Welltower Inc (WELL) — Q4 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 a reasonable assumption, the company can give no assurances that 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 review our fourth quarter and full year 2023 results and describe high-level business trends and our capital allocation priorities. John will provide an update on the operational performance of our Senior Housing and Outpatient Medical portfolios and progress on our operating platform build-out. Nikhil will give you an update on the investment landscape, and Tim will walk you through our triple-net businesses, balance sheet highlights, and 2024 full year guidance. First, as I reflect back on 2023, it was a year of solid execution across the board with significant progress achieved in all aspects of the business. Operating performance far surpassed our initial expectations. We had a great year, a record-setting year in terms of capital deployment, and we meaningfully strengthened our balance sheet and liquidity profile. Just as importantly, perhaps, is the groundwork we laid to sustain this level of performance and continue to deliver outsized growth not only in 2024 but also well into the future. This includes the considerable progress John and his team have made on the build-out of our operating platform, which we continue to believe will transform the industry. On top of that, as we have discussed in recent quarters, we have executed a number of operator transitions across all our geographies, as well as converted a handful of properties from triple-net to RIDEA. All should bear fruit later this year and in 2025. We finished the year strong with significant momentum to set us up for another year of solid performance in 2024. In terms of our Senior Housing Operating portfolio, I was particularly encouraged by the occupancy growth in the fourth quarter, which is seasonally not the strongest period. The portfolio saw 110 basis points of sequential occupancy gains, which translates into 330 basis points year-over-year occupancy growth, and the 330 basis points year-over-year occupancy growth is by far the highest level we have ever achieved in the fourth quarter of any year in our recorded history. Just as compelling is that looking at the intra-quarter trends, year-over-year occupancy growth strengthened each month, which is unusual given the aforementioned seasonality of the business. We’re also pleased with the rate growth achieved by our managers. During our last call, I described to you that one of our largest operators, Sunrise, pulled forward January 1, 2023 rate increases into the fourth quarter of 2022. This year they have returned to their historical cadence of January 1 rate increases. While this distorts our show portfolio’s reported Q4 2023 RevPOR or the unit revenue, the rest of the portfolio delivered RevPOR growth of 6.8%, reflecting the underlying fundamental strength of the business. While our 2024 guidance assumes some diminution of RevPOR growth from full year 2023 levels of 6.6%, we still expect another year of near double-digit topline growth as occupancy continues to build at a solid pace. The fourth quarter 2023 same-store ExpPOR or expense per occupied room grew 1.7% year-over-year. The lowest level of growth in Welltower’s recorded history, driven by fourth quarter 2023 same-store compensation per occupied room growth, which grew 1.9% year-over-year, also the lowest growth in Welltower’s recorded history. While the normalization of agency labor usage is helping to dampen compensation growth, we are also seeing some good trends in the salary and wage lines. All of these trends are resulting in a favorable spread between RevPOR growth and ExpPOR growth. The powerful combination of this revenue backdrop with continued margin expansion that should be expected due to the high operating leverage inherent in the business leaves us feeling very strongly about our 2024 NOI growth setup. Tim will give you our detailed buildup of our NOI guidance based on our current assumptions, but please understand that we have no false pretense about perfectly knowing what the business will look like as we move through the years, particularly the all-important summer months. But we are optimistic, given the demand-supply backdrop, which improves by the day, and the rising system-wide occupancy, as well as the early success we have seen in John’s operating platform buildout. While 24.4% NOI growth last year for our shop portfolio alone was very encouraging, I’m extremely pleased with our capital allocation activities as well. 2023 was the most active year in our history in terms of raising and deploying capital. We completed almost $6 billion of investments in the year, nearly half of which closed in Q4 alone. While I won’t get into the specific transactions, I will mention that they share some common characteristics. First, we generally grew with our existing operating partners in their respective markets. Second, we acquired assets at a significant discount to replacement costs from core funds, private equity funds, pension funds, and financial institutions who were seeking liquidity. We also added a couple of new operating partners along the way who I envision us growing with in the near-term. More to come on this topic as we progress through the year. The torrid pace of investment activity in Q4 has continued with 2024 starting off with a bang. In fact, I do not recall having ever been this busy in the first quarter on the deal front. While we have pre-negotiated documents and structure to leverage, it is great trust that we have built with our 2023 counterparties that will make follow-on transactions easier to execute. Suffice to say, our near-term capital deployment pipeline remains robust, highly visible, and actionable, and squarely within our circle of competence, where we can bet with house odds rather than gambler’s odds. Along with what we have already done in 2023, these acquisitions that carry attractive bases, operational upside, and significant value-added from Welltower’s operating platform, we will have a meaningful impact on long-term compounding of the partial value of our existing short loans. With that, I will hand the call over to John.

Thank you, Shankh. Although most of my time at Welltower has been spent doing the Welltower hustle, getting up every day, identifying and aggressively pursuing the opportunities that exist, focused on improving the customer and employee experience. I want to take a moment to reflect on how proud I am of the Welltower team for success in improving the customer and employee experience, which is reflected in our performance. Focusing on Senior Housing for a moment, the Welltower team consists of our top operators and all of their employees, our key vendors, as well as the Welltower employees. We have all worked together to improve the customer and employee experience, which has resulted in fantastic results. On top of the industry-leading Senior Housing same-store NOI growth for the full year of 2022 of 20.1%, our full year 2023 Senior Housing NOI growth was 24.4%. Often on earnings calls, you hear the words 'tough cost.' That’s certainly true here. Yet our guidance for 2024 same-store Senior Housing NOI growth at the midpoint is 18%. Therefore, based on our two full years that are completed and in the record books, 2022 and 2023, and our guidance of 18% in 2024, that indicates that the three-year compounded growth of our same-store Senior Housing NOI in 2024 will be over 75%. That’s something to reflect upon. Thank you, Welltower team. Now back to our business. Our portfolio generated 12.5% same-store NOI growth over the prior year’s quarter, led by the Senior Housing Operating portfolio with 23.7% year-over-year growth. The Outpatient Medical portfolio produced same-store portfolio growth of 2.8% for the fourth quarter of 2023. This was driven by favorable operating expense management, increasing the operating margin by 220 basis points year-over-year to 71.4%. Notably, our proactive appeal process achieved favorable real estate tax reductions. The 23.7% fourth quarter year-over-year NOI increased in our same-store Housing Operating portfolio is a function of 9.7% revenue growth, driven by the combination of 5.5% RevPOR growth and 330 basis points of average occupancy gain and moderating expense growth. Expenses remain in control, coming in at 5.7% for the quarter over the prior year’s quarter. The strong revenue growth and expense control led to continued margin expansion of 290 basis points. Again, our ExpPOR growth for the quarter set a record for the lowest growth in our recorded history at 1.7%. All three regions continue to show strong same-store revenue growth, starting with the U.S. at 9.4%, Canada and the U.K. growing at 9.7% and 14.1%, respectively. The strong revenue growth in each region, combined with the expense control, have led to fantastic NOI growth in the U.S., Canada, and the U.K. of 21.8%, 21.7%, and 75.5%, respectively. We’re flying along with our integrated platform initiative, which will start to go live at our first operator in the first half of this year. I will not go into all the details, but I will say that our focus on improving the customer and employee experience is coming together very well. The integrations of the various modules will simplify the customer experience and reduce the labor around basic tasks, enabling our site teams to focus on what they love, our customers. More to come in 2024. I will now turn the call over to Tim.

I’ll go next. Thanks, John. On the transaction side, as Shankh mentioned, 2023 marked the most active year in the history of the company. Our new investment activity of almost $6 billion spanned more than 50 different transactions with a median transaction size of $54 million, in which we acquired 153 properties over the course of the year. I am sure you all have read about the confluence of a few factors that are creating the current investment backdrop, namely the great wall of CRE debt maturity, expiring SOFR caps, pressure on the regional bank balance sheets, and the denominator effect. Welltower is uniquely positioned to capitalize on these trends and serve as a counterparty of choice for our private equity sponsors, large pension and asset managers, and entrepreneurs that are impacted by this challenge. We are able to source these opportunities directly from sellers or through our operating partners, given our reputation of being a good partner and a reliable and credible counterparty. We are then able to analyze and underwrite quickly and in great detail, thanks to the combination of our data analytics platform, Alpha, and our best-in-business investment team. Finally, and perhaps most importantly, we then execute on the business plan for each asset through our deep network of aligned operating partners backed by the operating platform that John is methodically building out. These factors drive our sustainable competitive advantage for creating shareholder value. Our 2023 investment activity was focused on granular, off-market, high-conviction transactions. A majority of the transactions were focused on our seniors and wellness housing businesses, where we acquired additional assets in markets where we already have high-performing assets. By acquiring these assets at an attractive basis and consolidating operations under the same operator, we are able to reap the operating benefits of regional density. In the fourth quarter alone, we closed on nearly $3 billion of investments while remaining targeted and disciplined. We acquired 44 Senior Housing properties from 11 different sellers, growing our relationship with seven existing operating partners. We acquired roughly 8,800 units with an average age of around seven years at an average basis of $222,000 per unit at approximately a 40% discount to replacement costs. These transactions have a low six percent year one yield and are expected to generate unlevered IRRs north of 10%. I am also excited to provide an update on the performance of our Integra portfolio, where we have continued to see a sequential improvement in performance. For the 140 buildings that first transitioned to regional operators, we have seen annualized EBITDARM improve by more than $300 million, from losing more than $85 million in the three months prior to the transition to positive $228 million in the third quarter. While there continues to be meaningful remaining upside in performance beyond the current state, I am pleased to announce that EBITDARM coverage is now greater than one and a half times. We also transitioned the last seven remaining buildings earlier this month after getting the final set of regulatory approvals. On the back of our continued success turning around operations for our legacy Genesis and ProMedica skilled nursing portfolios, we have been active in deploying capital in the skilled space as we partnered with regional operators to acquire under-managed assets. Given the credit nature of our skilled nursing investments, we always strive to have meaningful downside protection through a combination of right per bed basis in states with a favorable reimbursement landscape and significant credit protection through personal and entity level guarantees. Looking ahead to 2024, we are off to an exciting start. We are delighted to announce our strategic partnership with Affinity Living Communities in which we are entering into a long-term programmatic development relationship and acquiring the Affinity portfolio of 25 active adult properties with an average age of less than eight years for $969 million or $233,000 per unit after allocating the NPV of interest cost savings to the assumed below-market debt. Darin, Scott, Charlie, and John have built a fantastic business over the last decade as they have meticulously iterated and refined the Affinity prototype. Their vertically integrated platform and unwavering focus on efficiency have enabled them to grow their footprint in typically expensive Pacific Northwest markets at an attractive basis to provide moderately priced active adult housing at average rents of approximately $2,100 per month. We have been incredibly pleased with the operating performance of our moderately priced active adult business over the last few years and are excited to partner with the Affinity team to further grow that business. Our investment team remains incredibly busy as we continue to be the steady hand and trusted counterparty in our business and remain well-positioned to capitalize on capital structure issues across the industry. We are inundated with opportunities up and down the capital stack and continue to balance price discipline, operator selection, and capital availability to be thoughtful stewards of our shareholders’ capital. I will now hand over the call to Tim to walk through our financial results in 2024.

Thank you, Nikhil. My comments today will focus on our fourth quarter and full year 2023 results, performance of our triple-net investment segments, our capital activity, a balance sheet liquidity update, and finally, the introduction of our full year 2024 outlook. Welltower reported fourth quarter net income attributable to common stockholders of $0.15 per diluted share and normalized funds from operations of $0.96 per diluted share, representing 15.7% year-over-year growth. We also reported total portfolio, same-store NOI growth of 12.5% year-over-year. Now turn to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats are reported a quarter in arrears. So these statistics reflect the trailing 12 months ending September 30, 2023. In our Senior Housing triple-net portfolio, same-store NOI increased 2.2% year-over-year and trailing 12-month EBITDA coverage was 0.95 times. It is also worth noting that our trailing three-month coverage in this segment moved above one time for the first time since the pandemic. Next, same-store NOI in a long-term post-acute portfolio group grew 5.2% year-over-year and trailing 12-month EBITDA coverage was 1.36 times. Turn to capital activity. We invested $3 billion in acquisitions, loans, and developments in the quarter, led by $2.1 billion of Senior Housing Operating investments. In the quarter, we continue to fund investment activity via equity issuance, completing a bought equity deal in November, which along with regular way ATM activity resulted in $2.8 billion of gross proceeds in the quarter, an average price of $86.20 per share. This equity issuance allowed us to fund investment activity, along with the extinguishment of approximately $250 million of debt in the quarter and end the year with a $2.1 billion cash balance. Staying with the balance sheet, as we finish 2023, I want to highlight the balance sheet transformation that has occurred over the last 24 months. When COVID hit in 2020, we acted quickly to protect the balance sheet by securing substantial incremental liquidity, in large part by reducing cash outlays and taking advantage of strong asset values by selling long lease duration assets into a zero interest rate environment. These actions helped alleviate the impact of nearly 50% drawdown in Senior Housing Operating NOI that bottomed out in the first quarter of 2021, driving peak leverage to nearly 7.5 times ex-HHS funds. After stabilizing the portfolio in the sevens in 2021, the combination of a strong recovery in Senior Housing performance and disciplined equitization of external growth over the last two years has allowed us to methodically lower leverage, finishing this year with 5.03 times net debt-to-EBITDA. Consistent with past commentary around the balance sheet, I want to underscore that despite the improvements in metrics, current leverage still does not reflect a full post-COVID recovery in Senior Housing Operating NOI, as our portfolio still sits meaningfully below pre-COVID NOI levels. A recovery back to these levels will drive leverage well below 5 times. In summary, in 2023, our post-COVID balance sheet recovery transitioned into a strategic repositioning, ending the year with substantially upgraded metrics from prior to the pandemic, and an expectation for further improvement as our Senior Housing Operating portfolio continues to carry significant organic cash flow growth momentum into 2024. This positions us with substantial capacity to continue to make systematically opportunistic capital allocation decisions to drive long-term shareholder returns in any market environment. Lastly, as I move on to the introduction of our full year 2024 guidance, I want to remind you that we have not included any investment activity in our outlook beyond that which has already been announced publicly. Last night, we introduced an initial full year 2024 outlook for net income attributable to common stockholders of $1.21 per diluted share to $1.37 per diluted share and normalized FFO of $3.94 per diluted share to $4.10 per diluted share, or $4.02 at the midpoint. As mentioned in our release last night, our 2024 guidance contemplates no HHS or other government grants, so after adjusting for $0.03 received in 2023, the midpoint of our initial guidance represents 11.5% year-over-year growth. This year-over-year increase in FFO per share is composed of a $0.33 increase from higher year-over-year Senior Housing Operating NOI, a $0.02 increase from higher NOI in our Outpatient Medical and triple-net lease portfolios, a $0.04 headwind from higher year-over-year growth in G&A expenses tied mainly to the continued build-out of our operating platform, and finally, a $0.10 increase from investment activity and financing activity. Underlying this FFO guidance is an estimate of total portfolio year-over-year same-store NOI growth of 8.25% to 11.5%, driven by sub-segment growth of Outpatient Medical 2% to 3%, long-term post-acute 2% to 3%, Senior Housing triple-net 2.5% to 4%, and finally, Senior Housing Operating growth of 15% to 21%, the midpoint of which is driven by revenue growth of approximately 9.2%. Underlying this revenue growth is an expectation for RevPOR growth of approximately 5.25% and an acceleration in year-over-year occupancy growth to 290 basis points. And with that, I will hand the call back over to Shankh.

Thank you, Tim. I wanted to address a few important topics before I open the call up for questions. As you may know, on November 28th, we lost my personal hero, mentor, and friend, Charlie Munger. We’re deeply saddened by his death and thank many of you for reaching out to my team and me during this difficult time. Charlie was truly generous with his wisdom, continually guiding us not only on the importance of compounding but also behaving like owners, not managers, deserving great partners by being one, and taking far less crowded high road, and acting with conviction when the conditions were right. We witnessed his wit, uncommon sense, simplicity, passion for multidisciplinary running, and innate ability to cut through noise and arrive at the right decision. The influence he had on Welltower, its people, and its culture is truly immeasurable. His serene guidance and sage, principled advice have been invaluable to me in my life and my career. Charlie was also an instrumental influence on the members of our senior leadership team to whom he gave his greatest gift of all time, his time. We’re grateful for the time we spent in his presence. I owe him a lifetime debt that cannot be repaid, but we will carry forward his teachings in how we deal with our owners, partners, residents, employees, and others. His most profound impact on us is perhaps cemented in the ground rule document that he guided me to write that you can find on our website. Moving on to a less somber topic, I want to draw your attention to some of the partners which we forged new relationship with in 2023. Beyond what we have announced so far, I want to highlight Affinity as our new growth partner. Nikhil walked you through the investment rationale for Affinity, but I would also like to express how excited I am to work with Darin Davidson and his team there. As we have gotten to know Darin over the last five years, he has proven to be a man of high integrity and thoughtfulness with a true compass on the future direction of how older Americans want to live. Despite adding a handful of managers to our growth platform in 2023, our partner and geographic strategy remains to go deep instead of go broad, and our consolidating roster of existing managers reflects that. In summary, I hope that the optimism conveyed by my partners today on the growth prospects of our business has resonated with you. While we remain focused on the execution of our 2024 strategic and operational goals, I cannot help but draw your attention to the outsized multiyear growth trajectory in front of us, which is supported by five different growth pillars. Number one, some of it is questionably a function of favorable demand-supply setup that I think you all understand. This should only get better as we look into 2025 and 2026. Number two, a lot of my personal enthusiasm stems from the digital transformation and business process optimization that John is driving. We should start to see some fruits of his labor this year, but much more in 2025 and 2026. Number three, overlay that with the impact of hundreds of properties that we have recently transitioned or agreed to transition to better operators. I am excited about the improving resident and employee experience that is currently underway with a financial impact following soon thereafter. Number four, add our extremely targeted and disciplined external growth opportunities, and last but not least, number five, our under-leveraged balance sheet that which Tim just described to you. We will continue to experience further organic deleveraging, which will either support an A rating or provide capacity for additional external growth. As we think about the next couple of years, we have never felt better about the growth prospects or accelerating growth prospects of our earnings and cash flow for our company on a partial basis. With that, I will open the call up for questions.

Good morning out there. Thank you for the time and appreciate the detail in your prepared remarks. So an observation, a couple short questions on wellness housing. The Affinity portfolio is generating a 60% operating margin, not exactly comparable, but seems to be above the range that a traditional assisted living facility could achieve. So first question on this end, where does that 60% margin sit on the bell curve of wellness housing operating performance outcomes? Second, with what looks like a very solid return profile, how much should we expect Welltower to lean into this segment in the years ahead? And finally, how has RevPOR and NOI growth in that portfolio trended over the last two to three years?

You snuck in three questions. Let me see if I can understand or remember all of them. First is we laid out our strategy of how we see investing in the senior living space, which is high price point, very affluent micro market, high acuity product, if you will, where we provide a service that can be charged accordingly and hire people and pay them appropriately. So that’s one strategy. On the other side of the barbell, we went from no acuity and built out a business over the last five to six years on this wellness housing side, where it’s a much lower price point but almost no services. So it’s sort of from an acuity standpoint and that provides obviously much higher NOI margin. That’s the two business segments that we know how to do well and make money, and that’s where we are. I’m not suggesting that anything in between is not something that is right or wrong or anything like that, but just not something that we’re focused on. Going back to your question, where that 60% or so margin sits in that wellness housing spectrum, I will say it sits towards the upper end, probably the upper half, but no means an aberration. So you think about this business from mostly a mid-50%s to mid-60% margin business. Your last question, how has the growth been in the wellness housing? Historically, it has been growing, I would say, mid-to-high single-digit. In 2023, the NOI growth for our wellness housing portfolio on a same-store basis has been 12.2%. In the fourth quarter alone, that was 13.1%. Hope I remembered all your questions.

Great. Good morning, and congratulations on a great year. A bunch of questions, but I’ll just focus on one. After three years of very strong, better-than-expected internal growth, the market appears to be pricing in approximately 700 basis points to 800 basis points of deceleration. As we look ahead, does growth normalize from here or can the current growth trajectory continue?

Thank you, Jeff, for the question. I’ll start probably with one of my favorite mongerisms, which is knowing what you don’t know is actually a lot more useful than being brilliant. So I want to make sure you understand that we have no hubris of what we don’t know. So, frankly speaking, I’m pretty surprised. For many months, I’ve been reading about this in research reports, talking to investors, that sort of this idea that if you had two good years of numbers, obviously, that has to go down pretty meaningfully. Frankly speaking, I don’t personally understand that. I will tell you that we don’t know how this year is going to completely play out. We give you our best guess that Tim described to you. It is possible that we have another year of growth that’s sort of similar to the last two years; possible if we have a strong summer sort of leasing season, right? But I think we’re going to have many great years in front of us with double-digit NOI growth. Now, whether this year, next year, this quarter, next quarter, I don’t know what chips will fall, but as we think about taking this portfolio to where it should be leased with our opinion, as we have told you, we’ll be very disappointed if we go back to pre-COVID. There is no reason we can’t even go back to where 2015 levels were, because if you look forward to the next few years, you will see demand-supply has been significantly better and our platform build-out should help us get well past that. We should have double-digit NOI growth for years to come. I hope that sort of answers your question. We have no hubris about knowing what we don’t know. But we think it’s also this idea that, because our business has done so well for the last two years, it has to go down; it has to meaningfully decelerate, it sorts of reminds me that perhaps, we should have more humility about what we don’t know. We’ll see how this plays out; we’ll see what the market gives us. Thank you.

Good morning. Thanks for taking the question. I guess I wanted to, you have a very strong outlook on shop. I wanted to dig into that a bit more in two parts. One, can you talk about sort of at the high end of your guidance range, what you or maybe the low end, what you’ve baked in for RevPOR growth? And then related to that, as you sort of trend towards 85% occupancy, clearly there are benefits to the bottom line. But I wanted to understand, do the operators need to staff up or spend more marketing dollars? Are there maybe some broad trends that you can share with us to achieve that 85% of the margin flow too?

I’ll start with the RevPOR, and then I’ll hand it over to John for any comments on the operating spend side. But thinking about the RevPOR, think about kind of 5 to 5.5 being kind of the range that drives, that kind of flexes from the bottom to the top of that range.

Yeah. So on how the numbers work, as Shankh and Tim have said for a long time, the flow-through gets pretty fantastic as you get north of 80%. So when you talk about staffing up, you really have, and I mentioned this on the last call, the positions are in place. You have your head chef, you have your executive director, etc. So it’s very incremental. So this arc of the curve, there’s a lot of money that comes to the bottom line as you increase occupancy. Additionally, as we’ve said, because of supply-demand factors, that’s just expected in the marketplace. We may or may not decide to spend more money on marketing to accelerate that, but the conditions are fantastic right now.

Hi. Good morning. Thank you for the time. I wanted to ask about the trajectory of external growth. You lay out in the business update deck the opportunity to deploy in excess of $3 billion annually with your current stable of proprietary developers and operators. And on top of that are, of course, the opportunities outside of those relationships that could be added, like Affinity. I know you don’t provide guidance on investment activity, but is it fair to assume $3 billion is kind of the low end we can expect year in, year out, given that these partners of yours want to grow their businesses and they can only grow with you due to the proprietary nature of your partnerships? Thanks.

Jonathan, let me see if I can answer that question. We will not give guidance. Our shop is not designed to buy stuff. We only grow if we think we can grow to add value on a partial basis for existing investors. So, if that means it’s $3 billion, it’s $3 billion. That means it’s $300 million, it’s $300 million, and that means if it’s $8 billion, it’s $8 billion. That’s sort of where we are. Having said that, if you look at the page seven of our slide deck, we see there’s a massive amount of loans in the Senior Housing space that are rolling. That’s just a U.S. number. We’re also seeing opportunities in both the U.K. and Canada, similar ideas, and there is not enough credit in the system to refinance this. So we think the opportunity set, obviously, in front of us is going to be very robust. Speaking of pipeline right now, I want to reiterate the comment that I made in my prepared remarks. We have never been this busy in Q1. As you understand, there is a seasonality of the deal business as well, right? People work really, really hard into the year-end to close out the year, and Q1 is usually very, sort of, you don’t see a lot of activity. Activity starts to pick up, obviously, in Q2, and then that’s obviously translated into a heavy second half. And that normal seasonality, we haven’t seen, and perhaps it’s because of the debt curve that we’re talking about, perhaps it’s because of another thing that Nikhil mentioned, which is the interest caps that are coming up, and regional banks were nowhere to be found, right? So, in that context, I think we’re going to have a record year again. But who knows? If we don’t see the opportunities to invest, we won’t. But the pipeline remains robust, it’s visible, it’s actionable, and we can see a massive amount of value creation coming through that.

Hello? Perfect. So, good morning, and then congrats on a great quarter and a great outlook. On the regulatory front, again, in the past few weeks, there’s been some discussion. The House was kind of doing some hearings on Senior Housing and some concerns around maybe ultimately you also see some minimum staffing rules in Senior Housing. Just kind of curious what you’re hearing on your end, how you kind of see that evolving over time and what that could mean for profitability for Senior Housing operators.

Yeah. Thanks, Tayo. Obviously, we’re very aware of the conversations taking place on the regulatory side. I think something that’s consistent with how we’ve talked about this in the past is, this business, the Senior Housing side, we almost entirely play in a private pay business where the delivery of a high-quality product and reputation in the market is the most important driver of your business on a go-forward basis. And so, I think there are areas of the healthcare world where that’s not the same, and you’ve got more of a captive demand audience and there’s more concern over how you may run a business. But on the Senior Housing side, what we know very well, both the good and the bad, is that the business is entirely driven by reputation. So, it continues to be the focus of ours is that, whether it’s the staffing levels, the level of care, the quality of the employees, they are what drives the business day in, day out and it’s why we spend so much time focusing on creating these sustainable models for property levels.

Good morning. Thank you. Just tying some of the previous questions together, if I could, thinking about Affinity. Those are pretty attractive margins, and obviously, they’re very savvy operators, and then you tie together the opportunity set in terms of maturing loans on page seven of your deck. Are there other wellness or active adult type opportunities within that set of the $16 billion or so debt maturities, thinking about your overall margin implications for your portfolio as it changes?

I believe that the Senior Housing loan situation we’re talking about is the traditional Senior Housing product. You can, for some lender, sort of define this as multifamily; some can Senior Housing. So, there’s no way to specifically know. We play into the mid-market segment of that active adult, the wellness housing segment. You think about there are four large players in that space that we know of is that there are others, but the four major ones that we know of, Clover, Calamar, Sparrow, and Affinity, and all four of them are existing Welltower partners today. As I have mentioned before, I believe in going deep, not going broad. If we find more opportunities, we will obviously see how that stacks up against our growth potentials, etc., but we are definitely focused on growing our business. And I think you would say starting this business six years ago to about 25,000 units today, we’re doing a pretty good job of it. But growth for growth’s sake is something that I just can’t get my head around. Our job is to create long-term shareholder value, compounding on a partial basis what we’re after. So, we’ll see if we can do it, but I will be optimistic that wellness housing over a period of time will become a very significant portion of Welltower’s portfolio.

Thank you, Shankh. I’d like to revisit the investment pipeline and the various factors you’ve mentioned today and previously regarding the ongoing expansion of that opportunity. I’m interested in understanding the size of the investment pipeline in terms of fee simple real estate deals compared to credit opportunities, and how much of the recent expansion in the investment pipeline is driven by credit opportunities versus traditional fee simple setups.

Austin, I want to clarify your question. Many of the opportunities we are encountering stem from the credit situations of existing owners, including factors like rate caps, loan-to-value ratios, debt service coverage ratios, and refinancing. These credit situations influence our ability to act. Our execution typically involves equity opportunities, but we are also interested in the private credit side as equity owners. I’ve stated numerous times that we are not lenders; we own the properties based on their last dollar value from a credit perspective. We are comfortable taking back properties if the owner decides to. However, most of our actions focus on equity, even though we remain open to the right credit opportunities. It’s important to note that we never lend against assets at last dollar values for properties we are not interested in owning. This is a key consideration.

Thanks. It’s Nick Joseph here with Michael. Shankh, you’ve obviously talked about the robust acquisition opportunities a lot on the call and then the multi-year growth that you expect from senior sales. And so curious how you are seeing competition for both assets and loans. Is this attracting additional capital into the space, and then also just some more question on the development side. Obviously, we haven’t seen development pick up yet, but given the multi-year growth outlook, when would you expect that to start to pick back up?

I think, from a competition perspective, as I mentioned earlier, all the transactions we've carried out have been privately negotiated directly with the sellers. We're not participating in auctions or anything like that, and a significant reason for this is the lack of liquidity in the market. Therefore, we aren't encountering much competition. Could you remind me what your second question was?

Let me answer that question. That was the development question. We have included a page eight in our slide decks that might be helpful for those considering this issue. There are several noteworthy points to discuss. First, let's acknowledge that construction costs have risen significantly. Regarding capital costs, securing a Senior Housing development loan today is quite challenging; even we are having difficulty obtaining one, and when we do, rates are around 350 to 400 basis points over. This indicates that your cost of debt is significantly high. We have not encountered a development pro forma that is viable from a financial perspective. Additionally, for an average Welltower location in affluent micro-markets on the East and West Coasts, redevelopment typically requires two to three years, followed by a couple of years of construction. More importantly, over the last 12 to 18 months, many of the platforms responsible for developing most Senior Housing assets have been dismantled. As highlighted on page eight, the first priority should be rebuilding the human capital before focusing on financial capital. It's important to remember that developers aim to create products for profitable sales. Given that much of the product traded over the past three years has been at around 70 cents on the dollar, how can one be confident that a product developed for one dollar will sell for a dollar thirty? Confidence in achieving those returns at the equity level is likely low. Moreover, with the lack of acquisition financing as previously mentioned, meaningful development appears to be years away. However, as I indicated, we can't predict the future and will observe how things unfold.

Yeah. I guess following up on development for the Affinity Development Program, how soon do you think we could see starts there, and is there a way to size up how big the annual investment outlay could be that you could ramp up to?

Yeah. Mike, my question, my answer to Nick’s question was focused on Senior Housing development, as in what do you understand as a regular Senior Housing product. Affinity or wellness housing, these are apartments, right? These are not where care gets delivered. So these are housing products. How can it be? I’ll tell you; probably if you think about it, Nikhil said, the average age is eight years. The portfolio size is 25. So just call it three to four starts a year, something like that would be something that I would expect. But we don’t know; it depends on where the product is year-over-year and what the current pipeline is. But something like that can be expected over time.

Yeah. Thanks for the time. John, I was curious if you could share a current stat on average age and move-in for your traditional Senior Housing portfolio, how it compares to pre-COVID? And just any big shifts you guys are seeing in terms of the demographics coming in the door or the behavior of the current tenants, again versus pre-COVID. We would love to hear.

Yeah. Good question. And what I am seeing is a little bit longer stays. As far as for the details of that, I don’t have that specific information; I can look to see if I can get it and get it back to you offline.

John, I’ll just add that if you look at the coming out of the pandemic, average age and acuity went up just coming out of the pandemic and sort of first three months, six months, something like that month where we’ve seen the acuity has gone up and the average age has gone up. As we sort of things have normalized, I would say we’re hearing more and more comments from our operating partners that the average age is coming down, and the length of stay, because of that acuity is coming down, but the length of stay is going up because of that.

Yeah. Thanks. I’m impressed with your guys’ occupancy gains reaccelerating. Is that mostly driven by move-ins coming in, or is it kind of the dynamic that you’re talking about in the last question related to move-outs as you’re seeing longer length of stays? So maybe move-outs are trending a little bit lower to helping that occupancy gain reaccelerate in 2024?

So, Mike, let me try to answer that question. I was just looking at this a couple of days ago. Interestingly, as we looked at the fourth quarter data is, obviously, we’re talking about the context sort of seasonal trends that we have seen in fourth quarter. Specifically looking at that, both move-ins and move-outs were better. So we have seen better move-in rates, and move-in trends, and we have seen better move-out trends. So that sort of both created this unusual seasonal pattern. As you have noted, not only the quarter was kind of interesting or frankly, confounding in a positive way from a seasonality standpoint, but what happened intra-quarter was even more confounding because as you go sort of get through deeper and deeper into winter, we see the business slow down just seasonally, and this year exactly opposite happened. So what’s the reason? Just from a pure math perspective, as I said, both move-ins and move-outs are better, but obviously, we’re not projecting that in the future, but we’ll see how it plays out as we get through the year.

Thank you. Good morning. I have a question for John regarding the optimization process with Senior Housing. It's fascinating and credible, the efforts being made, but it's not yet quantifiable. I'm wondering if soon, or in a reasonable timeframe, we might see this optimization reflected as a new line item on your slide, where you translate some of the work into actual financial figures. Currently, it's not something that can be easily modeled. I'm curious if this would lean more towards expense savings, which I would expect, or perhaps result in reduced vacancy rates, thereby affecting revenue. Could you provide some quantified insights into your efforts or indicate when we might expect that?

That's a great question. I tend to avoid sharing too many specifics because it often leads to copycat behavior, and it's more effective to focus on execution. The numbers reflect actual results, so it's not just talk; the outcomes are visible. I appreciate your interest in more details. Regarding frictional vacancy, we're not experiencing that right now, and there's significant opportunity to increase vacancy without concerns about it. We have various opportunities related to expenses, but they primarily pertain to productivity. As I often emphasize, our main goal is to enhance the customer experience rather than cut costs. There are productivity improvements that our platform is designed to address, like streamlining the moving process, which often takes hours due to paperwork. A unified platform will help eliminate that wasted time and allow our staff to focus more on customers. However, the bulk of our opportunities lie on the revenue side, whether through increasing occupancy by executing well, answering calls, and maintaining a high-quality customer experience, or by adjusting the value proposition in the market to reflect higher worth. I hope that provides some clarity.

Thanks. Yeah. Maybe a question for Tim on the balance sheet. If we look at a substantial amount of cash at the end of the quarter, and then the outline to have another $1 billion of asset sales and guidance, it just seems like, relative to the acquisitions you’ve announced so far that you’re sitting in like a significant excess cash situation. So maybe you could just give us a feel for how you think about that. I don’t know if there’s any planned debt repayments or anything else we should be thinking about there?

Yeah. Thanks, Nick. So you’re correct on the excess debt side or excess cash side. I will highlight that, as you indicated in the past, we have $1.35 billion unsecured maturities here in the first quarter. So $450 million of which matured in January and we paid off, and the remainder will be paid off in March. So that’s one component of the uses, and I think what you’re hearing from the rest of our team today is a lot of optimism around opportunities to put cash to work. So I think the balance sheet is very well positioned for that.

Hey. Good morning, everyone. Can you speak to the share gains you might be seeing in Senior Housing versus the local competitors when you look at that 230 basis points of expansion this year?

Wes, I missed the first part of your question. Can you please repeat the question and get closer to your phone?

Yeah. Okay. Sorry, can you hear me now okay? Yeah. Can you speak to the share? Yeah. Can you speak to the share gains you might be seeing in the Senior Housing versus the local competitors set? You did mention the 230 basis points this year, which is a record year?

We have a very large portfolio, making it challenging to generalize across three countries. However, all industry data shows that our portfolio has significantly outperformed in terms of both rate growth and occupancy growth. While that might not be surprising, the focus should be on the data available to determine its implications. We cannot predict the future, but I assure you that we will put in maximum effort to outperform the market. So far, I've observed that if we meet our NOI growth guidance for the shop portfolio this year, which is not guaranteed, it would represent a 75% compounded growth over three years. I don't believe there's any precedent for that in a large, broad portfolio. These results indicate we are meaningfully outperforming the market, and I anticipate that this gap will continue to widen.

Hi. Good morning. I have a question about pricing trends for new customers. How has that changed in the fourth quarter, particularly in relation to occupancy? Additionally, you mentioned changes in operating leverage as occupancy increases and as you achieve full staffing. How should we consider the balance between occupancy and pricing as we move into the rest of 2024 and into 2025?

Let me address your question. In the fourth quarter, I'm very pleased with the pricing trends. Throughout the year, we've significantly adjusted our portfolios. For example, in the Sunrise situation I mentioned, RevPOR growth was 6.8%, which is a strong figure, and such occupancy growth typically isn’t expected. Setting that aside, let's consider what next year might look like as we move past January 1. Many operators have shifted their timelines from January 1 to February 1, which is something I discussed two years ago, as the holidays tend to push things back a bit. Looking specifically at the first quarter for half of the portfolio rather than solely focusing on January 1, I’d say existing customer rent increases have generally remained similar to last year but are likely 100 to 150 basis points lower. If it was 10 last year, it’s around 9 this year, for instance. I’m not making a precise prediction, as some operators achieved more than a 10% increase last year, but generally speaking, it falls within that 100 to 150 basis points lower range. We will monitor how the rest of the portfolio performs throughout the year. Additionally, keep in mind that RevPOR isn’t solely influenced by ECRI and existing customer rent increases; market rent also plays a role. It’s uncertain how this will unfold, but typically, market rents are lower in Q1 and tend to rise during the summer months. As for your second question, regarding efficient frontier pricing versus occupancy at mid-80s occupancy levels, that’s a challenging question to articulate on a conference call. However, your inquiry is significant, as it relates to operating leverage and how incremental margins function. With occupancy in the late 70s to early 80s, it makes sense to focus on rates rather than occupancy. This might not hold true in the mid-80s where the optimal strategy could involve a balance of occupancy and rates. We’ll have to see how this evolves, but we believe that as of now, our estimate is that revenue growth will remain close to the double-digit range we experienced last year.

I want to conclude my thoughts on occupancy due to the recent sequential improvement and the guidance acceleration. From a different perspective, how much should we consider this as a trend across the industry where other operators might also see growth in occupancy, versus the specific advantages of John’s operating platform? Additionally, when reviewing the occupancy recovery slide in your presentation, should we start viewing 91% as the new target instead of 88%, given that the guidance indicates you will reach 85% by year-end? I’m trying to understand how confident you are in returning to peak occupancy levels. Thank you.

Let me try to answer that question. The second part is an easier one. If all we do is we end up at 91% occupancy, which is sort of 2015 achieved, then we, frankly speaking, didn’t add a lot of value. Because if you think about it, I don’t know, just pick a number, two years, three years, whatever your number of years is, demand-supply, I think you understand, starts to get materially better starting 2025, 2026, right, sort of. And the delivery schedule, if you look at it, you know what the stocks are, which is not much, right? You can see the demand-supply imbalance gets really interesting next year and the year after, right? So at least we can say that because we don’t know if there are other people that without our knowledge is building. It’s unlikely, but we don’t know. But at least we can sort of see the next two years with a reasonable clarity, and we don’t believe that friction vacancy of this business is 9%, right? John, is that it?

It’s absolutely not. It is substantially less. So that’s just not an option.

So do we believe that we’ll end up at 91%? I’ll be very disappointed if that’s the case, but we shall see what the market gives us. What was the first part of your question, Ron, that I missed?