastic NOI growth in the U.S., Canada and the U.K. of 25.4%, 27.1% and 37%, respectively. The management transitions continue to perform above expectations. We are grateful to our operating partners who are working so hard to ensure that we achieve the improved operations that we set out to accomplish in our journey to operational excellence. Our operators continue to do an amazing job of managing through the complexities of the business to provide a superior customer and employee experience. Many of our senior customers were born in the 1930s. The Depression. They have worked hard and sacrificed all their lives and now they deserve to enjoy the fruits of their labor. The product and services remain very affordable to a large segment of the population who have purchased and paid off their homes years ago, and are now at a point where they can sell their home and live off their assets, enjoying a good quality of life during their golden years, which they deserve. Our focus with our operating partners on improving the customer and employee experience benefits all stakeholders. For example, our focus on materially reducing agency labor improves both the customer and employee experience, as both benefit from permanent high-quality employees compared to the random agency employees lacking relationships with our customers and knowledge of the community systems and processes. Additionally, eliminating the agency or middlemen enables us to ensure the hardworking people at our communities receive a fair compensation package with vacation and benefits as well as competitive pay, and our shareholders benefit from the reduced leakage to the agency company owners. Care is the essence of the service provided, and ensuring employees can deliver outstanding care is one of our top priorities. Our operating platform efficiencies will increase the time available for care and reduce the stress on our employees. For example, at one site where one of my team members worked, the Executive Director spent over 3 hours per move-in inputting the documents into the antiquated systems. The CRM and Care modules are disparate systems. Our platform has all the documents in E-Form and the modules are fully integrated, reducing the potential for errors and saving time, which enables the site leader to focus on the customers and employees, not paperwork. We continue to make substantial progress on our platform and the related rollout. I'm grateful for the engagement and participation of our operators' leadership who are actively working with us to ensure the success of the platform. More to come in 2024. I will now turn the call over to Tim.

Thank you, John. Today, I will discuss our third quarter 2023 results, the performance of our triple-net investment segments, our capital activity, an update on our balance sheet and liquidity, and our revised full-year 2023 outlook. We reported a third quarter net income of $0.24 per diluted share and normalized funds from operations of $0.92 per diluted share, marking a 10.4% year-over-year increase and 16.5% growth when adjusted for HHS and changes in foreign exchange rates and floating rate debt. Our total portfolio same-store NOI grew by 14.1% year-over-year. Regarding our triple-net properties, same-store NOI for our senior housing triple-net portfolio increased by 3.9% year-over-year, with a trailing 12-month EBITDA coverage of .93x. During the quarter, we agreed to convert 11 StoryPoint assets from triple-net lease to RIDEA, increasing our managed portfolio to 55 Midwestern properties in the fourth quarter. Our long-term post-acute portfolio saw same-store NOI growth of 5.3% year-over-year, with a trailing 12-month EBITDA coverage of 1.44x. In terms of capital activity, we closed on $1.4 billion of acquisitions and loans this quarter, including $618 million of senior housing operating investments. The Revera PSP joint venture announced last quarter will be executed in three phases by geography: the U.K. portion closed in Q2, and the U.S. portion closed this quarter, resulting in a $75 million net investment, with the Canadian portion anticipated to close by year-end. We raised $1.9 billion through our ATM to fund our ongoing investments and improve our balance sheet for future opportunities. This allowed us to fully fund our year-to-date investment activities while also paying down $290 million of debt this quarter. As a result, our net debt to adjusted EBITDA ratio stands at 5.14x at the end of the quarter, representing a 1.8x reduction from the previous year. We expect this ratio to stabilize in the mid-5s on a pro forma basis following near-term investment activities and to continue to decline in the coming quarters as our senior housing operating portfolio recovers and drives organic cash flow growth. After including $900 million of gross investments completed in October, we currently hold $2 billion in cash and cash equivalents, have full capacity on our $4 million revolving credit line, and expect around $624 million from near-term dispositions and loan paydowns, giving us approximately $6.6 billion in available liquidity. Finally, regarding our full-year guidance, we updated our forecast for net income attributable to common stockholders to a range of $0.91 to $0.95 per diluted share and normalized FFO of $3.59 to $3.63 per diluted share, with a midpoint of $3.61. This adjusted guidance reflects a $0.055 increase from our previous midpoint, with contributions from a $0.03 increase due to higher anticipated senior housing operating NOI and a $0.035 increase from capital allocation activity, offset by a slight drag from increased G&A and a stronger dollar. Our updated FFO guidance is underpinned by an expected same-store NOI growth of 11.5% to 13.5%, driven by growth in outpatient medical of 2.5% to 3%, long-term post-acute of 4% to 5%, senior housing triple-net of 1.5% to 2.5%, and senior housing operating growth expected to be between 23% and 26%. Revenue growth is around 9.8% year-over-year, supported by an approximate 240 basis point increase in average occupancy and about 6.7% in rent growth. I will now pass the call back to Shankh.

Thank you, Tim. I want to conclude by turning your attention to three items that may not seem as important or exciting for our near-term results. On a combined basis, they may actually serve as a drag on our Q4. But nonetheless, it's extremely important to underscore as far as our stabilized or run rate earnings is concerned. First, we have convinced our partner StoryPoint to convert 11 properties from triple-net to RIDEA structure. 9 of these properties ran a historic lease structure with other operators, and 2 of them are recent acquisitions. StoryPoint is one of our best operators and a current RIDEA operator has cleaned up these billings, improved staffing, service quality and invested significant capital. These properties have gained 500 basis points of occupancy since the beginning of the year to 70% in September, revPAR is up 15% since they took over, and RevPOR of the new movements in 2023 is up another 12% from the average of 2023 numbers. This is setting up the stage for significant cash flow growth in '24 and beyond. A debt to equity conversion at the bottom of the cycle, perhaps the most value-accretive transaction we can complete today. As we have experienced in our recent legend conversion, we can expect to break even in 12 to 15 months relative to our previous contractual rent, and then our shareholders will get all the upside afterward. This obviously will work only if you have great assets run by great managers and we are right about the trajectory of the cash flow. And that is the bet I'm willing to take at this point in the recovery cycle. We continue to seek additional opportunities to achieve similar outcomes when they check the boxes of great assets and operator quality and when we can expand the pie with our partner so that we can attain a win-win solution for the long term. Second, Kisco, one of our strongest operating partners, measured by margin, occupancy and other operating metrics, recently merged with another one of our operators, Balfour. Balfour, now an affiliate of Kisco, maintains a dominant position in the Denver metro area and also has new buildings nearing completion in Brookline, in the Boston MSA and Georgetown in D.C., both properties opening in 2024. We thank Schonbrun and Susan Juroe for their partnership at Balfour and wish them all the best for the next phase of their lives and welcome Andy Kohlberg and his team to take over the stewardship and growth of these communities. Like StoryPoint communities above, this transaction will be significantly accretive to our stabilized earnings and cash flow growth. Last but not least, we're in the final stages of Project Transformer, the transaction, which I described to you last quarter, with our teams working really hard with Matthew and Frederic at Cogir. Our brand launch is coming up in the next few weeks, and people on both sides are working at a frenetic phase to achieve seamless transition. This is yet another transaction, like the others above, which, when we look back at in '24 and '25, we will feel really proud to have completed, as they have added to our earnings and cash flow growth despite some near-term friction and the tremendous workload for the combined team. Speaking of earnings and cash flow growth, I would like to provide a report card on the previous large transactions to Avery and Oakmont from Signature and Sunrise that we discussed with you in Q2. Both Avery and Oakmont have grown occupancy of approximately 300 basis points since transitions have begun. We, at Welltower, remain focused on the long-term price of getting this business to an elevated level of customer and employee experience and generating earnings per share that is substantially higher than where we came from. To sum it up, the powerful recovery in the senior housing operating business, the rollout of our operating platform, and significantly accretive capital deployment are all setting us up for an accelerating earnings and cash flow trajectory for '24 and '25. With that, I'll open the call up for questions.

Good morning. Thank you for taking my question. I've noticed a significant opportunity for external growth, especially with the recent merger of two of your peers. I was wondering if you could share whether this has been of interest to you or could potentially be in the future. Additionally, could you compare this approach to your more detailed strategy going forward?

I don't comment on other people's deals, but it appears to be a positive outcome for both parties. We were not involved in that process and we won’t be, to clarify. As we've mentioned before, our strategy focuses on transactions involving one asset at a time. Even when considering portfolios, Nikhil is currently wrapping up a portfolio transaction of 10 assets that were selected from a larger pool of over 80 or 90. We prefer to focus deeply rather than widely in our markets, and we truly believe in executing smaller transactions one asset at a time. Over the last three years, the average size of the transactions we've completed is around $30 million, which suits our approach and will continue to do so. We have no interest in pursuing larger opportunities. The market today indicates that, several years ago we estimated potential opportunities at $30 billion, but it appears the total addressable market is actually larger due to the volume of loans maturing and floating rate debt rolling over. We can grow the company sustainably as long as we have access to capital and can do so on a per-share basis, but large mergers and acquisitions have never appealed to me. I'm not ruling it out entirely, but it's just not something we are interested in. Specifically addressing your question, we are not engaged and will not participate in the process you mentioned.

Good morning out there. Thanks for taking the questions. I've got a three-part one for you guys here. But on the Cogir transaction, can you offer a sense as to what occupancy levels look like in the properties earmarked to be managed by the operator in the future? And then is there a way to quantify the NOI upside potential from this transaction and ultimately, the transition of those properties? Finally, is that Regency case study outlined in the deck a good example to gauge what that NOI potential could look like for the broader Cogir portfolio?

Connor, you were talking about, if I understand your question correctly, the Cogir transaction if you're talking about the properties that Cogir is taking over from Revera, the property occupancy is roughly around 80%. And we think that, as you know, Cogir obviously runs their properties well north of 90% occupancy and 40% margin, and I think we'll get there. What was the other part of the question, sorry, I missed that?

You mentioned the Regency case study in the presentation. Is that a suitable example to assess the NOI potential for the wider Cogir portfolio?

Yes. I think you will see in this particular portfolio that we're talking about, the transition portfolio, Regency was a very well-run portfolio. Cogir has been able to improve that margins from around, call it, 40% to about 50%. In this particular case, I believe that the improvement will be better and will go from margins from, call it, say, up 20% to 40%. So I think we should see better enhancement in this particular case than the Regency example.

Hi, good morning. Thank you. Impressive occupancy acceleration into September. Just curious what the early indications are for revenue increases to existing customers. I'm assuming some of the rate letters, apologies, have gone out already. So just curious how that year-over-year delta is looking for rent increases to existing customers? Thanks.

Juan, as you know, we are currently in the process of finalizing that. As I mentioned in my prepared remarks, we expect it to be very strong, similar to the last couple of years. However, we are not yet at the finalization stage. I still believe we will achieve this. Customers are expecting a high level of service, and costs remain high; overall, the industry's profit margins are not optimal for attracting capital. Considering all of this, I believe we will see strong rate growth. It's still too early to specify what that will be, but I continue to expect it to be very strong.

Hi. Good morning. Thanks for the time. Shankh, could you just clarify any comments you gave in your prepared remarks where you said that the Kisco, Balfour merger might be a drag on the fourth quarter? I didn't quite understand why that might be the case? And then maybe one more, if I could sneak it in, the SHO portfolio outperformed the typical seasonality in the third quarter. I think that's expected to continue into year-end. Is that driven more so by the U.K. related changing same-store pool, something else? Just any additional color there would be great. Thanks.

Let me try the first one. So I did not say that a specific transaction might be a drag on the fourth quarter. I said the three things that I described together could be a drag on the fourth quarter. But combined, all of them should be a significant driver of growth in '25 or just call it, stabilized earnings. That's the point I was trying to drive, not specifically about Kisco and Balfour.

And on your question on the seasonality in the business, you're correct. We continue to outperform the historical seasonality, and we are not seeing major differences between our transition portfolio. As Shankh mentioned, we are actually seeing very strong occupancy gains in the transition portfolio probably greater than what we've seen in the core portfolio.

Jonathan, just the core portfolio, as you know, sequential occupancy growth was around 150 basis points and the transition portfolio, the two I talked about were the majority of the transition we did in Q2. The occupancy growth in from Signature to Avery and Sunrise to Oakmont, both portfolios achieved a sequential occupancy growth of roughly 300 basis points. So almost double of what the same-store did.

Thanks. Yes, I was hoping to get maybe a little bit of a preview about how G&A could trend over the next year. And I know this year, there was the build out of John's group, and just trying to understand how far along that is and how that could affect G&A growth over the next year.

Nick, as I mentioned earlier this year, if you look back at the fourth quarter call, we anticipate at least another year of increased G&A as we continue to develop the platform. We've made significant progress, but there is still much to accomplish. When comparing G&A to NOI, it's important to consider the relationship between occupancy rates and revenues. We believe that the development of the platform is already yielding substantial benefits, but from the perspective of G&A alone, we expect to see another year of growth related to the build-out.

Thanks. It's actually Nick Joseph here with Michael. Shankh, I recognize you said you're not engaged, you won't be engaged. But last year, you reportedly got involved in a similar public to public M&A situation within the medical office space. You talked in the past a lot about being an IR buyer and cost base focused and that you look at everything. So just curious in this situation or more broadly, is it kind of the current valuation and underwritten returns aren't sufficient against the other opportunities that you're seeing? Is it something about medical office that's keeping you on the sidelines here?

I want to clarify that I do not comment on other people's deals, so I can't provide insights on underwritten returns. Regarding medical office properties, I mentioned last quarter that we are uncertain about long-term inflation, which makes it difficult for us to commit to an asset class whose growth profile is unclear. This concern is significant for us. We are actively seeking opportunities to create value, purchasing assets at 70% to 80% occupancy and then leasing them up to increase growth rates. However, traditional medical offices that are stabilized at around 95% occupancy with modest increases in rent do not appeal to us because of those uncertainties. Additionally, the relative opportunities available are crucial; if medical offices were the only option, our perspective might be different. We are currently focused on senior living investments, where we confidently see low double-digit unlevered IRR opportunities even without considerable value addition, which I expect we will achieve. So, our lack of interest isn't a comment on the quality of medical office deals; rather, it's about the comparative opportunities we are seeing right now. I have no insight into any specific deals because we are not engaged in them for the reasons mentioned.

Yes. Hey, guys. I have a question on the transitions. Shankh, you mentioned you've been very active in terms of proactive portfolio management. You achieved a lot of early success recently with Avery and Oakmont. How have these operators driven such strong results so quickly? And just how would you encourage us to think about future transitions in the portfolio?

I'm not going to answer the first question, Josh. Obviously, on a public call, there are trade secrets that we can't disclose. However, I want to emphasize that these changes don't happen automatically. Over the last five to seven years, we've made many transitions and learned valuable lessons from past mistakes. We've improved our approach and learned how to navigate challenges effectively, reaching a point where we can make a significant impact. The preparation involved in our systems and processes is something we’ve been taught. It's an evolution we've experienced over the years, and I'm very pleased with where we stand now. Regarding future transitions, whether this is the last one or if we will undertake many more depends on how we seek to optimize performance. I've often said that optimizing location, product, price point, and operator is crucial in our business. We will continue to optimize until we believe we’re finished. This journey is one I'm committed to, even if it means taking short-term setbacks. So far, based on recent results, we've learned how to manage those short-term challenges.

Hey, good morning, everyone. So I want to talk and perhaps to John on the rate number that you mentioned, the RevPOR number of 7% and specifically, the sustainability of that type of growth. It's always been my view that there was some sort of implied ceiling of growing rents for people that are 85 years old. And that at some point along the way, there's just a way of doing business. Now I don't know that there's a real ceiling of some sort, but it always seemed to me that was the case, correct me if I'm wrong? Number two, though, maybe it involves unpacking the rent, maybe it's rent between rent and care and so that kind of muddies the conversation. But I wonder if you could comment at any level about how rate might grow in the future considering what I would think would be some pushback for the reasons I just described?

Rich, let me try to start that. And John, you can finish anything that I haven't added. So I think your conversation that you have is a reasonable one if you think about a long-term tenant in the middle of the market. Our rate increase is because we have sold the majority of our mid-market product. Our U.K. and U.S. portfolio is primarily focused on very high-end customers, very wealthy customers, and the product remains incredibly affordable to them. And at that level, we haven't seen any pushback. The second point you have to consider, Rich, is we have never raised rates like you have seen in other asset classes, multifamily, stores, others, 20%, 25%. We have never raised that. So just sort of rates remain high single digits, whatever, like 8%, 9%, 10% is sort of what we have done. So it's much more sustainable than you think. But put that aside, just understand, put all of those comments in the context of average length of stay. You're talking about an average length of stay of 20 months. So we might be here talking about for the third year of increase of X percent. But just understand, the person who got the first year of increase, he or she is gone, she's no longer in the community. So if you put all of those together, you will see that if you provide very important point, if you provide the differentiated services at the highest level, your customer is willing to pay you. Now we are, as I've said many, many times, we're not focused on an individual number, call it RevPOR or rate. We're focused on very much the delta between RevPOR and ExpPOR and that's what we are focused on. I've said that last year and the year before. And we shall see what the market gives us. I have no idea what the market will give us if there's a pushback, we will adjust, but we haven't seen any yet.

I completely agree. It's about the difference between RevPOR and ExpPOR. Rich, you're probably considering multifamily situations where people stay for many years, which is quite different from our current context.

Hi. Good morning. Thank you. I certainly appreciate the operating leverage embedded in the SHO portfolio. And I was just wondering if you could provide a little more color sort of regarding labor trends for the general staffing there and what conviction you have and the ability to really continue to sustain pretty attractive or capitated growth of those expenses? I mean, are you getting longer tenures, lower turnover and lower recruitment costs or just a better labor talent pool? And again, I'm just thinking more beyond the Chef and the General Manager, what levers are contributing to a nice profile in terms of growth on the expenses for labor?

Jim, you are right that we are observing a significant decrease in turnover. The overall availability of employees who wish to join our company and contribute to the communities is increasing significantly. Our operating partners are becoming more effective at using technology and other resources to attract and retain talent. After experiencing a crisis, businesses often find ways to improve; each crisis can lead to better outcomes if the business endures. That is the trend we are noticing. As for our confidence in the RevPOR minus ExpPOR journey continuing to grow significantly, we cannot predict the specifics for any particular line item, situation, or quarter. I've mentioned this many times. Our objective is not to forecast the future but to respond to market opportunities and perform better than the market. We will monitor what the market presents us with.

Yes. And I would just add, in my comments, my focus is on productivity. So we want our employees to be paid well. We want happy employees and happy customers. We also want to increase productivity of the business so that we can manage to accomplish all of that. So that's really, I think, the take-home point.

Yes. Curious, how are you thinking about, I guess, senior housing development today? And how do you see starts potentially trending over the next couple of years?

Yes. Mike, I’m going to repeat what I mentioned at the NIC conference about a week or ten days ago. If we’re providing debt in senior housing today, your chances are better at a casino. If we’re offering equity for senior housing development today, it’s like trying to win the lottery. That reflects my perspective on senior housing development. I can't comprehend why there are any new projects, as it doesn't make any sense considering the current construction costs, capital costs, and business margins. There shouldn't be any new projects starting, yet it appears that there are. I think any stocks you're seeing reflect players using others' money, which is decreasing rapidly. I expect this trend to continue. Mike, did I overlook any part of your question? Yes. And before I forget, I mean, the development pipeline is primarily focused on wellness housing. There’s no senior housing development going on. I’m only confirming my earlier remarks on that.

Yes, thanks. Given the dislocation that we are seeing in the private market, is it harder for operators that are having liquidity issues to provide the same level of care versus your operators that presumably don't have these issues? I mean, are you seeing that in the marketplace at all right now? And if not, do you expect that this will become a bigger storyline over the next several quarters?

I can't speak for others, but our operating partners are performing exceptionally well. We are receiving numerous inquiries from new operating partners eager to join our journey. This interest could stem from their admiration for what John is doing, our data initiatives, our efforts to professionalize the business, or their own struggles—or perhaps a combination of these factors. However, I can tell you that we have encountered an unprecedented number of promising investment opportunities recently. We see operators from all regions in the three countries we operate in reaching out to be part of this well-capitalized platform, as well as John's platform.

Hey, great. Just a big picture one. So looking at the presentation, the NOI, the incremental NOI build, I noticed that you guys added a bar here that looks like another $172 million. And I'm tying back to your comments about the focus on RevPOR versus ExpPOR. It's clearly a margin benefit here. So I was wondering if you could talk about that, why add that to the deck? Are we supposed to read into it just more confidence in the ability to get back to pre-COVID margins is the question.

Yes, Ron. We added that to the deck through conversations with both investors and analysts alike. They're looking at it interpreting kind of a stabilized point to be reflective of 88% occupancy and 31% margins. When in fact, with the rent growth we've seen since fourth quarter '19, we were ignoring that rent growth, and we are baking in around 29% margin. So what we wanted to do is just show getting back to just the NOI level on today's rents means that you're getting to margins that are 200 basis points plus below where we were margin-wise in the fourth quarter '19, and what that final bar does is just shows you getting back to 88% occupancy, 31% margin in pre-COVID levels at today's third quarter '23 realized rents where NOI would be.

And Ron, I've said this before, I'll repeat it again. If that's all we get back to Q4 of '19 level or pre-COVID level, I would be very, very disappointed. If you have done this in Q4 of '19, you remember, those were not the greatest days of this business. So we were getting it for 4-plus years at this point and through our supply cycle. That is not a high point like a lot of other businesses are and we're very disappointed that's all we get back to.

Great. Thanks for taking my question. I'm here with Connor. How should we think about funding assumptions for the next tranche of acquisitions? And then also, how does the quality of the assets you're looking at compared to the quality of your existing portfolio? Or put differently, how do you assure investors that you aren't moving up the risk curve to chase the return profile?

I want to be clear with investors. I believe that investors understand our history, and you do an excellent job of visiting our properties to see it for yourselves. Pursuing higher-risk investments may be a consideration in tight situations, but that is not the current environment. In the past, when we faced such conditions, we sold off significant assets. We do not pursue riskier investments for higher returns; that’s not our approach. Addressing your main question, during the initial phase of COVID, we noticed a lot of disrupted cash flows. Many assets were only 60% to 70% occupied, including new developments, and were experiencing cash flow issues, which is typical for businesses that break even at 60% occupancy. The incremental returns during that period were markedly affected due to the occupancy losses from COVID. That was the situation two to three years ago. Today, we are witnessing broken capital structures; assets are generating the expected cash flows at around 80% to 82% occupancy, while the industry is providing yields of 6% to 6.5%. The real issue now is the underlying leverage, which is now over 350% to 400% at 9%, creating situations where you are negative in both cash flow and leverage. These are the transactions happening today. Over the past six months, I've observed a notable increase in the number of high-quality buildings owned by core investors, a trend I've not seen in the previous four years. The quality of available opportunities is improving significantly, but it's up to you to assess the quality of the assets we are considering. We provide these assets for you to visit, and I believe you will arrive at the same conclusion. Did I cover everything in your question?

And, Jamie, on your funding question. So in my prepared remarks, I spoke to kind of a liquidity build, and that's as of October 30. So we talked about $900 million in investments just quarter-to-date closed in October, $1 billion pipeline ahead of us about $2 billion in cash and $6.6 billion of total available liquidity to fund that.

Great. Thanks. Shankh, you were crystal clear with your thoughts on why development doesn't make sense broadly in senior housing today, but you did expand the development pipeline, I think it was up $600 million this quarter, roughly half of that was in senior housing. And clearly, you have a cost of capital advantage today. But I mean, is that what gives you the comfort moving forward with these projects? And then I'm curious, are developers coming to you to partner on future projects that can't sort of access construction financing? And how does that opportunity set compare versus acquisitions?

So I think, if I understand correctly, Nikhil correct me if I'm wrong, all our development starts are either fully 100% leased medical office developments that we have long-term contracts with our existing clients or their wellness housing development. I do not believe that we have started any senior housing development. I don't remember when was the last time we actually started the senior housing development. So because of all reporting in the same bucket, Austin, they are not senior housing development, there are what we call wellness housing, which is age restricted and age targeted apartments.

Hi, it's Juan here with Juan still. Just a quick question on the investment pipeline. Could you give a breakdown of kind of what you're looking at? And where do you think you see or where are stabilized deals say for what you're targeting in the major food groups?

Yes. So the pipeline today is, as I said, I don't know, Nikhil, but it's like 80% plus would be senior housing. And mostly, I would say, equity in senior living and probably maybe 90%. But the vast majority is U.S. senior housing, and there are some credit opportunities. I don't remember any transaction or pipeline about any MOBs, but do you know anything?

Nothing meaningful.

Okay. And stabilized yields, I would say, in the senior living today, we are targeting close to 8% on a stabilized basis and going in. I think I said last call, we are seeing sort of opportunities that start at 6%, ending at 8% and given the rise of real rates, we are seeing better than that today. Frankly, we have ratcheted our return expectations higher. So that's sort of where we are transacting. But we are not a yield buyer. We are still happy to buy a 1% yield if we think that's the right basis and the right assets. But generally speaking, those are the kind of opportunities we are seeing.

Thanks for the follow-up. Nikhil or Shankh, could you provide an update on the Integra process? How are those assets performing? Additionally, are there further opportunities? I ask this because you mentioned earlier that you might consider selling some of those assets once they stabilize. An update on Integra would be appreciated. Thank you.

Yes, Vikram. So we are pleased with the performance that we are seeing. Last quarter, I talked about the first 133 out of the 147 buildings that have transitioned. In the last quarter, those buildings produced roughly $70 million of positive EBITDARM compared to negative $90 million for the 3 months prior to the transition. Now fast forward another quarter, those same buildings in the second quarter generated $127 million of EBITDARM. So in the 6 months since transition, you're seeing a cash flow swing of $215 plus million and obviously, every month continues to be better than the prior month. And so if you look at June end and you annualize that, you were roughly $170 million, which is north of the rent. So here we are 6 months in when we had underwritten this, we thought it would take us much longer, about 18 months, give or take, to get to this point. So we are incredibly pleased with the performance. But we think there's still a long way to go. So your point about exiting upon stabilization, we are happy with the progress, but we are far from stabilization.