Welltower Inc (WELL) — Q3 2025 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. Given the sheer volume of announcements last evening, we'll keep our Q3 related comments concise, but I'm pleased to report that it was another record quarter with occupancy, margins and net operating income, all exceeding our already very high expectations. However, it was a watershed period in our company's history from two important perspectives: capital allocation and people. After I walk you through our significant capital allocation-related activities, the team will provide details of Q3 results. Then I'll return to discuss my favorite topics of people, culture, incentive design and the beginning of a new era of our firm, Welltower 3.0. Let's start with acknowledging luck. Many of yesterday's transaction announcements started 6 months ago at the height of uncertainty post Liberation Day. We always believed that life is not about predicting. It is about positioning. So when luck knocked on our door in April and May, we were positioned with our balance sheet, exceptional team, technology platform, and perhaps most importantly, courage to run towards this uncertainty and chaos. This positioning drove more than $23 billion in incremental transactions, resulting in year-to-date activity over $33 billion and bringing us closer to ever realizing our decade-long ambition of transforming Welltower into a pure-play rental housing platform for the rapidly aging population. At the core of our offering will always be systems, process, technology, and data-driven insights to enhance the experience of our customers and site-level employees, not capital, which is ultimately a commodity. Every capital allocation decision made at Welltower is viewed through an opportunity cost prism, evaluating the value foregone by pursuing a specific course of action while considering all implications of those decisions well into the future. And that opportunity cost prism allows us to narrow our focus on technology-driven transformation of our niche housing business. There is always room in organizations to boost performance by amping up their pace and intensity. And the fastest way to move the dial is to narrow the focus in a maximum growth, maximum gain war. This is why we're exiting our Outpatient Property Management business. While we'll continue to own some outpatient medical assets, it will consume little management time and effort due to the triple net nature of the retained properties. This is not to say a B2B business like OM is not a good business, but the intensity that is needed to achieve our audacious dream of transforming a tech for TAM-rich B2C industry like senior housing requires the laser focus of a hedgehog and the discipline to say no to hundreds of good ideas. While our motivation to go all-in on senior living with focus and opportunity to enhance the enterprise growth rate, we recognize that the direction of asset prices for what we are giving up is uncertain. Hence, we structured our large OM sale with significant participating profit interest. While the deal structure reflects a degree of heightened creativity, it is by no means a novel approach within our firm. We applied a similar idea nearly 5 years ago when we wrote a participating senior credit note on HC-One assets in the U.K. with warrants and an equity kicker at the height of Brexit and COVID uncertainty. I am delighted to inform you that the significant downside protected structure has generated a nearly 14% unlevered IRR at exit while providing us with an opportunity for a seat at the table in a bilateral negotiation for this recap. This recapitalization transaction marks the beginning of a new chapter of new operating income growth as our long-duration strategy unfolds for HC-One assets. Speaking of the U.K., I'm delighted to announce that after 6 years of conversations, negotiation, and a near transaction, we're finally the proud owner of the Barchester Senior Living portfolio. We recognize that buying highly successful family-owned businesses requires patience, finance, and a commitment to excellence that their legacy deserves. While a large checkbook that no counterparty ever questions is necessary, it is by no means a sufficient condition. We have carefully studied many transactions that Warren and Charlie have completed over the years with family-owned businesses. And I'm delighted to inform you that this $7 billion negotiation was done during a single sitting resulting in a firm handshake. Our years of conversation and close familiarity with the Barchester assets and management was certainly helpful as preparation. Equally important was the integrity and professionalism demonstrated by our counterparty. We're proud to welcome Pete and the Barchester management team to the Welltower operating partner family. Despite giving up in-place yield in HC-One and other loans and initial dilution incurred from 170 assets that are in lease-up from our recent acquisitions, together, the dispositions and acquisitions are expected to be accretive to FFO per share in 2026. To be clear, we would have completed these deals even if they are collectively near-term dilutive because of the significant opportunity for earnings and cash flow growth in '27 and beyond and due to the long-duration aspect of the transactions. These capital allocation decisions together are expected to change the near- and long-term growth rate of our firm despite the significant size of our asset base. This speaks to the level of excitement and high expectations we have from this year's $33 billion of transformative capital allocation activity. With that, I'll pass it on to John.

Good morning, everyone. I'll keep my comments relatively brief this morning. But as Shankh mentioned, we reported another fantastic quarter with no let-up in the strong momentum experienced in the first half of the year. While uncertainty persists for the direction of the broader economy, our business continues to gain strength given the needs-based and private-pay nature of our business, while our asset management initiatives through the Welltower Business System, or WBS, continue to bear fruit. Our strong results this quarter were once again driven by the exceptional performance from our senior housing portfolio. In fact, Q3 marked the 12th consecutive quarter in which the SHO portfolio same-store NOI growth exceeded 20%. Attaining 20% plus NOI growth for any sector is an incredible achievement, but 12 consecutive quarters is truly exceptional and likely unprecedented. Year-over-year organic revenue growth remains at approximately 10%, driven by a 400 basis point occupancy gain and strong pricing power. Our solid top line results were led by our U.K. portfolio as a 550 basis point year-over-year ramp in occupancy drove a 10.4% increase in revenue. Operating margins across the same-store portfolio took another step higher, rising 260 basis points as growth in RevPOR or unit revenue continues to solidly outpace growth in ExpPOR or unit expense. And while we've experienced a substantial recovery in margins over the past few years, we have a long runway for further expansion due to the scaling benefits achieved through higher occupancy, i.e., greater operating leverage, which will be further amplified by our far-reaching WBS initiatives aimed at transforming the Senior Housing business. The backdrop for growth in 2026 and well beyond remains favorable as senior housing demand is expected to grow even stronger while supply remains dormant. The beta of the sector remains attractive. But what truly sets us apart are our efforts to generate outsized alpha through operational excellence. And with the exit of our Outpatient Medical Property Management business, we are doubling down our efforts, attention and resources to our Senior Housing business with a singular focus on operational excellence through digital transformation. This includes the appointment of Russ Simon as EVP of Operations. Russ has created tremendous value for Welltower shareholders as Co-Head of U.S. Investments as well as partnering with me on asset management. Going forward, Russ will shift his focus to overseeing our asset management, capital planning and experiential solutions initiatives. Additionally, as Shankh will describe in greater detail, we are in the midst of a complete reimagination of our technology ecosystem. We're delighted to have Jeff Stott join us from Extra Space Storage as our Chief Technology Officer. While Logan Grizzel and Tucker Joseph have been appointed Chief Innovation Officer and Chief Information Officer, respectively. I'll conclude by saying that we've never been more excited as we are today about the prospects for our company. The Welltower team continues to work tirelessly alongside our best-in-class operating partners to reinvent our business through WBS and to elevate the experience of senior housing residents, their families, and the site-level employees. While I'm thrilled about the progress we've made to date, our excitement truly lies in what's to come as we enter Welltower 3.0, which will be defined by operations first. With that, I'll turn it over to Nikhil.

Thanks, John, and good morning, everyone. Since our last call 3 months ago, we have expanded our year-to-date transaction activity by $23 billion, including $14 billion of acquisitions and $9 billion of dispositions and loan payoffs. With today's announcements, our year-to-date investment activity now totals $23.2 billion, up from the $9.2 billion announced on the second-quarter call. Of this $23.2 billion, $5.4 billion closed through the end of the third quarter and nearly another $11 billion has closed since, with the remaining $7 billion expected to close later this year and in the first half of next year. On the disposition front, we are under contract to sell an additional 18 million square foot outpatient medical portfolio for $7.2 billion, resulting in a $1.9 billion gain on sale. We structured this investment to retain a $1.2 billion preferred equity stake accompanied by a profits interest, giving us 25% of upside while protecting our downside through the buyer's subordinated equity. We closed on the first $2 billion tranche of this transaction last week with subsequent closings expected through next summer. Additionally, we will exit the OM Property Management business with over 160 of our colleagues transitioning to Remedy Medical Properties, allowing them to continue their career growth. Following this transaction, our residual OM portfolio will essentially consist of premium net lease assets to high-quality investment-grade tenants. The long-term absolute net nature of these leases requires minimal management intensity. Turning to acquisitions, we are pleased to announce the GBP 1.2 billion acquisition of the HC-One portfolio in the U.K. Many of you will recall our courageous GBP 540 million first mortgage investment in HC-One's recapitalization at the height of COVID and Brexit uncertainty. That investment was structured with downside protection through a claim on HC-One's real estate portfolio at a last pound basis of approximately 40,000 a bed and upside participation through warrants and equity kickers. We have enjoyed a close working relationship with the company's management and ownership and have supported the company's growth through modest additional capital support. This investment has now delivered a profit of greater than GBP 350 million and over the last 4-plus years with an unlevered IRR of nearly 14% and a 1.6x equity multiple. While the payoff of this high-yield loan is modestly dilutive near term, the equity ownership of these assets adds significant duration to our returns. By deploying significant value-add capital and leveraging Welltower business systems and the best practices from our broader U.K. business, we expect this transaction to generate an unlevered IRR in the low teens. Moving on to our GBP 5.2 billion acquisition of Barchester which spans 3 buckets. First, 111 assets under a highly aligned RIDEA 6.0 structure. These high-growth assets rank in the top quartile within the U.K. and have in-place occupancy in the high 70s due to 39 newly delivered assets. Second, 152 mature assets in a triple net structure. These mature assets are 90% occupied with strong coverage, 3.5% annual rent escalators and the ability for Welltower to reset rent every 5 years to capture additional upside. Third, 21 assets that are currently being developed. In addition, through several other transactions, we are acquiring an additional 9 assets under construction in the U.K. Given the significant non-purpose-built stock and negative net supply growth over the last 10 years in the U.K., we are ecstatic about the significant growth opportunity embedded within this portfolio. While I have highlighted our larger transactions, our focus on granular activity remains unabated. The $14 billion of new investments announced today span more than 46,000 units across 700-plus communities across 50 different transactions. Our team spent the last few months walking every single one of these communities, conducting their diligence and establishing business plans with our operating partners. 91% of this activity was sourced off market. 16 of these transactions were in the U.K., 2 in Canada, and the remaining 32 in the U.S. I expect that with our narrower focus and relentless pursuit of better outcomes, the transactions announced today will fundamentally enhance the long-term growth potential of our company's earnings. With yesterday's announcement, we have added over 170 senior housing communities to our investment pipeline that are under development or still in lease-up. These communities will be a drag on near-term results, but as we detailed in our letter to our future shareholders, we will not hesitate to make capital allocation decisions, which are a drag today, but have the potential to create significant value tomorrow. I'll now turn the call over to Tim to walk through our financial results and updated earnings guidance.

Thank you, Nikhil. My comments today will focus on our third-quarter 2025 results, the performance of our triple-net investment segments, our capital activity, a balance sheet and liquidity update, and finally, an update to our full year 2025 outlook. Welltower reported third-quarter net income attributable to common stockholders of $0.41 per diluted share and normalized funds from operations of $1.34 per diluted share, representing 20.7% year-over-year growth. We also reported year-over-year total portfolio same-store NOI growth of 14.5%. 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 6/30/2025. In our senior housing triple-net portfolio, same-store NOI increased by 3.1% year-over-year and trailing 12-month EBITDAR coverage increased to 1.21x. Next, same-store NOI in our long-term post-acute portfolio grew by 2.7% year-over-year and trailing 12-month EBITDAR coverage was 2.02x. Moving on to capital activity. We continue to capitalize our investment activity with predominantly equity, raising $2.9 billion of gross proceeds in the third quarter. Additionally, in August, we completed a follow-on issuance of $1 billion in senior unsecured notes across 2 tranches for a blended coupon of 4.875%. This capital, along with retained cash flow, allowed us to fund $1.7 billion in net investment activity and end the quarter with $7 billion of cash and restricted cash on the balance sheet, while driving net debt to adjusted EBITDA to 2.36x, representing yet another record low leverage level for the company. With our current capital position, near-term liquidity profile, and expected proceeds from asset sales and loan payoffs, we are fully funded for the entirety of our acquisition pipeline, including the $14 billion of new acquisition activity, which we announced last night. And we expect run-rate net debt to adjusted EBITDA to tick modestly higher by approximately 1 turn on a run-rate basis for all of our announced transaction activity. Lastly, as I turn to our updated 2025 guidance, I want to remind you that we have not included any investment activity in our outlook beyond what has been closed or publicly announced to date. Last night, we updated our full year 2025 outlook for net income attributable to common stockholders of $0.82 to $0.88 per diluted share and normalized FFO of $5.24 to $5.30 per diluted share or $5.27 at the midpoint. There are 2 items I want to highlight in last night's net income guidance that relate to fourth-quarter activity and beyond. The first is our medical office portfolio sale, which, as Nikhil detailed earlier, is expected to have a total gain on sale of approximately $1.9 billion, $400 million of which is expected to be reflected in net income in the fourth quarter, with the remaining $1.5 billion expected in 2026. The second item relates to the 2035 10-year executive continuity alignment program. We expect approximately $1.1 billion of upfront costs associated with the initiation of the plan to impact net income in the fourth quarter, which will be adjusted out of normalized FFO. In addition, the program will result in a recurring amortization expense stream that will flow through normalized earnings over the next decade, alongside the ongoing impact of the increased diluted share count. Now turning to our normalized FFO guidance. Last night's increased range represents a $0.17 increase at the midpoint from our prior normalized FFO range. This increase is composed of a $0.045 increase from higher NOI in our senior housing operating portfolio, $0.105 from accretive capital allocation activity, and a $0.02 increase from FX and income tax benefits. Underlying this FFO guidance is an estimate of total portfolio year-over-year same-store NOI growth of 13.2% to 14.5%, driven by sub-segment growth of outpatient medical, 2% to 3%; long-term post-acute, 2% to 3%; senior housing triple net, 3.5% to 4.5%; and finally, senior housing operating growth of 20.5% to 22%. This is driven by the following midpoints in their respective ranges. Revenue growth of 9.6%, driven by increased expectations for occupancy growth of 390 basis points and RevPOR growth of 5.1% and expense growth of 5.25%. And with that, I will hand the call back over to Shankh.

Thank you, Tim. Before we start Q&A, I want to highlight the most important announcements we made last night, the launch of Welltower 3.0, an operations and technology-first platform. This is the third iteration of our company after refounding our firm from a deal shop called Healthcare REIT. We took HCN down to its studs and built Welltower 1.0 with a goal of being a great capital allocator. We turned over half of the assets, the majority of the operators, and 95% of the people. And we launched a data science platform that in the words of a CIO from a leading private equity firm has become synonymous with the category, much like Band-Aid or Kleenex. Then came COVID. And with Charlie's prodding, I realized we needed to recruit individuals from industries of high standards, or the equivalent of short-haul trucking executives to address the challenges of the railroad industry decades ago. The hiring of John Burkart from the multifamily industry and the subsequent hiring of hundreds of our colleagues who are focused on operations and asset management to delight customers and site-level employees marked the beginning of Welltower 2.0, a well-oiled capital allocation machine with high-performance compute power to sort through trillions of data points to buy one asset at a time. Things have been going on well in recent years with performance, which I would describe as somewhat satisfactory. And yet again, we are disrupting our own firm from within, which we believe will create a leaping emergent effect culminating into Welltower 3.0, an operating company in a real estate wrapper. This new era places operations and technology first with a singular focus on delighting customers and prioritizing site-level employee satisfaction with complementary capital allocation actions to go deeper in our markets with a narrower focus. This phase starts with a complete retooling of our organization, not writing a manifesto. Many organizations hire management consultants, create pretty PowerPoint decks, announce new mission and vision statements, but ultimately change nothing about how they go about doing business. There is no place for consultants, bankers, or managerial layers at our shop, only leaders who are willing to get their hands dirty by actually doing the work and building the business, laying one airtight brick at a time. We're taking the best from our capital allocation side of our house, including Tim McHugh and Russ Simon to lead the next phase of our journey focused on operations, technology, and innovation. Additionally, we are once again bringing in significant talent from industries with higher standards, which includes proven tech executives such as Jeff, Logan, and Tucker to join Swagat to form a tech quad, which will serve at the core of Welltower 3.0's growth engine. I'm convinced you will see a new wave of talent following these leaders, similar to what we have witnessed in recent years on the capital allocation side of the house, which has become the envy of the real estate industry. This newly established tech quad will be key to reduce latency in a complex adaptive system like our business. As latency shrinks materially, the network effect will kick in high gear, creating a new paradigm of maximum growth and maximum gain that simply does not occur in an industry like ours with changes at a glacial pace. Lastly, today, I will describe a dramatic change, which strikes at the heart of this company's incentive structure. From my first day in this business, I've been bothered by the misalignment of the incentives between our company, the owner of our assets, and our operating partners, the manager of the community. I wish I could have said better things about the alignment between management and the forever owners of a company like ours. Hence, you have seen a decade-long effort from us to fix and align external and internal incentives. Following years of deep structural changes in this area, I'm delighted to inform you that my utopian idea of everyone swimming or sinking together is finally taking shape, an ecosystem of internal and external participants where everybody is fully aligned and everybody is all in. I would urge you to read our press release from last night carefully to fully grasp the changes that are taking place in 3 distinct steps to achieve the same goal of alignment and ownership. One, elimination of compensation for Welltower management and making them owners through performance-oriented Welltower stock; two, introduction of RIDEA 6.0 construct where the operator wealth creation is now irrevocably tied to Welltower stock; and three, a $10 million annual grant for site-level employees for the 10 best performing senior housing communities, also in Welltower stock. All of them capture the 5 key tenets of the incentive design that we have previously laid out to you. Simple, significant, non-gamable, earned as a team and duration matched with the immediacy of a role's impact: 10 years to forever for Welltower management, 5 to 7 years for operating partners, and 1 year for site-level employees. I would underscore that my colleagues are betting their prime years of their careers on this idea, and many of my operating partners, Dan Hughes at StoryPoint, Matthew Duguay at Cogir, and Courtney Siegel at Oakmont. While what we are embarking on embodies a unity of purpose, shared sacrifice, and perhaps some share dilution, woven in a seamless wave of deserved trust and mirrored reciprocation by a group of people from different walks of life. They share 2 rare genetic qualities: a fiduciary gene representing their innate desire to put the interests of our owners ahead of their own and a delayed gratification gene, which refers to their instinctive bias towards sacrificing immediate rewards for much larger gains tomorrow. While a long-winded person like me with a long attention span is perfectly capable of spending hours detailing every part of this plan, let's focus on my favorite, the Welltower grant for site-level employees to honor the memory of Charlie Munger. Imagine a world where our site-level employees work in beautiful and inviting communities equipped with the most advanced and easy-to-use digital tools, freeing them from paperwork and administrative burdens. Not to mention meaningful career advancement opportunities in a regionally dense portfolio of scale in this business, and they get paid more than they otherwise would in a competitive community, sometimes in a significant and life-changing way due to the Welltower grant. Why would they leave? Costco's experience over many decades suggests perhaps they won't. Instead, they will continue to delight our customers. Our reputation of happy customers will further attract even more customers who are willing to pay for that level of service in an industry where usually half of the phone calls go unanswered. That's network effect, pure and simple. The fruits of this network effect will silently compound over many years and decades to come. Charlie often said, take a simple idea and take it seriously. He would be happy to know that we have taken the simple idea of Berkshire-style stewardship, along with Costco-style customer obsession, very seriously and betting our life on it. And with that, I'll open the call up for questions.

Congrats on the strong results and all the transactions. Shankh, you've mentioned various changes, including in the portfolio, personnel, and compensation plan. I'm trying to understand your comments on Welltower 3.0, especially since things have been progressing positively for some time. The industry has performed strongly, with stock values doubling or tripling depending on the timeframe. I'm looking to grasp two main points: first, is there a specific goal or something you're aiming to demonstrate? Additionally, how should we view the growth engine in terms of cash flow moving forward?

Thank you, Vikram. We don't have anything to prove. Our core belief is that we're here to make a contribution. What we aim to do is eliminate agency problems from the system and align everyone to be owners, ensuring that interests are aligned across the board. That’s our main focus. Regarding your second question about how to sustain growth in the future, it's crucial to recognize that making real money involves duration; the span of growth is what truly matters. Currently, there is too much emphasis on the short term. Real value creation hinges on duration. As for why things are going well and why we continue to innovate, consider how successful Netflix was when they focused solely on DVDs. Imagine if they hadn’t disrupted their own model; they wouldn’t be where they are today. We are proactively working to reshape our organization from within. Our aim is to digitally transform the business to provide better outcomes for our customers and site-level employees. This effort is expected to generate significant growth and a compounding of cash flow over time for our owners. That is the path we are on.

Congrats on the announcements. A lot to talk about, but hoping you can share more details on this new compensation plan. Was that presented by the Board as a team package as an all-or-nothing proposal? Did it evolve into that? And then the 3 operators that are now similarly changing their incentive fee to take units, is that structure being offered to other partners as part of RIDEA 6.0 to further align them with shareholders, now management, and extend the duration of hopeful outperformance?

Okay. So let me answer the first question, and then we'll go to your second question. Our Board has spent an enormous amount of time with leading compensation consultants, several law firms, and many, many consultants and advisers for months at this point and spent hundreds and hundreds of hours to come up with what they consider the right plan, which you saw. So I have really nothing to add to that other than the fact that it aligns with the 5 tenets of the incentive design that we have always talked about, right? Simple, significant, earned as a team, duration matched, and non-gamable, right? That's really what it is. As I said, the first 3 operators that we mentioned, they're the founding class; they don't necessarily have to be the only ones, right? We are trying to simply align the interests of our operating partners with our owners. And obviously, as you know, that regional density is very important to us. So if there will be opportunities to bring in other operating partners into the fold, we'll consider it. But at this point in time, we only have the 3 partners who are the founding class of this new program, and we'll see where the future takes us.

Shankh, in the past, you've talked about the various sources of capital available to the company. In the case of the acquisitions you announced yesterday, why not issue equity to fund some of those investments instead of the asset sales?

Very, very good question. So if you go to John, the first call I did as CEO, I laid out my belief of how capital allocation works. Most people think of capital allocation as a function of where capital goes or what you buy in very simplistic terms. It's actually so much more intricate than that. And then you have to think about your source of capital and you have to think about the relative cost of that capital. And so as you can think about what we are doing, if you fix aside, which is the buy and just purely consider the sell, you're right, correct. We could have done it through equity. And frankly speaking, the spot cost of that equity is lower than the spot cost of that asset sales, which is like $9 billion of asset sales that Nikhil talked about. So it would have generated a higher near-term accretion, and it would have created a disaster for the long-term value creation of this company. In other words, if you think about our assessment of what we are giving up, you have to think about these things from an opportunity cost standpoint. What we are giving up by definition that we are not doing it through equity tells you that our view, which is a view you don't have to agree with, our view of our cost of equity is higher than the cost of the capital of the asset sales. You can come to the decision, obviously, why is that? Because we have a higher view of growth and the duration of growth of that equity. It is an incredibly important question. I have seen so many companies and their management get sucked into near-term FFO accretion math and dilute their shareholders without thinking through how long-term value creation works. Thank you for the question.

Shankh, I wanted to circle up on the recent Care Home deals, the Barchester and HC-One. How do these portfolios compare to Welltower's current portfolio in terms of asset quality and maybe the private pay percentage? And does that impact the growth outlook of those assets at all? Or is it very similar to the current portfolio?

Yes. On a cumulative basis, it's very, very similar. It's similar quality assets on a blended basis, similar metrics. So yes, really no change there.

I know in the opening remarks, you outlined a lot of the aspects of the MOB disposition. But I was wondering if you could discuss your decision regarding the structure.

Yes. So let me repeat, Farrell, what I said. If you just think about it, we are making an opportunity cost decision of two things. First, refocusing and entirely having a singular focus of management's time and attention into this digital transformation of an industry called senior living. That's what we are focusing on. So that's sort of one aspect of a strategic move that's behind this. The second, obviously, is the cost of capital conversation we just had. Remember, at the end of the day, we have no idea what the future looks like. We don't have a crystal ball. It is entirely possible that the value of these assets tomorrow is significantly higher, right? We obviously believe that the next 10 years is in a deglobalized world. It is going to look, relative to the last 10 years when we had 0 inflation and 0 rates, it's going to be different. But we have no idea whether we're right or not. So the structure reflects that if values go up significantly or value goes up at all, our shareholders will still reap the benefit of that value accretion that we are leaving behind today. That's what the whole structure is about, is how do we sort of do what we are trying to do and focus that capital into high-growth opportunities at the same time. We think very highly of Remedy as an operator. All our colleagues are going there. We think they will continue to create a lot of value. It is entirely possible that cap rates come down, and interest rates come down. We're totally wrong about our macro views. And if all of those things happen, you have to sort of think about, okay, did I sell these assets in the wrong time in the cycle, right? So you have to think about these things from both a strategic standpoint and a capital standpoint, and that's how we came to this conclusion.

Just following back up on the outpatient medical sale. Just a few questions there. I mean, you guys in the sub give that held-for-sale NOI. I just want to make sure that, that's sort of apples-to-apples to apply that to the sale of the $7.2 billion, and that looks like it's a 6.25% cap rate. And I just want to see if that's right. And then also on the preferred, if you could just talk about what the yield is you're getting on the preferred and then also if you guys are offering any seller financing as part of the transaction?

Sure. So I'll start kind of backwards. On the preferred, the coupon is 8% and it's $1.2 billion, and that's really all we're leaving behind. That's why the $7.2 billion transaction results in net proceeds of $6 billion. So no seller financing. This will be financed through bank financing. Then secondly, to answer your question about the yield, that 6.25% is in the right ballpark. That includes some property management and profitability as well. The real estate yield is a little bit lower. But then obviously, if you think about the net yield once you factor in the reinvestment of the preferred, that's closer to 6%.

More high-level question for you guys. When your numerous press releases hit last night, I couldn't help but go back to Shankh's annual letter where you really kind of doubled down on this idea that you can actually grow faster at a bigger size and that because of various network effects you would get. You also talked a lot about doubling down on data design because of just kind of improved latency and how it will just kind of help you do business with better operational efficiency. Could you talk a little bit about just again, Welltower 3.0 and everything that's going on, whether it's RIDEA 6.0, all this alignment with management compensation; how do you kind of just see all that fitting together? And exactly what does that set you up for going forward?

That's a great question. To simplify things, let's discuss how an organization's growth curve works. In my annual letter, I explained that it's important to bring a team of people together in close proximity. This is similar to Newton's law of gravitation, where the force is inversely proportional to the square of the distance. Having a tight-knit team minimizes latency. For example, in a typical business, if you reach out to a community, you might not receive a response half the time, and if you do, it could take two business days. In contrast, with the Welltower Business System, our customers are receiving responses within minutes, though I still find that length of time unacceptable. Historically, business room turnarounds took 37 days; now they're down to 11 days. While that’s still longer than the 3 to 5 days it took previously, we're making progress in reducing latency. In our company, there's no management layer—decisions are made on the spot without layers of approval. This approach also reduces latency. When latency decreases, our network effect can flourish, leading to maximum growth and efficiency in a business landscape that traditionally moves slowly. As discussed in my annual letter concerning transactions, we've acquired 700 communities, and we've visited each one. This effort is a result of significant technological initiatives and years of hard work. Additionally, with the recent hiring of Jeff, Tucker, and Logan, we're aiming to ensure that no calls go unanswered and that every call is returned promptly, which would effectively eliminate latency. Those operational days are on the horizon.

Lots of exciting news today, so I'll ask something maybe more holistic in that how do you go about managing the execution risk of everything announced today, including acquisitions, dispositions, new leaders? Where are you focused from an operational perspective to ensure these changes are implemented successfully? And what could go wrong here?

That's a very broad question. The truth is, managing risk on the deal side involves a large team with extensive experience in transactions, more so than most teams in this industry. This has been evident, especially during COVID when travel was restricted, yet this team, led by Tim and Nikhil, managed to execute effectively in deal tax, deal accounting, and legal matters. We have a strong team in the U.S., Canada, and the U.K. On the operations front, reducing risk is tied to our efforts in developing Welltower Business Systems, which we are consistently enhancing. We are bringing in executives from high-standard industries, and this process is continuously evolving. Our excitement about the opportunities increases every day as we assess our skills and bring in individuals to fill those gaps, driving progress forward. It’s important to remember that business is fundamentally about people. Spreadsheets and legal documents do not conduct business; it’s entirely people-driven. I think most businesses operate this way, and for us, it’s crucial to attract, retain, and develop the best talent.

Great. Quick 2-parter for me. So on the incentive structure for Welltower 3.0, the presentation mentioned the 5 named executive officers, but far down in the release, it also notes that management is working with the Board on long-term incentive and retention for 2 existing and 5 newly promoted EVPs. So I guess my first question is, was it possible for all 12 to go all in on the incentive structure? And then my quick follow-up is just on competition over the next 10 years, whether it's talent or technology, as more capital comes to the space, how do you think about protecting Welltower's moat over that time period?

Thank you, Ron. Those 2 questions are actually fairly correlated. So let's start with your first question. As we said, that we are working with our Board to come up with a strategy to retain our colleagues who are actually doing all the work. We're absolutely doing all these things, and hopefully, you guys are pleased with our execution. That's not because of me or Tim or Nikhil, that's our team. This is a team game. We're all putting tremendous amounts of effort 24/7, and this has been 10 years in a row. So this has been obviously for us that retaining that group of people that you mentioned is extremely important. How we go about it, it's a broad process. As I mentioned in the previous question, our Board has gone through an enormous amount of effort with their lawyers, bankers, and comp consultants to come up with a process that has been satisfactory for us. And we'll hope that the same process will unfold, and we'll get to the satisfactory answer for our rest of our colleagues here that you mentioned. But as far as I'm concerned, I only believe in one way of living: go all in and do it in that manner, right? Do very few things. The only things I'd like to do is to go absolutely all in. So that will be my hope. And think about it, the second point of your question. As more capital comes in, there's a structural element to that question. As you think about it, a lot of capital is structured in GP/LP style. Frankly speaking, LPs don't pay GPs enough to spend the hundreds of millions of dollars that we spend on technology to get there because there's no way to get that money back, frankly speaking. So we shall see how that happens. It needs to be done by permanent capital. And from a permanent capital standpoint, you need a mindset. It's not a question of money. You just need a mindset to say, how do I transform a business? How do I invest today where I may or may not see the benefits for a long time to come? That's the question of long attention span.

Just on the investment side, curious on your thoughts on both single-family and manufactured housing and opportunities or lack thereof in those 2 good groups relative to the seniors and active adults.

Very, very good question. Finally, somebody gave me an easy question to answer. I remain within my circle of competence. I don't comment on things that I don't know anything about. That's one of our key tenets of our business that we are very much focused on what we know and our cycle of competence; what do I know about manufactured housing and nothing. So we'll remain within our cycle of competence and keep doing what we do.

The investments in hard assets are certainly captivating, but I believe the key investments are in your people, as well as in operating systems and technology. Can you help me understand how you are managing this? Your additional investment in technology seems to be based on the expectation of a sufficient return for it to be worthwhile. With all the positive customer experiences you're mentioning, do you have any concerns about potential fatigue when it comes to rent increases? If customers are satisfied but face 10% or 12% annual rent hikes, at what point do you monitor that situation to ensure it doesn't become an issue, potentially leading you to reduce some of the internal investments that are essential for your long-term sustainability? I'm interested in how you assess and manage this situation.

Thank you for the great question, Rich. To address the two parts of your inquiry, first regarding technology investments, we have a strong desire to continue investing, whether in technology itself or the people supporting it. We anticipate significantly higher returns from these investments compared to real estate returns, and you should be able to see these results reflected in your real estate P&L. When you compare our performance to the industry's, it's clear that these positive results are not merely due to easy comparisons; we are facing very tough comparatives. Despite these challenges, our results speak for themselves, yielding a return on investment that surpasses traditional real estate ROI. The second part of your question is more nuanced. As I’ve mentioned before, let's consider how the business operates. When demand outstrips supply, rents naturally increase. However, we typically maintain rents at sustainable high single-digit levels. We're open to leaving some money on the table now for future benefits. In the senior living sector, residents usually stay for about 20 months, meaning we often see only one rent increase during their stay. So, while you might think about scenarios involving repeated 10% increases over multiple years, that doesn’t reflect reality since the average duration of stay is around 18 to 24 months, leading to just one rent increase typically. Ultimately, it’s important to note that if we're discussing a philosophical perspective, our organization's ethos includes a commitment to delayed gratification. We prefer to forgo immediate gains for greater long-term benefits. We're not rushing; we focus on achieving sustainable growth, which comes from happy customers and satisfied employees. That's our primary focus moving forward.

Apologies, a bit of a pedestrian question, but maybe for Tim, how was the $1.1 billion noncash charge for the comp plan calculated? Just trying to understand some of the accounting mechanics here, please.

Yes, Jim. So the plan is as highlighted in our 10-Q, the plan is essentially broken up into 2 pieces. There's an upfront expense piece of it, which is the $1.1 billion that you're alluding to. And then there's another $200 million that will be amortized over the following 10 years of the plan.

Do you see similar opportunities for the Welltower business system in the U.K. as you do in the U.S.? Is it pretty much plug and play?

It is nothing but plug and play. But yes, we do have enormous opportunity. Just think about, generally speaking, there's a tremendous amount of opportunity overall in this business from an operations and operations sophistication perspective, and that same opportunity exists in the U.K. as well and very much so. Our operating partners are welcoming us to bring in new ideas, new technology, new processes. Business systems are about business first, systems later. It's about process first, technology later. But still all of those things, we're enormously excited about that opportunity. Nikhil, do you want to add anything to that or John?

No, I think that covers it. It's really the same opportunity.

One of the things I'll just mention from a U.K. standpoint, as you have seen, hopefully, in the quote on our press release, the U.K. government is meaningfully welcoming us to bring that technology and that operational sophistication to the care sector. So that's also very much of a strong angle that we have been working with the government.

Can you help frame how NOI is performing on the 2024 vintage of senior housing acquisitions versus expectations at underwriting?

John, in general, let's discuss the areas where we haven't performed well. We faced significant challenges during the holiday season, but aside from that, I would say that most acquisitions, both individually and collectively, have met or exceeded our expectations. Nikhil, would you agree?

Yes, absolutely correct.

Just curious what percent of the SHO NOI the 3 operators under RIDEA 6.0 represent? And I guess as you continue to grow, how do you keep a large percentage of the SHO NOI under that new alignment? And just curious if there are hurdles to adding other operators to the structure in the near term?

I don't have that information readily available, but I will look into it and get back to you. As I mentioned earlier, this discussion doesn't have to be limited to just those three operating partners. Our goal is to implement a regional business strategy, engaging our operators to focus on their strengths. This business model involves significant complexity at the customer level, which our operating partners handle exceptionally well. At the same time, we are concentrating on areas where scalability offers a strategic advantage. The responsibilities are clearly divided in this regard. Our interests are aligned, and we are all working towards the same objectives, so we don't anticipate significant issues in achieving our goals. When operational challenges arise, we will address them collaboratively and see where we land.

Just a quick one on the announced investments. You've talked about IRRs, but can you just give a sense as to the overall initial blended yield on the $14 billion and maybe parameters for how wide the range was between the different components?

Yes, Mike, we never really disclose yields until the transaction is closed and then it shows up in the sub. But in general, the activity is not that dissimilar to our activity in the last couple of years.