Welltower Inc (WELL) — Q1 2024 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 hand the call over to Shankh for his remarks.

Thank you, Matt, and good morning, everyone. I'll review first quarter business trends and our capital allocation priorities. John will provide an update on the operational performance of our senior housing and outpatient medical portfolios. Nikhil will give you an update on the investment landscape. And Tim will walk you through our triple-net businesses, balance sheet highlights and guidance update. I'm very pleased with the strong start to the year as we delivered nearly 19% year-over-year growth in FFO per share with contributions from all parts of our businesses, but I remain particularly excited about our senior housing business, which continues to surpass our expectations. Despite continued uncertainty with respect to the direction of the economy and turbulence across many sectors within commercial real estate, the demand-supply backdrop for senior housing improves with each passing day. We, along with our operating partners, are proud yet humbled to provide an important solution for the rapidly growing number of seniors who choose to live in a curated and purpose-built environment. And while this demographic-driven end-market demand continues to strengthen, the new construction remains extraordinarily difficult, pushing off any impact of new supply many years into the future. In terms of our Q1 results, we posted another quarter of double-digit same-store revenue growth coming in at 10.3%, driven by strong occupancy and rate growth. While Q1 is usually a seasonally weaker period than Q4, same-store occupancy grew 340 basis points year-over-year, representing an improvement from Q4. This is the strongest growth we have seen in our history, other than Q1 of 2022, when the comp year was a negative number as we lost occupancy in Q1 of 2021 due to COVID. We also saw outperformance on the rate side. Reported same-store RevPOR or unit revenue growth of 4.8% was dragged down by the leap year impact of an additional day in February. However, adjusting for this extra day, RevPOR growth remained strong at 5.6%. Overall, same-store expenses were up 5.7%, and unit expense or ExpPOR was up 0.4%, driven by same-store compensation expenses up 5.4% or just 0.1% on an occupied room basis. Reported ExpPOR was understated because of the leap year impact and otherwise would be up 0.9%. Regardless, we are very pleased with the underlying trends as unit revenue growth far outpaced unit expense growth, resulting in another quarter of significant margin expansion. This combination of strong revenue and moderating expense drove same-store net operating income growth of 25.5%, marking one of the strongest quarters in our history. This growth was broad-based, with all three regions posting year-over-year same-store NOI growth in excess of 20%, with growth in the U.K. reaching nearly 50%. From a product standpoint, our independent living and wellness housing portfolios delivered another quarter of extraordinary growth, but our assisted living continued a streak of strong outperformance. And as for our non-same-store pool, we're even more pleased with the performance of these assets as numerous properties we transitioned within the past year have seen a strong improvement in performance, while some recent acquisitions have also outperformed. We continue to look for opportunities within our own portfolios to effectuate further triple-net to RIDEA conversion or operator transition in an effort to enhance the resident and employee experience, where we believe financial performance will eventually follow. We are confident that this informational feedback loop created through this continual focus on employee and customer experience is a long-term driver of lower risk and superior operational returns. We don't always get the community and the manager combination right in the first go, but it is our responsibility to try again. Status quo is not an option for us. Speaking of conversions, I'm pleased to inform you that we are in the process of converting eight additional well-located communities from triple-net to RIDEA. Despite short-term drag, we believe this action will be significantly additive to our full cycle stabilized earnings as we have demonstrated in our recent transaction with Legend. These capital-light transactions and others similarly made in 2023 will create significant growth for us in '25 and beyond. Speaking of transactions, the capital markets backdrop remains very conducive to deploying capital. Since the beginning of the year, we have closed or are under contract to close $2.8 billion of investments across 23 separate transactions, including $1.1 billion, which we spoke to in February, mostly made up of the Affinity transaction. These investments are predominantly with our repeat counterparties or existing operators. As excited as we are about this record level of activity in just the first four months of the year, we remain incredibly busy parsing through granular opportunities in both the U.S. and the U.K. Our near-term capital deployment pipeline remains robust, highly visible, actionable, and squarely within our circle of confidence, where we can bet with the house odds rather than gamblers' odds. As rates and credit space continue to march higher, our telephones are ringing off the hook as we are requested to provide solutions to institutions, families, operators, and other sellers. 2024 will be a very active year for us. While I wrote extensively about our apathy towards entity-level M&A transactions in my annual letter, our enthusiasm remains unbridled for tuck-in acquisitions, one asset at a time, where we can invest at an attractive basis with operational upside and irreplicable uplift from Welltower's operating platform. As we have said in the past, our goal is to achieve significant regional density, seeking to grow deep in our market, not broad. With the help of our data science platform Alpha, we're able to identify one asset at a time, not only those with the strongest growth prospects but also those that have the strongest fit to our portfolio. Though we occasionally come across sellers who are disconnected from asset value, as they appear to be living in a time capsule of yesterday's interest environment, or simply hoping that we'll be back there soon, many more pragmatic and smart institutions and families realize that perhaps hope is not a strategy, especially in the face of a looming wall of debt maturity for the industry and constrained financing options. We continue to provide solutions to counterparties who want a sophisticated and reliable partner who shows up at the closing table without fail with cash and operating partners. We at Welltower are in a handshake business and will remain so. Our stellar reputation is much more valuable to us than a few basis points that we may leave on the table. After all, our NorthStar remains the long-term compounding of par share value for our existing shareholders, not maximizing the deal for a quarter. In the end, time is the friend of wonderful companies that compound and the enemy of the mediocre. With that, I'll pass it over to John. John?

Thank you, Shankh. Momentum that continues to build in our business through 2023 has carried into the early part of this year, as reflected by our strong first quarter results. Our total portfolio generated 12.9% same-store NOI growth over the prior year's quarter, once again led by the senior housing operating business. First, I'll comment on our outpatient medical portfolio, which remains very stable, producing year-over-year same-store NOI growth of 2% for the first quarter of 2024. Leasing activity remains healthy, and our retention rate once again exceeded 90%, leading to consistent and industry-leading same-store occupancy of nearly 95%. The full year same-store NOI guidance is unchanged between 2% and 3%. As for the senior housing operating portfolio, our results remain impressive. The 25.5% first quarter year-over-year same-store NOI increase represents the sixth consecutive quarter in which growth has exceeded 20%. Our top line growth came in at 10.3%, driven by strong occupancy growth of 340 basis points and strong rate growth of 480 basis points. All three of our regions continue to show favorable same-store revenue growth, starting with Canada at 9.1%, and the U.S. and the U.K. growing at 10.1% and 14.8%, respectively. Additionally, expense growth continues to moderate, up 5.7% year-over-year with the broader inflationary pressures continuing to abate. In terms of labor-related trends, we've not only seen broader macro pressures continue to ease, but also our various property and portfolio level initiatives have been paying off. For example, by creating greater regional density within our senior housing portfolio, employees are able to fill open shifts at other regional properties, reducing the usage of agency labor and improving the overall customer experience. Regional densification also creates more opportunities for career progression and lower turnover as employees can take on increasing levels of responsibility at different properties managed by the same operator in the same region. And equally important, through the build-out of our operating platform, we're beginning to create efficiencies, which will allow for more time to be spent on resident care, improving the customer experience and reducing the administrative burden and related stress on site employees. Shifting back to the quarter, we reported a 320 basis points year-over-year improvement in margins as unit revenue growth continues to outpace unit expense growth. While NOI margins are below pre-COVID levels, the significant operating leverage inherent in our business and benefits of our operating platform should allow for multiple years of further margin expansion ahead. This year is still young, with peak leasing season ahead of us, but we remain encouraged by the start of this year. Ultimately, our Q1 numbers speak to the great work that the entire team is doing. We are relentlessly focused on improving the customer experience and employee experience and will continue to pursue operational excellence. Thank you, Team Welltower, including our operators, Welltower employees, and vendors. I'll now turn the call over to Nikhil.

Thanks, John. Before speaking to our recent investment activity, I wanted to share some high-level market observations. As we have indicated before, we are in a unique environment in which business fundamentals are very strong, and at the same time, the opportunity to deploy capital remains extremely compelling. In large part, this backdrop is a function of the challenged seniors housing debt, which sits on the balance sheet of the largest lenders in the space. While we have previously spoken about the $19 billion of seniors housing debt maturing this year and next, a deeper look into the performance of these loans is helpful. A great case study is Fannie Mae's senior housing debt book, with a total outstanding principal balance of $16 billion. It's worth noting that borrowers typically seek out agency financing upon stabilization. As a vast majority of these loans are for assets that were previously stabilized at some point. Of these $16 billion of loans, $5.9 billion are subject to floating rates. But despite that, 44% or $7 billion of the Fannie senior housing book is considered criticized, suggesting loans with high risk of default. In addition, over $1.1 billion of loans are more than 60 days past due. While the agencies are the lender of choice for stabilized products, borrowers typically seek out banks for riskier development and lease-up bridge loans. Unlike agency loans, these loans are almost always based on floating rates and have shorter durations. While granular information is hard to find on the status of these loans on bank balance sheets, it wouldn't be unreasonable to assume that at least a similar percentage or almost 50% of the $20 billion-plus senior housing loans on bank balance sheets are showing similar distress. In fact, as I listened to first quarter earnings calls, several regional banks that have historically been among the most active in the seniors housing space, I heard a consistent theme of concerns about their sector exposure and the desire to reduce it. This is not surprising given the poor performance of these loans over the last five years. Given the staggering level of maturing and underperforming loans, current borrowers are left with tough choices. On one side, borrowers can capitulate and accept the ultimate downside of losing a significant portion or perhaps even all of their equity. On the other side, for those with staying power and the right set of incentives to continue to come out of pocket for incremental capital to service and right-size the debt load with the hope that some combination of continued improvement in asset level performance and a reversal in the trajectory of interest rates will allow them to achieve a meaningfully better exit value over time. Perhaps unsurprisingly, with inflation showing signs of reacceleration over the last few prints and interest rates rising, the hope trade for a quick reversal in the trajectory of interest rates is dwindling and counterparties are coming back to us in droves with the hope of achieving an outcome somewhere in between the two extremes I just highlighted. Given our reputation of being solutions-oriented and creative dealmakers that honor our original price through the course of the transaction, we continue to be the counterparty of choice for motivated sellers seeking surety of execution and continue to engage with repeat sellers on follow-on transactions. During the first quarter, we completed gross investments of $449 million, comprising $241 million of development funding and acquisitions and loan funding of $208 million, comprised solely of seniors and wellness housing property types. We acquired three senior housing communities with an average age of eight years for $158,000 per unit. We also received repayments of $36 million across three outstanding loans over the course of the quarter. In addition to the transactions closed in the first quarter, we are currently under contract or have closed on $2.6 billion of gross investments across fifteen different transactions spanning 146 properties across the U.S., U.K., and Canada. These transactions have a median value of $37 million. As Shankh mentioned earlier, we are sticking to our mantra of building regional density through focused and granular transactions, and continue to grow with operators that are producing strong results for us in these markets. Our recent activity includes incremental new business with our partners at Oakmont, Cogir, Sagora, Discovery, Liberty, LCB, and Healthcare Ireland, to name a few. I'll end by extending a warm and heartfelt thank you to our best-in-business investment team located across our offices in Dallas, L.A., London, New York, Toledo, and Toronto. We have been fortunate to be able to hire, train, and retain the brightest young minds from leading universities across the country, year in and year out, while many other competitors eliminated or drastically reduced their teams during COVID. We had the foresight to plant the seeds of talent many years ago and are now able to enjoy the fruits from the trees that have since grown. While on one hand, the work at Welltower is incredibly challenging, fast-paced, and perhaps never-ending, on the other hand, I believe that the training, opportunity, autonomy, and accelerated career growth are unparalleled. The dedication, thoughtfulness, and integrity exhibited by the professionals on our team is inspiring. I couldn't be more proud of our team or more excited about the opportunities ahead of us. I'll now hand the call over to Tim to walk through our financial results.

Thank you, Nikhil. My comments today will focus on our first quarter results, the performance of our total investment segments, our capital activity, a balance sheet and liquidity update, and finally, an update to our full year 2024 outlook. Welltower reported first quarter net income attributable to common stockholders of $0.22 per diluted share and normalized funds from operations of $1.01 per diluted share, representing 18.8% year-over-year growth. We also reported total portfolio same-store NOI growth of 12.9% year-over-year. Now turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats were reported a quarter in arrears. So these statistics reflect the trailing 12 months ending December 31, 2023. In our senior housing triple-net portfolio, same-store NOI increased 3.8% year-over-year, and trailing 12-month EBITDA coverage was 1.02x, which marks the first time this coverage has moved above 1x since the pandemic began impacting the segment. Next, same-store NOI in our long-term post-acute portfolio grew 3.1% year-over-year, and trailing 12-month EBITDA coverage is 1.23x. Staying with the long-term post-acute portfolio, the Integra Healthcare JV entered our same-store pool and coverage metrics this quarter. As a reminder, the 147 properties were put into a master lease in Q4 2022 and the individual assets will then transition to local and regional operators over the following five quarters. The entire master lease enters the same-store pool this quarter, while the individual assets will enter the rent coverage metrics as they complete five quarters of operations under their respective operators. In Q1, 95 of the 147 assets entered our coverage metrics with trailing 12-month EBITDARM and EBITDAR coverage of 1.58x and 1.13x, respectively. As we've noted on previous calls, the Integra portfolio experienced a continuous upward trend in cash flow over the last year, as reflected in the trailing three-month EBITDARM and EBITDAR coverages for these 95 assets at 2.23x and 1.74x, respectively. As we move through the year, the rolling forward of last year's positive operating recovery, as well as the addition of the remaining transition Integra assets into the coverage pool, should lead to a continual upward trend in our coverage metrics throughout 2024. Turning to capital activity. As Nikhil just walked us through, we have $2.8 billion of closed or announced investments year-to-date, inclusive of the Affinity transaction announced last quarter. In the quarter, we continued to fund investment activity via equity issuance, raising $2.4 billion of gross proceeds at an average price of $91.22 per share. This allowed us to fund investment activity along with the extinguishment of approximately $1.5 billion of debt in the quarter, including $1.35 billion of senior unsecured notes, and we ended the quarter with $2.5 billion of cash and restricted cash on the balance sheet. Staying with the balance sheet, on the third anniversary of our COVID leverage maxing out in the mid-7s excluding COVID relief funds in the first quarter of 2021, we ended this quarter at 4.03x net debt to adjusted EBITDA. We expect to end the year at a target leverage of approximately 4.5x net debt to EBITDA, implied by last night's full year guidance update. Consistent with past commentary on the balance sheet, I want to underscore that while our key credit metrics are at historical levels, over half of our NOI is represented by our senior housing operating portfolio, which currently sits at just 82.5% occupancy, with NOI still well below pre-COVID levels. As NOI recovers back to pre-pandemic levels, the meaningful recovery in cash flow is expected to drive debt-to-EBITDA below 4x from projected year-end 2024 levels, further enhancing our financial position and access to capital. Lastly, as I move on to last night's update to our full year 2024 guidance, I want to remind you that we have not included any investment activity in our outlook beyond the $2.8 billion to date that has been closed or publicly announced. Last night, we updated our full year 2024 outlook for net income attributable to common stockholders to $1.48 to $1.61 per diluted share and normalized FFO of $4.02 to $4.15 per diluted share, or $4.085 at the midpoint. The incremental increase of $0.065 from prior normalized FFO guidance per share at the midpoint is composed of $0.03 from an improved NOI outlook in our senior housing operating portfolio and $0.055 from accretive investments and financing activities, offset partially by $0.01 from higher G&A expectations and $0.01 of near-term drag due to a triple-net conversion. Underlying this increased FFO guidance is an increase in estimated total portfolio year-over-year same-store NOI growth to 9% to 12%, driven by subsegment growth: 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 17% to 22%. The midpoint, which is driven by revenue growth of approximately 9.2%, is made up of RevPOR growth of approximately 5.25% and year-over-year occupancy growth of 290 basis points, along with total expense growth of approximately 6%. And with that, I will hand the call back over to Shankh.

Thank you, Tim. While we are very pleased with our execution thus far in the year, we're on the cusp of an all-important summer leasing season. So let's see what the market gives us. While we are proud of our recent operating results, it is important to recognize that it's not by happenstance. This is not a commodity business with a narrow range of outcomes. Our results are a function of capital allocation and portfolio management decisions made yesterday. To paraphrase Buffet, someone is sitting in the shade today because someone planted a tree a long time ago. Similarly, capital allocation decisions today will drive operating performance tomorrow. So even after nearly $15 billion of capital that we have deployed since the depth of COVID and hundreds of communities undergoing operator transition, we still have our hands full to optimize location, product, price point, and operators on the asset side of the balance sheet. On the liability side, under Tim's leadership, we're absolutely hitting it out of the park. A sharp improvement in cash flow, coupled with our recent capital raising efforts, has driven net debt to adjusted EBITDA down to 4x, which represents the lowest level in our recorded history. In the very short term, we maintained significant dry powder with over $6 billion of total near-term liquidity to pursue attractive capital deployment opportunities and fund other near-term obligations. In the medium term, we have built significant debt capacity to take advantage of when we eventually get to the other side of the Fed cycle and still maintain an extremely strong balance sheet. Said another way, we don't believe that one's balance sheet should be viewed as an object of vanity, but instead as a counter-cyclical tool to prudently tap into to drive per-share growth. Our balance sheet was one of the five pillars of growth, which I articulated during our last call. While I won't repeat all five of those pillars today, I'll just reiterate that our confidence in delivering outsized levels of share growth for our existing shareholders remains as strong as ever. While we are fortunate to have a strong multi-decade tailwind at our back, just note that we will not settle for the beta of the business; instead, we are committed to creating significant Alpha again for our existing shareholders with years of compounding growth ahead of us. We appreciate your support. With that, I'll open the call up for questions.

Great. Starting with the SHOP guidance range, the guidance rate is almost 20%. Looking at the assumptions, it seems that the occupancy and RevPOR assumptions haven't really changed, and it was primarily driven by same-store expenses. I was wondering if you could share any insights on the conservatism that is incorporated in that? Also, do you have any early indications regarding the peak leasing season?

Ron, as we have indicated, this is too early in the year. Just as you know, our annual results will be pretty much defined by what the summer leasing season gives us. Though while we're pleased with what we have seen this year, there's this healthy level of paranoia in our team. We don't know what the market will give us. We'll report to you. Our promise to you remains that we'll get more than our fair share of the market, but we need to see what the market gives us, and we'll update you in 90 days, and we'll see where we land. Thank you.

Could you discuss your outlook for underlying FAD growth? FFO was strong, but FAD growth was even stronger in the quarter. How do you see FAD trending? Additionally, considering your healthy coverage, how do you plan to utilize the free cash flow or potentially increase the dividend?

Yes, Vikram. On the FAD side, we've had ongoing conversations around this just FAD growth. We continue to focus on the long term. On the CapEx side, growing our internal capital management team and enhancing that team has been a main initiative over the last 1.5 years. As we've done that, we've continued to identify value-add projects that have very attractive returns. CapEx is probably a bit elevated now from a long-term run rate, but it is helping drive cash flow alongside of it. As long as we continue to see those opportunities, we'll continue to put capital to work. On the dividend part of the question, I'll start, and then I'll let Shankh add anything. When we cut the dividend at the start of COVID, we referenced cash flow as being the main driver of our dividend policy. And that hasn't changed. As we sit here today, not only has cash flow recovered pretty meaningfully from the COVID lows, so too has our confidence around the ongoing recovery in senior housing, which was reflected with our updated guidance last night. So consistent with past commentary on the topic and our current financial position, you should expect that our current dividend policy is something we're actively discussing with our Board of Directors.

I have nothing to add to that.

I have a two-part question regarding the acquisitions. Regarding the $2.6 billion that has been closed under contract, can you provide an insight into the first-year yield and the expected ultimate stabilized yield? Additionally, is the market distress or the rise in interest rates contributing to higher yields on new investments?

Nick, I'll take the first part. So on the $2.6 billion, it's 100% senior housing and wellness housing. If you look at the spot capital markets environment today, it is very similar to what it did in the fourth quarter as interest rates have run up. We'll provide more disclosure next quarter as these transactions have closed, but you can expect the return profile to look very similar, both in terms of going in and stabilized yield as what we had in the fourth quarter.

Yes, Nick, you are correct that we have raised capital to complete all the transactions. I want to clarify that the $2.8 billion we mentioned is not part of our pipeline; it consists of deals that have closed or are in the process of closing. Our pipeline extends beyond that and is very strong, with many opportunities that we believe are actionable in the near term. We'll see how things develop. I completely agree with your perspective that we remain under-leveraged. Our aim is to maximize our stabilized and full-cycle earnings. As I noted, you can fully expect us to utilize the liability side of our balance sheet to drive significant additional per-share growth once the Fed cycle is completed.

With respect to senior housing operators that have changed their strategy by pushing back the annual rent increases into the earlier part of the key selling season, I guess, how does that trend appear to be playing out so far from a retention perspective? And would you expect that benefit to potentially flow through to new lease rate growth?

Yes, there hasn't been any pushback regarding the upcoming increases. People recognize the challenges on the cost side of the business and value the proposition, which has been received positively. In terms of market rents, we are observing strong demand. The dynamics between renewals and the market are interconnected; while the market influences the overall economics, it is the market that largely influences renewals. Currently, the market is robust, with strong supply-demand fundamentals and a solid value proposition.

On the increased expected headcount spending this year, can you talk about the investments being made in the analytics and/or operations team and the scaling potential to address the capital deployment opportunities?

Yes. As it relates to the ops team, we are finding tremendous opportunities to build out that team and do things more effectively than are currently being done. That's simply a surprise that we can bring operational excellence at our size. We continue to lean into that. We're finding that really throughout each of the areas that I'm involved in as it relates to investments.

Yes, Jonathan, when considering the vast number of transactions we handle, it would be nearly impossible to manage without exceptional tools. As you have observed, the tools and capabilities of our analytics team are essential to our operations. They play a crucial role in every phase of the investment process, from screening and reviewing numerous properties to predicting the stabilized net operating income for each property under various operators and identifying the best operator for those properties. This is fundamental to our work, and all the investments we have made are yielding significant rewards.

I wanted to ask about the senior housing portfolio that Shankh mentioned, which is performing well. I'm curious about how many of the nearly 150 assets in the transitions category, which are not in same-store, will be added over the year. How are those performing compared to the same-store portfolio? Should we expect them to contribute to growth as they are integrated into same-store?

Many of these early transitions will eventually be included in the same-store pool after five quarters. Depending on when they were completed, they will likely come towards the end of the year. You should anticipate strong growth from them; however, it is too soon to determine if they will be additive. It is likely that they will show similar growth or contribute to the overall growth. That said, it's important to note that they will be facing strong comparisons from robust quarters that preceded them. What was the other part of your question, Juan, that I missed?

Juan, regarding the numbers, out of the 159 who transitioned, approximately 62 are in our transition portfolio. Those will be returning in 2025, while most of the others will enter the pool in 2024.

It's Nick here with Michael. You touched on what's happening on the bank side and on the lending side, but also on kind of the long-term drivers and the supply-demand imbalance. So I guess, are you seeing more capital that you're competing with for some of these deals getting more interest in the space? And I guess on the flip side, just on development, obviously, we haven't seen starts bounce back, but are you starting to see anything from a planning stage or any green shoots of supply starting to at least be contemplated?

Yes. Nick, I think the answer to both of those questions is a simple no. We haven't seen any new capital come into the business. There's really not much capital out there that is not reliant on the debt market. The debt markets are just completely closed, and we expect them to continue to be focused for the foreseeable future. That obviously plays into the development cycle as well. So we've actually seen the opposite rather than folks taking on new predevelopment and new potential projects; folks are giving us products that they're previously pursuing, disbanding teams, etc. So to answer your questions.

John, I wanted to follow up on a comment you made on the operating platform and how a big part of the strategy is to create efficiencies to reduce the admin burden and put more time into care. I was hoping you could elaborate on where you are in building out this capability. And just in general, provide more color on this aspect of the operating platform.

Yes, absolutely. I would rather honestly about it, we're getting very close. There are not a lot of detailed updates to give other than we're right on plan right now. As it relates to the types of savings we expect and that we're identifying, they're pretty substantial when you look at how a person starts as a prospect and moves through the process ultimately into the community. We're reducing the paperwork pretty dramatically, reducing the repetition of input of information because the system is a singular unified system. All of that reduces errors and wasted admin time and really enables senior people, like the nursing teams, executive directors, and sales teams, to focus on their jobs and leverage technology to drive value there.

I guess, John, sticking with you, can you provide some color on the performance of the Cogir, PLR portfolio in Canada? I mean, how has that relationship worked so far? And are there plans or discussions to create new PLR relationships to build off of the structure in different parts of the market?

Yes, I'll begin with the broader question regarding our plans for the PLR. Our focus has always been on driving value from the perspectives of both our customers and employees, as well as our shareholders. We are not simply looking to create multiple partnerships; instead, our objective is to generate substantial value. In this case, our partner Cogir and my colleague Frederick have been excellent to work with, and the collaboration is progressing very well. The teams and assets have embraced Cogir, and we are highly appreciative of the work being done. We expect that the portfolio will perform exceptionally well this year. However, since this transition occurred during a quiet period, there hasn't been much activity regarding leasing, which is just beginning in Canada.

It looks like there are some real standouts on the senior housing side among your larger operators in terms of in-place NOI contributions. I mean, Sunrise was up 30% sequentially, Oakmont 11%, StoryPoint 19%, etc. And John, you speak to sort of the benefits of densification and regional operators, was such gains in the NOI really driven more by that, do you think in best practices? Or was this more of a cyclical episodic, each portfolio in terms of NOI advances traditional occupancy, etc., gains?

We're not going to provide specific performance details on this call, which has always been our approach. However, we can say that our operators have performed exceptionally well across three regions. This is not coincidental; some of our operating partners have consistently delivered strong results over a long time. Our strategy, developed years ago, focuses on depth rather than breadth, and we are committed to it. John provided several examples of this strategy in action, including employee retention and long-term career developments. We also have examples showing how this strategy positively impacts revenue, even when customers have various options nearby. Ultimately, we believe that an excellent experience for both customers and employees leads to strong financial outcomes. We will continue to focus on this straightforward strategy.

Tim, a quick question. Was there a change in the same-store operating expense guidance for show? Because it looks like your same-store revenue drivers didn't change, but the NOI growth expectation increased?

Yes. Thanks, Mike. It did. Our overall expenses that were part of our initial budget were 6.5%. Today, our revised outlook is adjusted to 6%, which is a reduction of 50 basis points.

Nikhil, when your team's underwriting new skilled nursing investments, can you give me a sense for kind of a range of EBITDA reductions you're potentially contemplating in your underwriting for staff mandates?

Yes. I think, John, in the skilled business, we are essentially structured credit, short-duration providers of capital. We're super focused on basis, and beyond that, it doesn't really have a meaningful impact just given the downside protection we have. I think this question is probably a better question for folks that play.

Great quarter. It keeps getting better and better. Shankh, used the word were abundant amount of paranoia in the company, which is good to hear. I want to sort of tackle that side. I'm sure that you focus not only on the opportunities, which you're clearly doing but also on the potential risks that can materialize. Think of a company like Prologis, obviously, like you and industry thought leader, but down 21% this year and trading near its 2-year low. How does Welltower anticipate potential pitfalls that may materialize? Some of the things that you're thinking about to manage around today, to your point, about deploying capital and making sure that it produces the end results that you're envisioning. I'm thinking about 25% same-store NOI growth and how someone might say why is Wall Street getting rich at the expense of seniors? Is there a rent control conversation potentially out there? I'm just wondering some of the things that frame your paranoia and how you might respond to that?

Thank you, Rich. I mentioned a healthy level of vigilance, and we are consistently evaluating potential risks. Now, let's discuss the numbers. The figures can be very unforgiving. When your net operating income decreases by 50%, turning $100 into $50 means you need to increase by 100% to return to your original position. While a 25% growth in NOI is notable, we need to be candid; I previously stated at an industry conference that, as a sector, we haven't generated any profit over the last decade. Although the year-over-year statistics are noteworthy, it's important to grasp the foundational numbers. To revert to our original state as an industry, if NOI were down by 50%, or even 40%, losing 20 percentage points in occupancy means you would need a 100% increase to reach a historical high. In this context, it becomes apparent that industry profitability remains quite difficult, which is evident in the margins. The margins are still significantly lower than before COVID, and it's worth noting that the peak of this business wasn’t prior to COVID either; it occurred in 2015 over the last roughly 15 years, and we haven't even approached that peak. The issues you've raised are interconnected. If we can't reach a foundational level of margins, which would depend largely on rates and occupancy, new investments, especially in development, become impractical. Attracting investment for existing communities is crucial and must make sense. All these matters are interconnected. We're striving to offer excellent service to our communities, residents, and employees while recognizing the competitive landscape of operational real estate, like apartment stores and single-family rentals, which have enjoyed significant rent increases in the past; our growth has been more modest, typically hovering around 8% to 9%. This trend is largely influenced by supply and demand dynamics alongside rising costs. We're confident about our situation and will see how we progress with this rate growth. Additionally, it's worth noting that on a same-employee basis, labor costs have increased by 30% to 40% over the last five years. All these factors are relevant. We are always mindful of our shareholders, and you can observe how we are managing our balance sheet. Prologis is an excellent company and will remain one, regardless of fluctuations in stock value. They have built substantial value over the years. Stock prices may vary, but that's beyond our direct management. Our duty is to run the business and identify opportunities for creating long-term value. In the short term, we will continue to navigate these challenges.

For that $19 billion opportunity over the next two years, is that a domestic opportunity only? And can you highlight what you're seeing in the U.K. and Canada?

Yes, that is a domestic number we're talking about. We are seeing similar situations in our international markets. One of them where particularly that market is challenged is the U.K., and we're seeing significant opportunities in the U.K. I think I mentioned that, and I think you will see us pursuing many granular transactions in the U.K. this year to take advantage of that. Health care real estate credit in the U.K. If it is possible to be worse than the U.S., which is very hard today, it's probably the U.K. market; the debt market is worse than that of the U.S. today.