Welltower Inc (WELL) — Q3 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. Good morning, everyone. I’ll review third quarter business trends and our capital allocation priorities. John will provide an update on operational performance for our senior housing and medical office 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 updates. I’m once again pleased to report another very strong quarter across the board at Welltower, from operations to capital deployment, a further strengthening of our balance sheet, and continued progress on our operating platform rollout. The result was a 21% increase in FFO per share and our fourth guidance raise for the year, this time by $0.13 per share, reflecting the extraordinary strength of our platform. This quarter also marks the first time in our company’s history that our quarterly revenue exceeded $2 billion. In terms of the senior housing operating portfolio, results continue to surpass our already high expectations. Year-over-year same-store NOI growth came in at 23%, marking eight consecutive quarters in which the growth exceeded 20%. Despite macroeconomic uncertainty and heightened geopolitical tensions, topline growth on a same-store basis remains resilient at 9%, driven by another quarter of outsized occupancy growth of 310 basis points coupled with strong rate growth. Particularly noteworthy is the 160 basis points of sequential spot-to-spot occupancy growth that we experienced, a reflection of both the strong tailwinds of our business and especially our operating platform initiative, which will continue to bear fruit in the coming quarters and years. Not only are we pleased with the sequential growth, but the occupancy run rate exiting the quarter solidly exceeded the prior year, and early fourth quarter results have been positive as well. Additionally, I would be remiss not to mention that the spread between RevPOR or unit revenue and ExpPOR or unit expense remains at a historically wide level. This trend resulted in another 300 basis points of year-over-year margin expansion of our SHO portfolio. As we have discussed in the past, we remain focused on the delta between RevPOR and ExpPOR, not the absolute levels. Overall, we are delighted with our results and believe that we're carrying significant momentum into 2025 as the tailwinds that have lifted our business over the past couple of years continue to strengthen. As I have described in our recent calls, the backdrop of our senior housing business is only getting better as the growth of the 80-plus population picks up from here. Starting next year, 5,000 Americans will turn 80 every day. Remember that we’re only at the front end of this trend, with the crest of the silver tsunami not being seen till well into the future. What is also irrefutable is the favorable supply outlook. Construction starts continue to drop and in the third quarter reached the second lowest level on record after the second quarter of 2009. Banks continue to wind down their senior housing loan exposure and have been reluctant to put new capital to work. Given the extended timeline to build a new senior living community, which we detailed on Slide 19 of our business update, we may not face the impact of new supply in our markets for years. In today’s construction cost and financing cost environment, it makes no economic sense to build. We have had a couple of years of solid growth, but we believe that we are still in the very early stages of an extended period of extraordinary growth for the senior housing sector. Without stealing John’s thunder, this end market demand growth will be amplified by the rollout of our operating platform. I’m delighted to report that during the quarter we went live with our tech platform at our first set of properties, along with preparing to broaden and accelerate the rollout in the near term. Beyond the technology rollout, we expect our broader operating platform initiatives, including our hands-on asset management, to have a compounding effect on our portfolio’s outperformance. Shifting to capital deployment, the only change we have observed since our last call is that the opportunity set has expanded further. We announced another $1.2 billion of transactions completed or under contract since our last quarterly update, bringing our total year-to-date investment activity to over $6 billion. Nikhil will provide you more details, but as with the past few quarters, most of our investments have been bolt-on acquisitions within the senior housing sector that are improving and benefiting from our already established regional density. Our goal remains to delve deeply into our markets, not broadly. While 2024 is shaping out to be a record year for Welltower in terms of capital deployment, we continue to unearth compelling opportunities across all property types, geographies, and capital structure, and expect a busy Q4 and Q1. Lastly, I will quickly reiterate that through the exceptional cash flow growth we have achieved this year and prudent funding of our investment activity, our balance sheet has strengthened meaningfully. With leverage at 3.7 times and nearly $10 billion of liquidity, we remain well-positioned to address all near-term obligations and capitalize on attractive investment opportunities. We have also created the flexibility to lean into the balance sheet to drive further growth at an opportune time. To sum it up, we’re starting to see the Lollapalooza effect of cyclical, secular, and structural growth driven by our operating platform, which will be further enhanced by bolt-on acquisitions and balance sheet optimization to drive meaningful financial growth. We are singularly focused on this long-term compounding of our net earnings growth for existing owners, our true North Star. We cannot be distracted, discouraged, or dissuaded. With that, I will turn the call over to John.

Thank you, Shankh, and good morning, everyone. At the risk of sounding like a broken record, we posted another quarter of fantastic results with no let-up in momentum, which continues to build across the business. Before getting into the details, I’ll echo Shankh’s sentiment that we’re looking forward to closing out the year on a strong note and excited for another period of solid growth in 2025 and beyond. During the quarter, total portfolio same-store NOI increased 12.6% versus the year-ago period, once again led by our senior housing operating portfolio. First, I’ll provide an update on our Outpatient Medical business, which posted year-over-year same-store NOI growth of 2.2%. The consistency of the business remains evident with healthy leasing activity during the period and another quarter of strong tenant retention. Same-store occupancy remained stable at an industry-leading 94.5%. As for the Senior Housing business, the business continues to deliver exceptional results. Demand for needs-based product is clearly on the rise, and our proactive asset management initiatives, which I’ll get into shortly, are unquestionably delivering Alpha. In the third quarter, the portfolio achieved year-over-year same-store NOI growth of 23%, once again exceeding our expectations and allowing us to yet again raise our full-year outlook, which Tim will describe shortly. The strength in our Senior Housing business was broad-based with solid occupancy gains experienced across all our geographies and property types. It’s worth repeating that while the summer months typically represent the most active period of leasing during the year, our sequential same-store occupancy gain of 120 basis points and spot-to-spot gain of 160 basis points are well above typical seasonal trends. In fact, this quarter tied a record for sequential same-store occupancy growth when excluding the second half of 2021 as we were coming out of the pandemic. On a year-over-year basis, same-store occupancy increased 310 basis points, also amongst the highest levels ever achieved in our history. Rate growth across the portfolio also remained strong with same-store RevPOR growth increasing 4.9% year-over-year. While our budgeting process for next year is just starting, we believe that rate growth should once again remain favorable as portfolio vacancies decline further and our pricing initiatives begin to bear fruit, more to come in the coming months. In terms of expenses, we continue to be encouraged by trends within the labor market and further moderation of broader inflationary pressures. ExpPOR or expense per occupied room increased just 0.7% year-over-year, the second lowest level in our history. Most importantly though, as Shankh mentioned, the spread between RevPOR and ExpPOR growth remains historically wide, contributing to another quarter of substantial operating margin expansion. At 26.5%, the NOI margin for our same-store portfolio remains below pre-COVID levels, but we expect continued improvement going forward as the operating leverage inherent in the business is recognized. The other big driver of future margin expansion will be our operating platform. Our operating platform includes a technology platform and other site-level technology, an internal capital team, which I referenced last quarter, our data science capabilities, and more. I continue to recruit top talent and build out various capabilities that we leverage with our operators and our asset management team across our portfolio to deliver Alpha. During our last call, I mentioned that we would soon be going live with our first technology platform in Q3, launching an end-to-end tech platform with our first operator. I’m pleased to report that through the dedicated efforts of the Welltower team and our operator, it has been very successful for all stakeholders. The customer experience is a modern digital experience, substantially simplifying and shortening the move-in process for the family and the residents by eliminating paperwork. The employee experience has improved dramatically as we have simplified and automated the processes as well as providing employees with important real-time data, ensuring top care for our customers. As a result of the technology platform, the Executive Directors are saving five hours per move-in, enabling them more time for leadership and to focus on our customers. Additionally, potential errors are being avoided due to the singular database for the various modules, meaning that data is only input once, so there are no inconsistencies in the spelling of a customer’s name or other critical care information. Finally, we deliver the technology platform at a lower cost than the combined disparate systems being replaced. At this point, we’re preparing to roll out the tech platform to additional operators in the near term. While we have a long way to go, we’re excited by our initial success, which would not have been possible without the hard work and buy-in from our best-in-class operating partners and the many Welltower team members who are working tirelessly on this effort. To sum it up, it was another strong quarter for Welltower between solid operating performance and our accomplishments on various operations and asset management initiatives. While it’s too early to speak to the outlook for 2025 with any detail, we remain as optimistic as ever about the growth prospects of our business as the demand-supply backdrop for senior housing is only strengthening and the benefits of the operating platform begin to be realized in a more meaningful way. We continue to execute on our mission to improve the experience of senior housing residents and employees. With that, I’ll turn it over to Nikhil.

Thanks, John, and good morning, everyone. I am pleased to report that our investment activity and pipeline remain incredibly robust, visible, and actionable. Over the past three months since our last call, we have either acquired or entered into agreements to acquire an additional $1.2 billion of assets. This is a fraction of the $15 billion plus of opportunities that we consider during this time frame. These incremental transactions bring our year-to-date investment activity to a record-setting $6.1 billion. This growth underscores the strength of our market position and the abundance of opportunities we’re pursuing. As always, our focus and excitement are driven by the expected attractive risk-adjusted returns of our transaction activity rather than the deal volume. Acquiring quality assets at a reasonable basis with significant cash flow growth prospects remain at the core of our investment strategy. In the third quarter, we closed on $2.15 billion of transactions. Our activity remains granular, with Q3 closings spanning 15 different transactions across 13 different operating partners and a median transaction size of $56 million. Our Q3 transactions were heavily focused on our seniors and wellness housing businesses, where we added 40 properties and more than 5,200 units. We acquired these assets, which have an average age of just over five years, at $244,000 per unit at a significant discount to replacement cost. We expect our transactions that close this quarter to stabilize in the mid-to-high 7s yield and generate an unlevered IRR in excess of 10%. Our team’s reputation, expertise, and network continue to drive our success. An impressive 94% of our investment volume by dollars this quarter was acquired through off-market transactions. This approach has allowed us to source opportunities from a diverse range of sellers, including six transactions from developers facing maturing construction loans, three from foreign counterparties, including two from Asia and one from Continental Europe, four transactions with repeat counterparties, highlighting our reputation as a fair and reliable partner. I’d like to quickly reflect on the macroeconomic trends we have witnessed recently. Despite the 50 basis point rate cut by the Fed, the 10-year treasury yield has increased by over 60 basis points since the announced cut as market participants are now wrestling with the likelihood of long rates staying higher for longer. We laid the case out for this scenario in detail on our last call. The impact of the rate cut to borrowers with floating rate debt is minimal as they still face debt maturity challenges, as bank lenders continue to reduce their senior housing exposure. Q3 earnings results for many banks that have historically been active in the senior space focused on highlighting their desire to continue to reduce their exposure to our sector. Agency financing also remained challenging due to limited stable product, elevated DSCR requirements, and higher long-term rates. It’s not surprising that with this backdrop, Fannie Mae and Freddie Mac’s origination volumes are down 91% and 71%, respectively, versus their pre-pandemic peaks. This constrained lending environment continues to create attractive investment opportunities for us. On the back of this environment, we are engaged in direct bilateral conversations with eight of our highly respected private peers to evaluate significant portions of their portfolios for potential acquisitions. We are also seeing an increase in interest from sellers requesting to take Welltower OP units in transaction consideration in lieu of cash. This allows those exiting their asset-level positions to have a mechanism for continuing to participate in the strong tailwinds of our industry, but in a manner not constrained by an unforgiving capital structure and with our best-in-business operating partners backed by Welltower’s operating platform. This proactive and collaborative approach underscores our commitment to continuing to unlock interesting opportunities while conducting business in a first-class and mutually beneficial manner. In conclusion, in this volatile capital markets environment, we remain focused on leveraging our expertise and data science platform with our operating partners and peer relationships to capitalize on attractive opportunities to create long-term value for our shareholders. Thank you for your continued support and confidence in our team. 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 third quarter results, performance of our triple-net investment segment, our capital activity, a balance sheet liquidity update, and finally, an update to our full-year 2024 outlook. Welltower reported third quarter net income attributable to common stockholders of $0.73 per diluted share and normalized funds from operations of $1.11 per diluted share, representing 20.7% year-over-year growth. We also reported year-over-year total portfolio same-store NOI growth of 12.6%. Now, turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage stats are reported a quarter in arrears, so these statistics reflect the trailing 12-months ending on June 30, 2024. In our senior housing triple-net portfolio, same-store NOI increased 5.8% year-over-year, and trailing 12-month EBITDAR coverage was 1.09 times, marking a new post-COVID high in coverage. Coverage in this portfolio continues to improve above pre-pandemic levels, and greater than expected growth in this portfolio is being driven mainly by improving underlying fundamentals and leases currently on a cash basis. Next, same-store NOI in our long-term post-acute portfolio grew 3% year-over-year, with trailing 12-month EBITDAR coverage of 1.74 times. Moving on to capital activity, in July, we issued a $1.035 billion convertible note due in 2029. We intend to use the proceeds from the note to address our 2025 unsecured maturities coming due in the second quarter of next year. We continue to equity finance our investment activity in the quarter, raising $1.2 billion of gross proceeds at an average price of $122 per share. This allowed us to fund $2 billion in net investment activity and end the quarter with $3.8 billion of cash and restricted cash from the balance sheet. Staying with the balance sheet, we ended this quarter with 3.73 times net debt to adjusted EBITDA. Even after completing $1.5 billion of incremental net investment activity, we expect to end the year below four times net debt to EBITDA, which would represent over a one-turn improvement relative to the end of 2023. This level of deleveraging is being achieved despite deploying a record amount of capital. Our cash flow capitalization of acquisitions and the significant increase in our cash flow generation allowed us to build a powerful asset that will allow us to prudently fund future investments and enhance our go-forward cash flow per share growth. To illustrate the substantial increase in balance capacity, as Shankh mentioned earlier, our annualized revenue exceeded $8.2 billion this quarter. This signifies a $3.2 billion increase compared to the end of 2019, while our net debt has decreased by $2.7 billion during that same period, reflecting a 20% decrease from COVID levels, concurrent with a 60% revenue increase over that same period. It is noteworthy that our current debt stack includes $2.1 billion in convertible notes that are in the money. This deleveraging should be amplified through the embedded upside within our senior housing operating portfolio, further bolstering balance sheet capacity and providing for increased flexibility and optionality. Lastly, as I turn to our updated 2024 guidance, I want to remind you that we have not included any investment activity in our outlook beyond the $6.1 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 $1.75 to $1.81 per diluted share and normalized FFO of $4.27 to $4.33 per diluted share, or $4.30 at the midpoint. Our updated normalized FFO guidance represents a $0.13 per share increase at the midpoint from our previously issued guidance. This increase is composed of $0.06 from an improved NOI outlook in our senior housing operating portfolio, $0.015 from taxes and FX, $0.01 from performance in our triple-net and OM segments, and $0.045 from accretive capital activity. Underlying this increased FFO per share guidance is an increase in estimated total portfolio year-over-year same-store growth to 11.5% to 13%, driven by sub-segment growth of outpatient medical growth of 2% to 3%, long-term post-acute growth of 2% to 3%, senior housing triple-net growth of 4% to 5%, and finally, increased senior housing operating growth of 22% to 24%. This is driven by the following midpoints in their respective ranges: revenue growth of 9.2%, made up of RevPOR growth of 5.25% and year-over-year occupancy growth of 300 basis points and expense growth of 5%. And with that, we’ll hand the call back over to Shankh.

Thank you, Tim. As many of you, my fellow shareholders know that my team and I are true believers that compounding is the only way to create substantial long-term value. Compounding not just in the context of middle school math, but in everything in life. We define compounding as dogged, incremental, and continuous progress over a very long period of time. For this team, it has been close to a decade since we took our predecessor company down to a start by turning over roughly 60% of the portfolio, changing out 95% of our human capital in middle management and up, evolving our operating partners while creating greater alignment through win-win structures. More importantly, we changed these companies' culture as we built what you know as Welltower today, brick-by-brick. We founded a culture of owners not managers with agency problems, a culture of shared value with our operating partners to deliver real value for our customers and site-level employees shoulder-to-shoulder no matter what. A culture of resilience having endured four different crises over the last decade. These crises included oversupply, a crippling pandemic, labor shortages, and the worst inflation in 40 years. A culture of extreme excellence to build and create true residual Alpha for our owners, not defined by Wall Street’s view of the real estate industry which has a checkered history of creating value. We’re focused on creating Alpha, not levered beta for existing owners. Over the past decade, we have built a unique data science platform, the first of its kind in the real estate industry, powered initially by machine learning, then deep learning, and finally by AI long before many of these terms got into the folklore. With Chutzpah and perhaps naïveté, we launched an operating platform initiative by attracting John and hundreds of our new colleagues who followed him from a dozen industries of higher standards during a pandemic no less when we didn’t even know if the business would survive. I sat down this past weekend to reflect on our Q3 results, and for the first time since I arrived at Welltower, I felt a sense of satisfaction in that the compounding of our efforts over the course of many years is beginning to pay off. Not because of the strong results we posted in the quarter, but because of a feeling that our audacious dream of transforming this industry is finally coming together and what that may portend for the next few years. Having said that, this feeling lasted for about five minutes as my usual healthy paranoia set in. We have a long journey ahead, and frankly, our pursuit of dogged incremental and continuous progress will never be over. Mediocrity and complacency have no place in our culture. Like Navy SEALs, we believe the only easy day was yesterday. While occasionally in moments like this, looking at the scoreboard may not be so bad, we’re in this game because of our love for the game. With that, we’ll be back to the game. Operator, please open the call up for questions.

Hi there. Thank you for the time and great to see the strong results. Hoping you could talk more about the historically wide gap between unit revenue and unit expense and margins and specifically trying to understand the incremental margin at today’s 86% occupancy, and where that incremental margin goes once occupancy surpasses 90% or even higher since variable costs at that point are minimal. Thank you.

Thanks, Jonathan. So, you’re right in highlighting that the way that, that kind of RevPOR, ExpPOR math is expressed through our financials is in that flow-through margin. Last quarter, we noted that flow-through margins had gone above 60% for the first time since the kind of post-COVID recovery. Again, this quarter, we were in the low 60s from a flow-through. It's important to note that we had one operator making about 1% of our same-store pool that, through some kind of changes to their operating model, is implementing and incurring higher expenses right now than we’d expect. So, excluding that operator, flow-through margins would have been closer to 67%. Consistent with what we’ve said in the past, you should see flow-through margins kind of move into the mid-60s and approach 70% as we start to re-approach pre-COVID levels of occupancy of 88%, and then from thereon improve.

Thanks. Nick Joseph here with Michael. Shankh, you made the comment that it makes no economic sense to build. I know it’s hard to generalize and obviously it’s regional, but I’m just trying to get a sense of kind of how far off we are before it does make economic sense either from a rent growth perspective or costs coming down. Just trying to quantify that a bit? Thank you.

Nick, really good question. It’s hard to say in a general manner because cost is a function of local situations, labor, etc. We haven’t seen construction costs come down. You have seen some material costs have come down, which has been offset obviously by increases in insurance and labor costs. If you want a general rule of thumb, remember that rent growth will not get you there. Rent growth relative to operating labor cost growth will get you there. So, in markets, you will need a 25% to 30% increase of RevPOR minus ExpPOR where construction will start to make sense. I always believe people will do what makes economic sense, and we have tried to make it work in the best locations where pricing is not a question, even we’re struggling with that. That’s the best locations such as Palm Beach and Cupertino. Imagine your question is that average of the industry where this makes no economic sense whatsoever.

Hey, just a quick one from me. I’ve been reflecting on this top-line growth of 8% where you got over 300 basis points occupancy gain, but I see 5% pricing growth, which is basically the fastest out of any rates that we cover. I think we’re all trying to figure out what that number is going to look like in 2025. So, I guess my question would be, as you sort of reflect on that number, maybe a little bit more color of what drives that. Is there anything sort of one-time? And not putting words in your mouth, but is there a reason that we should expect that to decelerate as we flip the calendar? Thanks.

Ron, very good question. We’re not going to sit here and try to speculate what 2025 will look like. I’ll point out a couple of things. John made a specific comment in his prepared remarks about how he’s feeling about pricing. We’ll see what the market gives us. I will tell you that we would expect to gain market share. But, at the end of the day, everybody is subject to market. We are focused on RevPOR minus ExpPOR, not RevPOR. Having said that, you can focus on what John said in his prepared remarks. From an occupancy standpoint, remember, revenue is a function of pricing and occupancy. I’m going to refocus you on what I’ve said on the last call. And I said occupancy cannot necessarily say it will, but can get growth, can get better next year. Hopefully, after this record sequential occupancy change in the third quarter of this year, that gives you more credence to the comment I made. Hopefully, that’s helpful, but just understand it’s too early to say. We’ll see what the market gives us.

Thanks. Yes, just following up on the topic of occupancy, maybe Shankh or John. Can you just talk a little bit about what you saw in the quarter in terms of traffic trends, maybe year-over-year sequentially? How do you feel like you’re getting a bigger benefit right now from lower turnover in the portfolio?

Yes, I’ll jump in. Traffic is up, in addition to what we saw with higher closing ratios. In other words, our execution is improving, which is important and is a function of the operating platform. As it relates to turnover, that’s been consistent, no issues there. But the bigger issue is we’re executing and taking market share.

Great. Thanks. Shankh, you highlighted that you’re carrying significant momentum into 2025 and that the tailwinds in the business continue to strengthen. Speaking of demographics, but at the same time, I think absorption has been stable in recent quarters across the sector. So, I’m just curious if you think we’re at the cusp of absorption reacceleration and that being related to your comment about occupancy growth potentially getting better next year?

Yes. Austin, I’m not going to comment on what may or may not happen in the macro. Absorption is a macro industry-wide phenomenon. As John just mentioned, we’re focused on market share. You can see what our sequential occupancy growth is relative to the industry, that we’re entirely focused on using our operating platform and our best-in-class operators' hard work to gain market share, right. If we can get improvement in absorption, that’ll be a bonus. That’s just not something we can control. That’s not something we’re focused on.

Hey, this is George on for Vikram. You highlighted an expanded visible acquisition pipeline. Can you provide more color on how much of the flow is non-US? And what percentage of the deal flow do you pass and say no to? Has that percentage changed recently?

George, on the second question, in my prepared remarks, I talked about how of the $1.2 billion of incremental activity we announced this quarter, the universe of opportunities we looked at was $15 billion. From the $15 billion, we acquired $1.2 billion. This number fluctuates up or down every quarter, but generally speaking, it’s roughly a 10% hit rate. As for your second question, geographically, I think Shankh said it in his remarks, but we have active transactions we’re looking at in all three markets.

Great. Thanks for the time. Question on CapEx for the senior housing business. It’s been running 30% to 45% of NOI over the last year and change. Just curious, over the next two to three years, where do you expect CapEx as a percentage of NOI for the senior housing business to stabilize?

Yes. So, I’ll step in. The question is let me give you a broader answer here. As I mentioned last time, we’ve created an internal team. We’re executing at amazing levels where we’re both reducing the costs by 20% to 50% on a unit basis and speeding up the timelines. We’re also changing the fundamental way we do things. Historically, this business is really the operators function, kind of like on the PE model where it’s very short-term decisions. For example, you might have an asset that has three buildings, and they’ll do one roof, and then the next year the following roof, and the following year the following roof. What that’s doing is driving up costs dramatically because of smaller projects due to three mobilizations. Then, you have all kinds of other stuff flowing through like roof leaks impacting the customer experience and all the issues along those lines. Right now, we’re doing everything correctly with long-term life cycle costs in mind, reducing the long-term run rate. This means we’re pulling some things forward, and it won’t change the long-term run rate. However, there’s some stuff that’s elevated right now because, in this example, we would be doing all three roofs, avoiding future roof leaks and getting the project behind us and moving forward. There’s a little noise going on, but it’s all for the efforts to lower the long-term run rate and the unit costs are dramatically lower. So, it’s just excellent execution by the team.

Yes, thanks. Can you provide some color on the tech platform rollout that you mentioned? I know you have other initiatives that you’re working on. How does this work out financially? I’m assuming Welltower has made the initial investment to build out these platforms. Are your operators paying a recurring fee for this, or does it just get reflected in significantly better financial results for you as these get rolled out to your operating partners?

Yes, Mike. The goal is clearly the latter part of your question, so significantly better financial results. The flow of the cost is that, you’re right, the initial investment is coming through Welltower. There’s a bit of duplicative cost upfront because as we transition into this, you have legacy technology systems of operators moving over to our own. In the end, this isn’t intended to be a cost savings exercise, but it will be the tech stack will be less expensive because it will be scaled across our entire operating platform rather than subscale across all of our operators. That’ll come through over time. Beyond the investment, the initial thought should be that there shouldn’t be an uptick in costs.

Mike, just remember one of the things we have to think through, just in addition to what Tim said, that software cost is already part of the SHOP margins. So, there is cost flowing through our P&L, and it’s duplicative in nature today because obviously, you have to make a lot of initial or upfront costs. As a run rate cost, remember that technology cost is part of the SHOP expense stack.

Hi, thank you. Maybe a question for Nikhil. You mentioned talking to eight private peers. Just hoping you can maybe add a little color on that. Is that larger scale transactions or more of the singles and doubles you’ve been doing today?

Yes, Juan. As you would imagine, when you’re talking to eight different groups, from some of those, you might not look to buy any assets either you don’t like the asset quality or the valuation. With some, you might see eye to eye on a lot. It’s hard to generalize, but just given the numbers we’re talking about, there are different ranges of outcomes that everyone we’re speaking with.

Yes. Hey, everyone. Thanks for the time. I guess I was looking at your business presentation update, the path to recovery slide on page 21. So, the bridge assumes you go back to pre-COVID occupancy and margin at today’s rate. That seems a little unrealistic just given the forward-looking backdrop. How should we think about what else gets layered in beyond this to kind of get to like a bridge? Tying that into the tech cost you flagged as being part of the SHOP expenses, how should we think about that influencing this bridge?

Yes. Josh, it’s a good catch that if you just look at the page, we’re trying to give you a sense of what occupancy growth, how that impacts our embedded NOI growth. Going back to pre-COVID, I’ve said this before, if we only revert to pre-COVID, at least John and I will be stepping down. We consider that a complete failure. We expect occupancy growth to be substantially higher than where it is today. However, the most important point is what you made is at today’s rate. What should be added, if we’re just trying to understand what’s a normalized earnings for this company, is: what’s your frictional vacancy of our portfolio should be, which is obviously one add. You have to decide how long it takes to get to that frictional vacancy. Meanwhile, in those years, what’s your RevPOR minus ExpPOR, because our rates are growing faster than our expense growth. That adds to that. Our first set of numbers we gave you a few years ago when we started giving you the disclosure is that our NOI is actually $33 million higher than pre-COVID. Our occupancy is significantly lower, yet it is $33 million higher. You’ll see that in the fourth bar on that page, and that’s because rates are much higher. RevPOR minus ExpPOR got you that higher NOI despite lower occupancy, and that same thing follows through as you are thinking about whatever your definition of frictional vacancy is. We’re not going to quantify what technology costs may or may not come down. That’s not the focus. We think we’re after the big ball, which is revenue. There is a lot of opportunity on the expense side, as we implement systems and processes and have site-level employees focus on why they signed up to be in this industry. Our focus is on compassionate care. We want to try to make people’s lives easier. Just one example is our tech suite rollout, which is saving about five hours of effort from an executive director’s perspective, so they can focus on what they signed up for, which is leading people and providing care to families. Thank you very much for the question.

Hi, thank you. Just one on the transaction market; it feels like you’re competing only with yourselves on some of these deals. Could you talk about what you’re seeing in the way of capital flows and when you expect competition to start picking up? Just trying to understand the likelihood of you being able to maintain the sort of cadence on investment activity?

Let me start and Nikhil you can jump in. First, we’re not trying to maintain the level of activity. I’ve said this before, our company is not designed to buy stuff. We’re not a bunch of deal junkies. We’re trying to invest capital to further strengthen our market position and drive earnings and cash flow growth. So, if the market opportunity is there, we’ll do it. If it’s not there, we won’t. If we believe market prices have gone to a level where somebody is willing to pay more for assets than we are willing to, we’ll sell, as we have seen pre-COVID. The focus is on value creation for existing shareholders. If you have 94% for example in this quarter and that number remains around that up or down a few points every quarter, 94% of what you buy is in a privately negotiated bilateral transaction. You have to compete with one person in that situation that is yourself. If it gets into your head what your cost of capital is, our cost of capital is much higher than what you believe, purely because we believe our normalized earnings is much higher. We are not trying to do a cost of capital game on a spot basis. We’re thinking about our long-term return for individual stakeholders and trying to decide whether expanding the partnership by buying something increases the growth rate and terminal value for existing owners.

Thanks. It’s a perfect segue to my question. So far this year, you’ve grown the portfolio by 7%, $6 billion to $90 billion of enterprise value. You’ve grown FFO guidance by 7%. That’s probably coincidence. However, I noticed that $0.045 of the $0.13 this quarter was attributable to external investing. Of that, how much was driven by this sort of spread investing phenomenon of a seven yield in your low cost of capital? How much of that was previous year outperforming to your point better growth profile of the company? You did $5.9 billion last year at a 7 to 1 yield. I imagine that’s a higher yield today. Is the $0.045 purely from activity this year or outperformance from previous years? Thanks.

Thanks, Rich. I would just note that $0.045 is capital activity, right? That’s how we’re financing things, also what we’re acquiring. The bucketing represents incremental changes in guidance. That $0.045 is all driven by incremental capital activity since we last provided guidance. The move in our senior housing or outpatient or triple net will be fundamental performance. What I mean is things we acquired last year outperforming underwriting are showing up in fundamentals. However, when I get the guide and talk about capital activity, it’s truly just incremental from last time we updated you about what’s being driven by new acquisitions, the timing of acquisitions, and the way we finance.

It’s an extraordinary question, Rich. If you think about the activity, which is obviously what we talk about quarter-to-quarter, but what impacts your number for this year is when you close, and the majority of the closings are happening in Q3 and Q4. The impact of those closings, you’re not going to entirely feel this year; you’re going to feel it next year, especially with a focus on growth. We are growth investors. I’ve seen enough companies destroyed by chasing yields. You can be assured that’s not what we’re doing. You have a timing issue of how that flows to the numbers, and assuming that we are buying what we’re telling you we’re buying, which is growth, your impact on a forward-looking basis will be higher.

Hey, good morning, everyone. Can you answer which segments are driving the occupancy gains? Is it active adult, independent, assisted living, and any potential mix headwind on rate next year and potential export benefit?

It’s been across the board, as the wellness housing portfolio is extremely highly occupied. You should assume that’s a drag on growth, and the majority of the growth flowing through our number overall is coming from assisted living and independent living. On the export question, let me finish the call question. On the export side, go back to what John said in his prepared remarks. Labor costs seem like they’re moving in our direction. We can't provide you what that may or may not be for next year, but directionally it’s moving positively.

Good morning. Thank you. Looking at the SHOP portfolio, obviously the same-store portfolio exhibits a little bit higher occupancy and margin versus the total implying that non-same store is a little lower. Is there a reasonable expectation on cadence regarding how fast the total portfolio sort of catches up to the same store, if you will, in terms of occupancy and margins? Two to three quarters as you apply your operating platform or that too short, too soon?

Let me take the first part. Tim, you can provide some guidance on how non-same store flows into same store. Frankly speaking, Jim, we don’t care about same store versus non-same store. All we care about is bottom-line FFO growth. No question that the non-same store, given its lower occupancy, will be growing faster. Remember that you should assume the assets we’re buying are lower than market occupancy. That’s a drag on our earnings today, but it gets you to a higher earnings tomorrow and gives you better growth.

Yes. Jim, regarding the total portfolio, the biggest difference is you’ve got deliveries on the development side. Preopening costs along with general network capital drags and anything delivered can impact margins. However, you should expect to see those margins converge over time, as the mix is relatively similar.

Yes, hi. In terms of the tech rollout, can you give us a sense as to what you think the annualized margin improvement could be at the property level based on what you’ve rolled out just so far?

Mike, we’re not going to speculate on the margin improvement. We will tell you that we believe that we’ll get to a higher level of margins than pre-COVID. That’s a function of where we think the operating platform is taking us, and the initiative will ultimately lead to higher occupancy. It is challenging to speculate on exact numbers in this setting, but we’re optimistic we’ll achieve a better future compared to the past.

Yes. Good morning, everyone. Good quarter, great outlook. In regards to the SHOP portfolio, you have been comparing some portfolios from triple net to SHOP. It has been improving, increasing your overall growth profile as you get more exposure to SHOP. Should we expect that the SHOP portfolio could be an even bigger percentage of your NOI going forward? Or at a certain point, do you start picking up again? Well, the downside when you do have supply or when fundamentals get softer suggest that the optimal exposure is some percentage of NOI to SHOP.

Very good question, Tayo. Let me answer the easiest part first: will SHOP continue to grow as a percent of the overall portfolio? The answer is a resounding yes. You can see that our SHOP portfolio is low occupied. The majority of the margin flow-through is just starting to come. Even if we don’t buy another asset, you’ll get to a much higher place than where you are today. The second question is an even more important one as we think about long-term portfolio management. I recommend you read the letter to future shareholders that I wrote a few years ago on the Investor section of our website, where we focused on this topic. Our true belief is that volatility is not risk. You’re talking about okay, what happens in a year or two or whatever; you might get downside volatility of owning equity versus debt. That’s why your question is near and dear to my heart. I wrote a lot about this topic. I think you will appreciate reading that section of the letter focusing on this topic. Thank you.