Operator:

Thank you for standing by. My name is Kayla and I will be your conference operator today. At this time, I would like to welcome everyone to the Welltower's Second Quarter 2024 Earnings. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Matt McQueen, General Counsel. You may begin.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I will review first 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 investment landscape and Tim will walk you through our triple-net businesses, balance sheet highlights and guidance updates. We're very pleased to report another quarter of significant bottom line growth with normalized FFO per share up 17% year-over-year or over 19% adjusted for prior year subsidies. Quarter was once again led by our Senior Housing portfolio, but with notable contributions from all other areas of the business, including investments. Last night we announced another $1 billion of acquisitions under contract since our last update at NEREIT Conference in June, bringing our acquisition activity to approximately $5 billion year-to-date. There continues to be no dearth of capital deployment opportunities in front of us at extraordinarily attractive economics, which I'll get into shortly. Ultimately, we're pleased to once again be able to raise our full year FFO per share guidance as we continue to capitalize on the unprecedented internal and external growth opportunity in Senior Housing. Before John goes into details, I wanted to first provide some high-level thoughts on the Senior Housing business and why we remain as optimistic as ever about its future prospects.

RevPOR:

While margin remains well below pre-COVID levels, I would note that we have made significant progress since hitting the trough levels of profitability in 2021, with farther upside remaining through the scaling benefits achieved through higher occupancy aka operating leverage and as the operating platform begins to bear fruit. Overall, while we are pleased with the results we achieved this quarter, what we are much more excited about is the fundamental backdrop is for us to dramatically improve as we look forward to 25 and beyond. It starts with end market demand. Baby boomers are just entering their eighties and pickup in demand, which we have recently witnessed, will only intensify going forward. Not only is the 80 plus population growing at a fastest clip in decades, but what's even more compelling is the growth of this group of seniors will accelerate to 5% to 7% per annum as we close out the decade, driving demand even higher and there is plummeting new supply. The second quarter construction starts were once again negligible, falling well below trough levels you've seen even during GFC. It remains extraordinarily challenging to secure construction financing as regional banks that served as the most prolific lender to the sector in previous cycles has effectively shut down all activity. And despite the attractive growth prospect of our industry, most developers have thrown in the towel due to a lack of development economics. We think this will continue as returns, or should I say lack thereof, were made on other people's money, no longer available as investors lick their wounds from the last cycle. While the beta of the Senior Housing business remains extraordinarily attractive, what truly sets us apart are our efforts to generate outsized alpha for our existing owners. This is reflected by the difficult but important steps that we continue to take to further amplify our long-term growth trajectory. This not only includes the build out of our operating platform, which John will get into in a minute, but also involves numerous capital light transactions such as operator transitions, conversion and conversion of triple-net and to RIDEA leased structures. We are confident that several operating platform initiatives will start to impact occupancy and NOI next year. Expanding on the theme of enhancing long-term growth through capitalized transactions, we announced transition of 89 Holiday by Atria assets to six Welltower's strongest operating partners with deep expertise and local scale in their regions. We have experienced tremendous success with hundreds of transition we have effectuated in recent years and we expect similar outcomes from this most recent set of assets. More importantly, we hope to achieve over $70 million of additional NOI upside when new operators stabilize these properties. And separately, we converted or agreed to convert 47 triple-net leased properties to RIDEA structure in Q2, allowing us to directly participate in substantial growth of these properties that are poised to deliver in coming years.

S&P:

And yesterday, we announced the recast and upsize of our revolving credit facility to $5 billion, bringing near-term liquidity to nearly $9 billion. Our new revolver comes at an improved pricing and extended term relative to our previous facility, a testament to the strengthening of our credit profile and growth outlook of our business even in these challenging times for real estate credit. We will remain disciplined in our funding of our future opportunities. But as I have previously mentioned, we have created significant debt capacity to tap into creating another lever for us to further augment our earnings growth. With that, I'll pass it over to John.

Nikhil Chaudhri:

Thanks John. It's hard to believe that we're almost at the end of the summer. We have worked tirelessly over the last three months since our first quarter call, expanding on our investment activity by an additional 2.1 billion. Since we have been working at such a torrid pace, I thought it would be helpful to summarize what we have accomplished so far this year. We closed on $200 million of transactions in the first quarter and announced additional transaction activity of 2.6 billion on our first quarter call. We subsequently signed up and announced another $1 billion of transactions at NAREIT in June and last night announced an incremental $1.1 billion of acquisitions, bringing this year's total closed or under contract transactions to $4.9 billion. We are pleased to report that as of the end of the second quarter, we have closed on $1.6 billion of these transactions and we are diligently working towards closing the remainder of our announced transaction activity by year-end. The incremental $2.1 billion of investment activity announced since our first quarter call is essentially entirely made up of seniors and wellness housing assets in the U.S. and UK and spans a total of 17 transactions with a median transaction size of $65 million. These transactions comprise of 82 communities with nearly 7000 units, an average age of seven years and a stabilized yield above 8%. Through these transactions, we are growing our relationships with Legend, Storypoint, QSL, Care UK, Arrow Senior Living, to name a few operators. Welltower's stellar reputation permeates globally as we remain the counterparty of choice for sellers, as evidenced by the unabated quality and pace of our investment activity. I want to highlight an emerging new trend that we have witnessed recently, inbound inquiries from Asian and continental European investors who own seniors housing product in our target markets. Perhaps driven by the strength of the dollar, but we are seeing direct inquiries to acquire senior housing assets from foreign counterparties who we have not transacted with before. During this quarter, we had net loan funding of $349 million as we originated $486 million of new loans and received repayments of $137 million across 17 loans. A vast majority of the new lending activity was with one high quality sponsor from whom we also acquired a portfolio of seniors housing assets. As I have stated before, we are creative deal makers with a problem solving mindset. I spoke last quarter about the dearth of debt capital in the Seniors Housing space, and I'm pleased to announce that we have been able to close out a creative win-win transaction with a counterparty given that backdrop. We previously transacted with this counterparty last year when we acquired 10 Seniors Housing assets for $469 million. We reengaged with them this year for a follow-on transaction. In this case, for a subset of the portfolio spanning roughly 1000 units we were able to see eye-to-eye on upfront pricing of $271 million and acquired those assets outright at a greater than 35% discount or replacement cost assuming a maximum payout on the performance based earn-out. For another subset of assets, we couldn't find alignment on the current valuation, but we were able to offer a creative debt solution. This $456 million first mortgage loan carries a 10% yield and spans nearly 1000 units across several newly built marquee senior housing properties with the last dollar basis at approximately half of replacement cost of these light new assets, this loan reflects a 56% loan to value based on our underwritten stabilized values. As with most of our loans, there are several structural enhancements to potentially convert these shorter duration debt investments into long duration equity investments. This entire transaction is underwritten to achieve an unlevered IRR north of 10%. Moving on to capital light transactions, as announced earlier, we are transitioning 89 former Holiday assets from Atria to six different regional managers. 69 of these transitions are already complete, and the remaining 20 are scheduled for later this week. As was our business plan all along, we have plans for significant capital investment across all these buildings. 65% of these projects are either completed or underway, with the remaining working through plans, scopes and budgets to start soon. With an inventory of over 900 modernized light new units, the newly appointed regional managers are hard at work in training the sales teams to market the enhanced value proposition of these communities. While we have been disappointed with the results achieved to date, we remain optimistic that we'll soon recognize significant operational upside in this portfolio through our focused regional density strategy.

Bryan:

I'll now hand the call over to Tim to walk through our financial results.

Timothy McHugh:

Thank you, Nikhil. My comments today will focus on our second quarter results, performance of our triple-net investment segments, our capital activity, our balance sheet liquidity update and finally an update to our full year 2024 outlook. Welltower reported second quarter net income attributable to common stockholders of $0.42 per diluted share and normalized funds from operations of $1.05 per diluted share, representing 16.7% year-over-year growth or 19% year-over-year growth after adjusting for relief funds received in Q2 2023. We also reported total portfolio of same-store NOI growth of 11.3% year-over-year. Now turning to 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 twelve months ending 03/31/2024. In our Senior Housing triple-net portfolio, same-store NOI increased 4.3% year-over-year and trailing 12-month EBITDA coverage is 1.4 times, marking a new post-COVID high in coverage. In the quarter, we reached agreements to transition 36 properties operated by Storypoint and New Perspective from triple-net to RIDEA effective 3Q bringing total year-to-date RIDEA transitions to 47. Consistent with our strategy over the past two years, these conversions, despite being short-term dilutive, should prove highly accretive over time. As Welltower moves into the equity position these assets continue to benefit from post-COVID recovery in fundamentals and the industry's long-term secular growth trends. In the case of these two operators, it also moves our entire relationship to RIDEA, creating complete alignment across our portfolio of properties with them. Next, same-store NOI growth in our long-term post-acute portfolio grew 2.7% year-over-year and trailing 12-month EBITDA coverage was $1.47 times, which represents an increase from 1.23 times last quarter as more of the recovery in the Integra Healthcare portfolio is reflected in our coverage metrics. Moving on to capital activity. We continue to equity finance our investment activity in the quarter, raising $1.6 billion of gross proceeds at an average price of $96.64 per share. This allowed us to fund $1.2 billion of net investment activity in debt paydowns and end the quarter with $2.9 billion of cash and restricted cash on the balance sheet. In July, our treasury team, led by Matt Carrus, refinanced our revolving line of credit, achieving increased capacity by $1 billion, resulting in $5 billion of total borrowing capacity, while reducing our borrow costs by 7.5 basis points, through reduction in facility fees and base rate to so far plus 72.5 basis points and extending the maturity by two years. I want to thank our banking group for the support they continue to provide Welltower. We deeply value these longstanding relationships. In July we also issued 1.035 billion convertible notes due in 2029. Note bears interest at 3.125%, is convertible to equity at $127.91 per share. We intend to use the proceeds from the note to address our 2025 unsecured maturities coming due next June. The combination of these efficiently priced refinancings increased the total duration of our debt stack to six years and brings our total current available liquidity to $8.7 billion. Staying with the balance sheet, we ended this quarter with 3.68 times net debt to adjusted EBITDA and after completing our incremental $2.7 billion in net investment activity, we expect to end the year at approximately 4.25 times net debt to EBITDA. The resiliency of our business model, trajectory of our future growth and strength of our balance sheet recognized by S&P and Moody's in the quarter as they both moved their outlooks on our BBB+ BAA1 credit ratings to positive during the quarter. Lastly, as I move on to last night's update of our full year 2024 guidance, I want to remind you that we have not included any investment activity in our outlook beyond the $4.9 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 $01.52 to $01.60 per diluted share and normalized FFO of $04.13 to $04.21 per diluted share, or $04.17 at the midpoint. This guidance increase represents an incremental increase in the midpoint of $0.06 per share from a NAREIT guidance and 8½ cents per share from our first quarter normalized FFO guidance. The 8½ cents at the midpoint is composed of 3½ from an improved NOI outlook in our Senior Housing operating portfolio and 6½ cents from accretive investment and financing activity, offset partially by a 1½ penny from higher G&A expectations and near-term drag from triple-net to RIDEA conversions. Underlying this increased FFO guidance is an increase in estimated total portfolio year-over-year same-store NOI growth to 10% to 12.5%, driven by subsegment growth of Outpatient Medical 2% to 3%, long-term post-acute 2% to 3%, Senior Housing triple-net 3% to 4% and finally Senior Housing operating growth of 19% to 23%. This is driven by the following midpoints of their respective ranges. Revenue growth of 9.2% made up of RevPOR growth of 5.25% and year-over-year occupancy growth of 290 basis points and total expense growth of 5.5%. And with that, I'll hand the call back over to Shankh.

Operator:

[Operator Instructions] Our first question comes from the line of Jonathan Hughes with Raymond James. Your line is open.

Shankh Mitra:

Yes Jonathan, we are focused on growing with a set of operators that we find to be exceptionally good in their region at their price point for their product. And there remains portfolios in our triple-net that fits that bucket and over time, you can expect us to continue to work through that and convert into RIDEA. And there will be assets in triple-net that will remain triple-net because we think, though for those assets, primarily midmarket assets, that's the right structure. We've got to think about long-term. Obviously, as I mentioned last time, I think our last call I mentioned that our underlying EBITDA in our triple-net portfolio is actually growing slightly faster than our RIDEA portfolio purely because of the geographic mix. That's primarily U.S. and UK. But it will not be prudent for us to think, let's just convert the whole thing, because right now we have the growth. We have to think about long-term and think about the growth prospects beyond stabilization relative to what we think inflation will be over a period of time. But there are opportunities, and you can imagine that we're hard at work, continue to work through with our partners to structure win-win deals.

Vikram Malhotra:

Good morning. Thanks for taking the question. Maybe just Shankh, building on your last comment, I mean I don't know what innings we are in terms of the recovery, but whatever phase we're in. Can you just maybe elaborate give us color on sort of what gets you through this next phase of growth, both internal and external? And I just mean like the components that drove internal expenses and better pricing power seemed sustainable. If you can comment on that, as well as on the external growth, just curious, the acquisitions you're doing, like how much occupancy upside do they have relative to the portfolio? Thanks.

Operator:

And your next question comes from the line of Nick Yulico with Scotiabank. Your line is open.

Shankh Mitra:

Nick, let me try and I think John or Tim, you can jump in as you fit. There are several questions I'm not sure I remember of them all. First is the occupancy. I think you heard John's comment that we have thousands of units that are under renovation that's going through. A lot of units are actually offline, so that might have contributed, as John said, that will impact or has impacted some near-term fundamentals. I've said this million times that we will always sacrifice short-term for long-term. We would expect that will augment our 2025 growth, but we are confident achieving obviously the NOI growth that we have put out otherwise we would not be raising that guidance. What was the other question, second half? Look, the thing is, if you think about the summer selling season, I sort of think about that June, July, August, September phenomenon. We got one month obviously in the quarter. We're pleased with June. That's sort of, this is the second quarter is always the second half sort of growth as we come out of the spring season, and it's really July, August, September that makes or breaks the year and we're very pleased with July and I have nothing more to add to that.

Joshua Dennerlein:

Yes, good morning, everyone. Tim I just wanted to get your thoughts on how you plan to lean into the balance sheet as a driver of future growth. Maybe you've really taken the leverage down and just thinking about like the opportunity set as you go forward?

Shankh Mitra:

But Josh, if you just think about longer term basis, there is massive organic deleveraging that's happening, and at the same time, the free cash flow generation is significantly picking up. You are onto something as you think about a longer term capital structure. We clearly don't think if we just stay where it is and organic deleveraging continues to happen, we'll be three times leverage soon. We don't think that's where a company of our size and scale should work at. So there is definite capacity to tap into to drive partial growth. But as Tim pointed out, that if the optionality, that's what I'm focused on. It's not a question of what we will in a given period of time do. It's the question is what we can. And as sort of, as you think about worst and normalized earnings for this company, if you think about that in terms of normalized balance sheet, not a point in time balance sheet that's too highly leveraged or too lowly leveraged as we are.

Unidentified Analyst:

Thank you. In your opening remarks, you mentioned the operating leverage that's inherent in the business. Maybe could you talk about run rate where you think that that can take margins to?

Operator:

And the next question comes to the line of Michael Griffin with Citi. Your line is open.

Shankh Mitra:

Yes. So I'll try to start. Nikhil, please jump in. So it depends on where in the product cycle you have availability of debt. So if you think about more stable product, which has in place significant occupancy and significant in place cash flow that still can be financed. So if there is any competition, then that competition is there. We have no interest in buying that product. We are total return investor. You have to think about if you buy in 90%, 95% occupied Senior Housing building, no matter what cap rate you buy at, you will end up being at a basis that at least for most cases is not acceptable to us. For us, it's always about basis and staying power. That's how we invest capital. So if there is any sort of interest or it's just purely on availability of debt. We play at a space where we are much more interested in future upside, much more interested in bringing our operators to change the operating platform and operating environment and that's why we don't. We just, obviously we have put up this kind of investment volume purely because people are coming to us directly before they go to market. You will see things that go to market a lot of times. We have looked at it and then decided that's not a fit to our portfolio. This company is not designed to buy. We're trying to invest capital and build our regional density. So we think about assets and one asset at a time, depending on what other assets we own in those markets with those operators and that's how we think about this business.

Michael Carroll:

Yes, thanks. Nikhil, I wanted to touch on your comment that you made in your prepared remarks regarding foreign counterparties. Do you know, or I guess, how much seniors housing exposure do these parties have and why are they looking to exit or reduce their exposure? I mean, are they just looking to completely get out of the business or are they just looking for a partner that can help them kind of capture some of the seniors housing upside that they might not be able to do themselves?

Operator:

And your next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Shankh Mitra:

One, I think I have already hinted about this to Vikram's question earlier, but we're very, as I said, we're very pleased with the occupancy growth over the last couple of years, including this year. But if we -- all the initiatives that John has been building towards, if that can enhance that growth, we'll be very pleased. We shall see. Even this year is not over yet. It's hard to comment on next year, but we'll be very pleased if that happens.

Michael Mueller:

Yes, hi. Your development pipeline and commitments are about 75% Senior Housing and 25% Outpatient Medical, I guess how do you see these dollars invested and the mix between the two trending over the next few years?

Operator:

And your next question comes on the line of Jim Kammert with Evercore ISI. Your line is open.

Nikhil Chaudhri:

I think I mentioned that two quarters ago or maybe even last quarter, I don't recall, but you can go back and check. But since 2018, we have built this business to about 25,000 units that the whole business, through a pandemic compounded roughly between 8% to 10%. So that's obviously, as you know, these communities are highly occupied and despite that, they're compounded at that level. I hope so that gives you a sense of why we're excited about the business.

Ronald Kamdem:

Hey, thanks so much. So looking at the cash flow statement, looked like you generated $1 billion of operating cash flow over a six-month period, which is looks to me like a first for the company. I know John is doing a lot on the operational side, which we'll see in 2025, but curious if there's any sort of thought either in sort of working capital efficiency, CapEx, as you're thinking about free cash flow, as you sort of scale and continue to grow these businesses, are there still sort of potential upside drivers to that? Thanks.

Operator:

And your next question comes from the line of Rich Anderson with Wedbush. Your line is open.

Shankh Mitra:

So first, let's talk about what we disagree. Let's not take example of what exactly you said. I'll tell you, it's much harder to get to 95% than actually stay at 95%. So your basic assumption that it gets harder as you go on the occupancy assumption is exactly opposite of what our assumption is. So that's sort of the number one point. Number two is what is the future growth of senior housing as a business? We will debate that when we get there. Our first goal is, as I mentioned, you probably have picked up on my earlier comments, that as you stabilize assets, your ability to charge or your ability to get to higher RevPOR increases pretty dramatically. Right? So that's basic supply/demand. And so first, our goal is to get the whole portfolio there. And as you know, we're constantly reloading the gun. We're constantly buying lower occupancy buildings. And Nikhil bought a bunch of buildings this quarter that are 40% occupied, 50% occupied. Right? So we have a few years of work ahead of us to get to the portfolio to where we believe frictional vacancy is. And it sounds like you and we have a very different opinion of what the frictional vacancy is. But let's just get there and after that we'll debate what the long-term NOI growth of the business looks like. However, I'll give you a hint to think about on your own. Think about what operational leverage at different level of occupancy is. The NOI growth is a function of at a occupancy level, what your flow through margins are. And as you know, flow through margins goes up as occupancy goes up. Purely that's called operational leverage, right? That's just operating leverage. Once you think through that, you can come to that conclusion yourself. But we're not going to sit here and speculate. We first need to get to the Promised Land.

Austin Wurschmidt:

Yes, thanks. I wanted to hit on John's comments around focusing on lower acuity customers, and I'm just curious how long the tail is to continue to draw upon that resident base. And given the longer lifecycle that you referenced, how does that play into your ability to sustain kind of the RevPOR, ExpPOR spread that you're focused on?

Operator:

And your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Your line is open.

Nikhil Chaudhri:

Yes, Omotayo, good morning. So first I just want to clarify that we're not just thinking about going back to pre-pandemic margins. As I said, that if that's all we do, we failed. So, but what needs to happen to get to a higher level of occupancy, a higher level of margin, is simply we need to get to higher level occupancy. So I think there's a lot of businesses you guys follow and cover and all and generally speaking, it's in our head that pre-pandemic was good. We have to remember that pre-pandemic for Senior Housing business was actually pretty bad times. Right? We got a few years of oversupply situations from call it 15 to 18, pre-pandemic wasn't good time. So we should not target to get to pre-pandemic. But to answer your question, occupancy needs to be higher for us to get there. And hopefully what you heard today, that we're excited about occupancy growth this year, excited about occupancy growth next year, and we hope that we will get to those margins as occupancy builds.

Wesley Golladay:

Hey, good morning, everyone. Can you talk about what is the timeline to stabilize your Wellness Housing developments and how much does falling lumber impact the development costs?

Nikhil Chaudhri:

I think on the lumber point that has helped, but overall cost of development has not come down. If you put everything in the blender with different contractors, different trades, labor cost, construction cost is still higher than it was a couple of years ago, meaningfully.

Emily Meckler:

Good morning, guys. On the last earnings call, you mentioned a significant amount of distressing your housing opportunities in the market. What percentage of these at risk of [indiscernible] properties holding roughly on 16 billion inclusive of agency and bank loans outstanding? Would you consider the quality and price you'd be willing to buy?

Operator:

And there are no further questions at this time. This concludes today's conference call. You may now disconnect.

Operator:

Thank you for standing by. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Welltower First Quarter 2024 Earnings Call. [Operator Instructions]

Matthew McQueen:

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.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I'll review first quarter business trends and our capital allocation priorities. John will provide an update on the operational performance of our senior housing and outpatient medical portfolios. Nikhil will give you an update on the investment landscape. And Tim will walk you through our triple-net businesses, balance sheet highlights and guidance update.

John Burkart:

Thank you, Shankh.. Momentum that continues to build in our business through 2023 has carried into the early part of this year, as reflected by our strong first quarter results. Our total portfolio generated 12.9% same-store NOI growth over the prior year's quarter, once again, led by the senior housing operating business.

Nikhil Chaudhri:

Thanks, John. Before speaking to our recent investment activity, I wanted to share some high-level market observations. As we have indicated before, we are in a unique environment in which business fundamentals are very strong, and at the same time, the opportunity to deploy capital remains extremely compelling.

Operator:

[Operator Instructions] Your first question comes from the line of Ronald Kamdem of Morgan Stanley.

Shankh Mitra:

Ron, as we have indicated, this is too early in the year. Just as you know, our annual results will be pretty much defined by what the summer leasing season gives us. You know we have -- though while we're pleased with what we have seen in the year, there's this healthy level of paranoia in our team. We don't know what the market will give us. We'll report to you.

Operator:

Your next question comes from the line of Vikram Malhotra of Mizuho.

Tim McHugh:

Yes, Vikram. On the FAD side, we've had an ongoing conversation around this just FAD growth. And we continue to focus on the long term. On the CapEx side, growing an internal or internalizing our capital management team and growing that team has been a main initiative over the last 1.5 years. And so as we've done that, we've continued to identify value-add projects, it's really attractive basically returns. And so CapEx, probably a bit elevated here from a long-term run rate. But is helping drive cash flow alongside of it. And as long as we continue to see those opportunities, we'll continue to put capital to work.

Shankh Mitra:

I have nothing to add to that.

Nicholas Yulico:

Just a 2-parter here on the acquisitions. In terms of the $2.6 billion, closed under contract. Can you give us a feel for the first year stabilized yield -- sorry, first year yield and then ultimate stabilized yield expectation. And then -- is any of the distress in the market or the higher interest rates pushing up yields on new investments?

Tim McHugh:

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

Austin Wurschmidt:

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

Operator:

Your next question comes from the line of Jonathan Hughes of Raymond James.

John Burkart:

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

Operator:

Your next question comes from the line of Juan Sanabria of BMO Capital Markets.

Shankh Mitra:

One, the -- a lot of these early transitions will eventually come into after 5 quarters. So depending on when they were done, they will come towards the end of the year. you should expect strong growth from them, whether they will be additive or not, it's too early to say. Probably, there will be similar growth or they will add to the growth. But it depends also -- remember, they're coming up with strong overlapping strong quarters behind them as well. What was the other part of your question, Juan that I missed?

Tim McHugh:

Juan, just on the kind of numbers there, the 159. So the Canadian assets that have transitioned, there's about 62 of those in our transition portfolio. Those transition in the fourth quarter. Those will be -- those will come back in '25, the majority of the rest of them come into the pool of '24.

Nicholas Joseph:

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

Operator:

Your next question comes from the line of Joshua Dennerlein of Bank of America.

John Burkart:

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

Michael Carroll:

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

James Kammert:

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

Michael Mueller:

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

Operator:

Your next question comes from the line of John Pawlowski of Green Street.

Nikhil Chaudhri:

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

Richard Anderson:

Great quarter. It keeps getting better and better. Shankh, used the word were abundant amount of paranoia in the company, which is good to hear. And I want to sort of tackle that side. I'm sure that you focus not only on the opportunities, which you're clearly doing but also on the potential risks that can materialize. And think of a company like Prologis obviously, like you and industry thought leader, but down 21% this year and trading near its 2-year low. How does Welltower anticipate potential pitfalls that may materialize. Some of the things that you're thinking about to manage around today, to your point, about deploying capital and making sure that it produces the end results that you're envisioning.

Shankh Mitra:

Thank you, Rich. I said a healthy amount of paranoia and we do, and we're constantly thinking -- constantly looking over a shoulder to think what can go wrong. Now let's talk about numbers. The law of numbers are very unforgiving, right? When your NOI goes down by 50%, $100 become $50, you need to go up 100% to go back to just where you started, right? So while 25% NOI growth is impressive, let's just be honest, like I think I said this in an industry conference a few months ago that we haven't made any money over the last 10 years as an industry. So while year-over-year numbers are impressive. We got to understand the basic numbers. Just to go back to where we started as an industry. And if NOI was -- let's just say it was down 50%, somewhere down 40%, but somewhere on cut in half, and that's what will happen if you lose 20 points of occupancy you need to just go back 100% to go back to a high watermark.

Wesley Golladay:

For that $19 billion opportunity over the next 2 years, is that a domestic opportunity only? And can you highlight what you're seeing in the U.K. and Canada?

Operator:

With no further questions, that concludes today's Q&A session. We thank you for your attendance. This concludes today's conference call. You may now disconnect.

Operator:

Good morning. And welcome to the Welltower Fourth Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Matthew McQueen, General Counsel. You may begin your conference.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I will review our fourth quarter and full year 2023 results and describe high level business trends and our capital allocation priorities. John will provide an update on the operational performance of our Senior Housing and Outpatient Medical portfolios and progress on our operating platform build-out. Nikhil will give you an update on the investment landscape. And Tim will walk you through our triple-net businesses, balance sheet highlights and 2024 full year guidance. First, as I reflect back on 2023, it was a year of solid execution across the Board with significant progress achieved in all aspects of the business. Operating performance far surpassed our initial expectations. We had a great year, a record-setting year in terms of capital deployment and we meaningfully strengthened our balance sheet and liquidity profile. Just as importantly, perhaps, is the groundwork we laid to sustain this level of performance and continue to deliver outsized growth not only in 2024 but also well into the future. This includes the considerable progress John and his team have made on the build-out of our operating platform, which we continue to believe will transform the industry. On top of that, as we have discussed in recent quarters, we have executed a number of operator transitions across all our geographies, as well as converted a handful of properties from triple-net to RIDEA. All should bear fruit later this year and in 2025. We finished the year strong with significant momentum to set us up for another year of solid performance in 2024. In terms of our Senior Housing Operating portfolio, I was particularly encouraged by the occupancy growth in fourth quarter, which is seasonally not the strongest period. The portfolio saw 110 basis points of sequential occupancy gains, which translate into 330 basis points year-over-year occupancy growth, and the 330 basis points year-over-year occupancy growth is by far the highest level we have ever achieved in the fourth quarter of any year in our recorded history. Just as compelling is that looking at the intra-quarter trends, year-over-year occupancy growth strengthened each month, which is unusual given the aforementioned seasonality of the business. We’re also pleased with the rate growth achieved by our managers. During our last call, I described to you that one of our largest operators, Sunrise, pulled forward Jan 1, 2023 rate increases into 4Q 2022. This year they have returned to their historical cadence of Jan 1 rate increases. While this distorts our show portfolio’s reported Q4 2023 RevPOR or the unit revenue, the rest of the portfolio delivered RevPOR growth of 6.8%, reflecting the underlying fundamental strength of the business. While our 2024 guidance assumes some diminution of RevPOR growth from full year of 2023 levels of 6.6%, we still expect another year of near double-digit topline growth as occupancy continues to build at a solid pace. 4Q 2023, same-store ExpPOR or expense per occupied room grew 1.7% year-over-year. The lowest level of growth in Welltower’s recorded history, driven by 4Q 2023 same-store compensation per occupied room growth, which grew 1.9% year-over-year, also the lowest growth in Welltower’s recorded history. While the normalization of agency labor usage is helping to dampen COMPOR growth, we are also seeing some good trends in the salary and the wages line. All of these trends are resulting in a favorable spread between RevPOR growth and ExpPOR growth. The powerful combination of this revenue backdrop with continued margin expansion that should be expected due to the high operating leverage inherent in the business leaves us feeling very strongly about our 2024 NOI growth setup. Tim will give you our detailed buildup of our NOI guidance based on our current assumptions, but please understand that we have no false pretense about perfectly knowing what the business will look like as we move through the years, particularly the all-important summer months. But we are optimistic, given the demand-supply backdrop, which improves by the day and the rising system-wide occupancy, as well as the early success we have seen in John’s operating platform buildout. While 24.4% NOI growth last year for our shop portfolio alone was very encouraging, I’m extremely pleased with our capital allocation activities as well. In 2023 was the most active year in our history in terms of raising and deploying capital. We completed almost $6 billion of investments in the year, nearly half of which closed in Q4 alone. While I won’t get into the specific transactions, I will mention that they share some common characteristics. First, we generally grew with our existing operating partners in their respective markets. Second, we acquired assets at a significant discount to replacement costs from core funds, PE funds, pension funds and financial institutions who were seeking liquidity. We also added a couple of new operating partners along the way who I envision us growing with in the near-term. More to come on this topic as we progress through the year. The torrid pace of investment activity in Q4 has continued with 2024 starting off with a bang. In fact, I do not recall having ever been this busy in first quarter on the deal front. While we have pre-negotiated documents and structure to leverage, it is great trust that we have built with our 2023 counterparties that will make follow-on transactions easier to execute. These counterparties also experienced what our promise always is, that we honor our handshake irrespective of circumstances, as evidenced by the continued -- our continued execution through this historic capital market volatility in the fall and winter of 2023. They know that we remain the clean shirt in an industry where re-trading counterparties is the norm. It is interesting and perhaps coincidental that we’re experiencing another bout of market volatility after a few weeks have come. Over the past few weeks, another regional banking crisis driven by U.S. CRE debt appears to be rearing its ugly head from New York to Tokyo to Germany. We are currently staring at approximately $16 billion of Senior Housing loans maturing in the next 24 months in the U.S., which dwarfs roughly about a couple of billion dollars of agency financing completed in 2023. This should generate significant equity, as well as private credit opportunity for us. Suffice to say, our near-term capital deployment pipeline remains robust, highly visible and actionable, and with -- and squarely within our circle of competence, where we can bet with house odds rather than gambler’s odds. Along with what we have already done in 2023, these acquisitions that carry an attractive basis, operational upside and significant value-add from Welltower’s operating platform, we have a -- we will have a meaningful impact on what remains a true North Star, long-term compounding of partial value of our existing short loans. With that, I will hand the call over to John. John?

Nikhil Chaudhri:

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

Shankh Mitra:

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

Connor Siversky:

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

Operator:

Your next question comes from Jeff Spector with Bank of America. Please go ahead.

Shankh Mitra:

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

Vikram Malhotra:

Good morning. Thanks for taking the question. I guess, I wanted to -- you have very strong outlook on shop. I wanted to dig into that a bit more in two parts. One, can you talk about sort of at the high end of your guidance range, what you or maybe the low end, what you’ve baked in for RevPOR growth? And then related to that, as you sort of trend towards 85%-ish, 86% occupancy, clearly there are benefits to the bottomline. But I wanted to understand, do you -- do the operators need to stuff up or spend more marketing dollars? Is there a maybe some broad trends that you can share with us to achieve that 85% of the margin flow too?

John Burkart:

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

Jonathan Hughes:

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

Operator:

Your next question comes from Tayo Okusanya with Deutsche Bank. Please go ahead.

Tayo Okusanya:

Hello?

Tayo Okusanya:

Okay.

Tayo Okusanya:

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

Operator:

Your next question comes from Jim Kammert with Evercore. Please go ahead.

Shankh Mitra:

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

Austin Wurschmidt:

Yeah. Thank you. Shankh, just kind of touching again on the investment pipeline and all the factors you’ve laid out today of -- and previously as to why that opportunity continues to expand. I guess I’m curious how big the investment pipeline you see today is sort of fee simple real estate deals versus the credit opportunities and how much of that expansion that you’ve seen in the investment pipeline more recently is a function of the credit opportunity side versus…

Austin Wurschmidt:

… the more traditional fee simple.

Operator:

Your next question comes from Michael Griffin with Citigroup. Please go ahead.

Shankh Mitra:

Yeah. I think from a competition perspective, as I mentioned in my prepared remarks, most of the transactions -- all of the transactions that we’ve executed on, they have been privately negotiated directly with the sellers. So it’s not that we’re participating in auctions or anything like that and a big part of that is there is really no liquidity in the market. So we’re not seeing any competition really. And then, I think, remind me again, what was your second question?

Shankh Mitra:

Yeah.

Operator:

Your next question comes from Mike Mueller with JPMorgan. Please go ahead.

Shankh Mitra:

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

John Pawlowski:

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

Shankh Mitra:

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

Michael Carroll:

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

Operator:

Your next question comes from Rich Anderson with Wedbush. Please go ahead.

John Burkart:

Great question. I -- as you know, I tend to avoid a lot of details, because everyone tends to copy things and it’s better to execute. I think what you’re seeing in our numbers, there’s real numbers coming through. So it’s not just discussing it. You’re seeing it in the output. But I do appreciate you want to get some more specifics. You mentioned frictional vacancy. We’re nowhere close to that right now. The opportunity to just literally increase vacancy without worry to -- worry or concern about frictional vacancy is there all day long and so there is really both. There’s some level of opportunities on the expenses, but that really relates to productivity, because again, as I say it over and over, our focus is on improving the customer experience, not about trying to cut anything. So to the extent there’s some productivity opportunities there, which the platform is focused at, in the sense of I mentioned last time, sometimes it takes hours to move someone in because of the paperwork and having a unified platform will solve for that and eliminate that wasted time, enabling our staff to spend more time with the with the customers. A lot of the opportunity, though, really is focused on the revenue side, whether it be increasing occupancy, because we’re just simply out executing. Frankly, we’re answering the phones and delivering that that quality customer experience that’s driving occupancy or because we’re changing the value proposition and the market says this is worth more. Hopefully that helps.

Nick Yulico:

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

Operator:

Your next question comes from Wes Golladay with Baird. Please go ahead.

Shankh Mitra:

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

Shankh Mitra:

Yeah.

Shankh Mitra:

Yeah. So, look, we have a very large portfolio, it’s hard to speak in generalities, and obviously, across three countries. But if you look at all of the industry data that you will see, our portfolio has meaningfully outperformed both in rate growth, as well as occupancy growth. But what’s new about that? But you can probably look at the data and others kind of decide that might get to that point. But as I said, we don’t know what the future will give us. Our -- what we endeavor, what I promise to you that will put 200% effort to outperform the market and that’s what we are trying to do. And so far, what I’ve seen, I mean, John mentioned a stat that, if we do achieve our NOI growth guidance in the shop portfolio this year, there’s no guarantee we will. But if we do, that’ll be 75% compounded growth over three years. There is -- I don’t believe there’s any precedence of that in a large broad sort of a portfolio. So we are meaningfully performing the market and that gap is widening and I think it will continue to widen.

Juan Sanabria:

Hi. Good morning. Just a question on pricing trends for new customers. One, how is that evolved through the fourth quarter? Just to think about that relative to occupancy. And I guess the second part would be, you mentioned the operating leverage changes as occupancy improves and you’re fully staffed. So how should we think about -- how are you thinking about the tradeoff between occupancy and price going into the rest of 2024 and into 2025?

Operator:

Your final question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Shankh Mitra:

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

Shankh Mitra:

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

Shankh Mitra:

Oh! Yeah. Yeah.

Shankh Mitra:

Yeah. So, look, I can’t speak for others, right, clearly, right? What do I know about others? My promise to you and our fellow shareholders have always been that we will put 100% effort to outperform the market. So far, we have done it, right? I don’t think Q4 numbers will be much different and I think our hope will be that we will continue to do so. My confidence in our ability to outperform the average of the industry is widening. I think that gap is widening and my confidence is increasing. But we still have to -- this is February 14th. We have to see what the year gives us.

Operator:

Thank you for standing by, and welcome to the Welltower Third Quarter 2023 Earnings Conference Call. I would now like to welcome Matt McQueen, General Counsel to begin the call. Matt, over to you.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I'll review our third quarter results and capital allocation activities. John will provide an update on performance of our Senior Housing Operating and Outpatient Medical Portfolios. And Tim will walk you through our triple-net businesses, balance sheet highlights and revised guidance. Nikhil is also participate in the Q&A session of the call. Against a backdrop of increasingly uncertain macroeconomic outlook, I’m pleased to report another strong operating results with which continue to exceed our expectations. Our Senior Housing portfolio posted another quarter of exceptional revenue growth, which continues to approximate double-digit levels, driven by both strong pricing power and occupancy build. We are delighted to report that occupancy growth not only accelerated through Q3, but also that September occupancy gains marked the highest level we've seen over the last 2 years. From a pricing standpoint, we continue to achieve outsized rate increases as reflected by nearly 7% growth in RevPAR or unit revenue. As you may recall, we previously mentioned that last year, one of our largest operator pull forward its typical January increase to September 2022. This year, the same operator elected to maintain its historical cadence of rate increases and will therefore wait until January of 2024 to push through rate increases. As a result, reported pricing of Q3 this year may appear lower than what we are experiencing in the business and it bears repeating that our operators' pricing power remains strong. The story on the expense side is similar to that of our top line and result continues to outperform our elevated expectations. We reported 2.4% expense per occupied room growth or unit expense growth, the lowest reported export growth in the company's recorded history. This is largely driven by a 2.7% increase in compensation per occupied room, which represents a substantial step down in recent quarters. This combination of strong revenue and controlled expense growth has generated 333 basis points of same-store margin expansion, yet another record for the company as it marks the highest level of quarterly margin improvement in our recorded history. And our shop NOI margin of 25.6% is the highest level of profitability we achieved since pre-COVID. NOI growth for the quarter came in 26.1%, our fourth consecutive quarter of 20% plus NOI growth and the second highest level of growth in the company's recorded history. While we are pleased that margins are moving in the right direction, we are also mindful that our profitability remains significantly below pre-COVID levels and below where we believe the industry can attract external capital investment on a long-term basis. Our managers strive to deliver a superior product, experience and provide valuable choices for our retired seniors. Our product remains highly affordable at the high-end while we operate in the U.S. and the U.K. and they should continue to focus on highly differentiated services, even if that means rate increases need to remain at the elevated levels. As I've said many times, cutting corners is not in our DNA. We recommend that our operating partners serve fewer residents well than serve more of them poorly. As a result, one of our key items to focus is to work with the right operator to improve the customer and the employee experience. We believe that doing so will improve the experience of all [technical difficulty] all of our stakeholders. Conversely, we will be very disappointed if our operators take the path of lease resistance, which ultimately will impact resident and employee satisfaction. We continue to focus on the delta of RevPOR minus ExpPOR as the single most important operating metric to optimize. While it is too early to comment on anything specific relative to 2024, as I sit here today, I can believe -- I believe that the delta of RevPOR minus ExpPOR can expand, which we need to get to a sustainable level of margin. From a product standpoint, AL continues to outperform IL and from a geographic standpoint, Canada finally caught up to the level of growth that U.S and U.K were experiencing. We have further retailing to do in our Canadian business with a new operating platform being launched in next few weeks. And going forward, we believe both of our international businesses will have been significant contributors to our earnings growth in '24 and '25. From a capital allocation standpoint, we have never been busier. Last quarter we spoke about a pipeline of $2.3 billion. We closed $1.4 billion in Q3, and roughly another $900 million in October. Additionally, we have another $1 billion of deals just about to cross the finish line. Beyond these billion dollars of investments under contract, our pipeline remains large and near-term actionable. But the execution of these deals will depend on our access to capital. The extremely challenged debt and equity market in this higher for longer rate environment suggests that this trend will continue and perhaps will get better in '24. We'll continue to see credit evaporate from our investment universe and are selectively pursuing great opportunities in both whole stack and med stack levels with highly favorable last dollar exposure. These opportunities have potential to achieve equity returns with basis and credit downside protection typically seen in low leverage transactions. We're seeing opportunities across product types and geographies with equity investments in U.S senior housing, and credit investment on the SNF [ph] side, making up the large stewards [ph] of opportunities that we're constantly being pinned on. I want to remind you that we have a three dimensional lens through which we measured investment opportunities

Tim McHugh:

Thank you, John. My comments today will focus on our third quarter 2023 results. The performance of our triple-net investment segments in the quarter, our capital activity, a balance sheet and liquidity update, and finally our updated full year 2023 outlook. Welltower reported third quarter net income attributable to common stockholders of $0.24 per diluted share and normalized funds from operations of $0.92 per diluted share, representing 10.4% year-over-year growth, or 16.5% growth after adjusting for HHS and the year-over-year impact from changes in FX rates and higher base rates and floating rate debt. We also reported total portfolio same-store NOI growth of 14.1% year-over-year. Now turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats are reported [indiscernible]. So these statistics reflect the trailing 12 months ending 6/30/2023. In our senior housing triple-net portfolio, same-store NOI increased 3.9% year-over-year and trailing 12-month EBITDA coverage is .93x. In the quarter, we agreed to convert 11 StoryPoint assets and triple-net lease to RIDEA, which will bring their regionally focused managed portfolio up to 55 Midwestern properties in the fourth quarter. Next, same-store NOI and our long-term post acute [ph] portfolio grew 5.3% year-over-year, and trailing 12-month EBITDA coverage was 1.44x. Turning to capital activity. We closed on $1.4 billion of acquisitions and loans in the quarter, led by $618 million of senior housing operating investments. As a reminder, the Revera PSP joint venture online that was announced last quarter will close by geography in three distinct phases. The U.K portion closed in 21Q and the U.S portion close this quarter, resulting in $75 million of net investment. And the Canadian portion is expected to close by year-end. In the quarter, we continue to issue through our ATM to fund ongoing investment spend and position the balance sheet for future opportunities. We raised gross proceeds of $1.9 billion, at an average price of approximately $81 per share, allowing us to fully fund year-to-date investment activity and also extinguish $290 million of debt in the quarter. This capital activity along with continued growth across our business segments including the continued post-COVID recovery within our senior housing operating business, help drive net debt to adjusted EBITDA to 5.14x at quarter end which represents 1.8x of deleveraging versus one year ago. We expect net debt to adjusted EBITDA to settle in the mid 5s on a pro forma basis post near-term investment activity, and it continued to trend downward in future quarters, as a recovery in our senior housing operating portfolio continues to drive organic cash flow higher. Additionally, filing this intra and post-quarter capital activity, including $900 million of gross investments closed to date in October, we have a current cash and cash equivalents balance of $2 billion, along with full capacity on our $4 million revolving line of credit and $624 million in remaining expected proceeds from near-term dispositions and loan pay downs, representing approximately $6.6 billion in near-term available liquidity. Lastly, moving to our full year guidance. Last night we updated our previously issued full year 2023 outlook for net income attributable to common stockholders to a range of $0.91 to $0.95 per diluted share and normalized FFO of $3.59 to $3.63 per diluted share, were $3.61 per share at the midpoint. Our normalized -- updated normalized FFO per share guidance represents a $0.055 increase at the midpoint of our previously updated guidance. This increasing guidance is reflective of a $0.03 increase from higher expected full year senior housing operating NOI, a $0.035 increase from capital allocation activity, which assumes no further investment year beyond what is close the date, and this increases are partially offset by combined penny drag on increase in expected full year G&A and stronger dollar. Underlying this FFO guidance is an increased estimate of total portfolio year-over-year at the same-store NOI growth of 11.5% to 13.5%, driven by subsegment growth of outpatient medical, 2.5% to 3%, long-term post-acute 4% to 5%, senior housing triple-net of 1.5% to 2.5%, and finally, increased senior housing operating growth of 23% to 26%. The midpoint of which is driven by continued better-than-expected expense trends, along with revenue growth of approximately 9.8% year-over-year. Underlying this revenue growth is an expectation of approximately 240 basis points of year-over-year average occupancy increase and rent growth of approximately 6.7%. And with that, I'll hand the call back over to Shankh.

Operator:

[Operator Instructions] Our first question comes from the line of Vikram Malhotra from Mizuho. Please go ahead.

Shankh Mitra:

So Vikram, I don't comment on other people's deals. It seems like it's a great outcome for both of them. We were not engaged, and we will not be engaged in that process, just to be specific. As we said many times, what works for us is one asset at a time transactions even if we do, when we do portfolios, Nikhil is finishing up a portfolio transaction right now of 10 assets that we have gotten. We have picked from a collection of 80, 90-plus assets. So it's sort of -- we're very, very focused on going deep than going broad in our markets. And we genuinely believe in small transactions with one asset at a time. I believe there are median size of assets, transactions that we have done in the last 3 years, which constitute this $12 million-or-so of assets we've bought is like $30 million. That's what we like, that works for us, and that's what will continue. We have no [indiscernible] opportunities. I mean what we see today, the market is, I will not be surprised, you guys will recall that we had talked about a few years ago, there will be potentially $30 billion of opportunities. As we sit here today, we can say the TAM is actually bigger than that, given how much loans that coming due, how much of floating rate debts are rolling over. So we have no problem growing the company as long as we have access to capital and we can do it on a per share [ph] basis. But large M&A is something that I've never liked. I'm not saying I'll never do it. But frankly speaking, it's just not much interest to us. And specifically answer to your question, we're not engaged and will not engage in the process that you mentioned.

Connor Siversky:

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

Connor Siversky:

So you outlined that Regency case study in the deck for those -- I think you were in British Columbia near Alberta. Is that a good example to use as a gauge for the NOI potential of the broader Cogir portfolio?

Connor Siversky:

Great. Thank you.

Juan Sanabria:

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

Operator:

Our next question comes from the line of Jonathan Hughes with Raymond James. Please go ahead.

Shankh Mitra:

Let me try the first one. So I did not say that specific transaction might be a drag on the fourth quarter. I said the three things that I described together could be a drag on the fourth quarter. But combined, all of them should be a significant driver of growth on 20 -- for '25 or just call it, stabilized earnings. That's the point I was trying to drive, not specifically about Kisco and Balfour.

Shankh Mitra:

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

Unidentified Analyst:

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

Operator:

Our next question comes from the line of Michael Griffin with Citi. Please go ahead.

Shankh Mitra:

So first thing I mentioned that I don't comment on other people's deals. So I have nothing underwritten, so I can't even comment on what the underwritten returns looks like. But specifically to medical office, I think I provided some color last quarter that we're unsure at this point what the long-term inflation land. And because we are unsure we are unsure of at this point to make a huge bet on an asset class that we don't know what the growth profile versus the long-term inflation looks like, right? So that's a very important point. We are finding opportunities where we think we can small opportunities where we can do value add. We are buying assets at 70%, 80% occupancy and leasing up and so that we can see the growth rate higher. But from a stabilized 95%, call it, occupied medical office with a 2.5% increase or whatever it is, the traditional medical office, which provides a good long-term, stable growth for institutional investors is not interesting for us. For that one reason. And the second reason is, it's always -- it's relative opportunities is the question, right? If that's the only thing that was available to us, will be a different conversation. We are easily picking off at low double-digit plus unlevered IRR opportunities in the senior living side assuming that we don't add much value, and I'm pretty positive we will add value. So it's just a question of relative opportunities of where we see we will today. And that's why we have no interest. By no means that suggests that we don't think it's a good deal or not a good deal. I have no idea what the deal is because I'm not engaged in it as I specifically mentioned will not because of the reasons I just pointed out to you.

Joshua Dennerlein:

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

Operator:

Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead.

Shankh Mitra:

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

Operator:

Our next question comes from James Kammert with Evercore ISI. Please go ahead.

Shankh Mitra:

Jim, you are correct that we are seeing turnover is coming down significantly. We are seeing that overall availability of employees who wants to be part of our business and part of the communities is increasing significantly. And we are seeing that our operating partners are getting better using technology and other resources to attract talent and keeping them in the business, right? So that sort of -- it's -- whenever you get hit by a crisis, people figure out ways to do things better, every crisis makes the business better if it survives, right? And that's what we are seeing. And what conviction do we have that RevPOR minus ExpPOR journey can continue very significantly. For a specific line item, on a specific thing, on a specific quarter, we have no idea. I said this a million times. Our goal here is not to predict the future. Our goal is to see what market gives us and do better than market. We'll see what market gives us.

Operator:

Our next question comes from the line of Mike Mueller with JPMorgan. Please go ahead.

Shankh Mitra:

Yes. Mike, I'm just going to be repetitive here. I was asked this question at the NIC conference about a week ago or 10 days ago, whenever that was. I'll repeat what I said on the panel. I think if we're a debt provider in senior housing today, you have a better lot going to Vegas. And if we are an equity provider and senior housing development today, you have a better life buying lottery. I hope that tells you what my view of senior housing development is. I don't even understand why there is any start, any like more than 0 because the economics doesn't make any sense given where construction cost is, where capital cost is and where the margin of the business is. It should not have any starts and it seems like it's going there. I think any stock that you are seeing, people are still playing with other people's money, and that's coming down -- closing down pretty quickly. And I think you will continue to see it's moving down. Mike, did I miss any other part of your question?

Shankh Mitra:

Thank you.

Michael Carroll:

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

Operator:

Our next question comes from the line of Ron Kamdem with Morgan Stanley. Please go ahead.

Tim McHugh:

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

Operator:

Our next question comes from the line of Jamie Feldman with Wells Fargo. Please go ahead.

Shankh Mitra:

I don't want to assure investors of anything. I think investors are aware of our track record, and you guys do a very good job of visiting our properties. So you can see it. The chasing the risk curve to get investments might happen when things are really, really tight. It is an exactly opposite environment, Jamie. And when those environments have occurred in the past, we were massive sellers of assets. We don't chase risk curves to get return. That's just not what we do. Now going back to your actual -- the crust of your question is, frankly speaking, the initial part of COVID, what we are noticing was sort of a lot of broken cash flows, right? Assets while 60%, 70% occupied; new development, brand new assets, 3 years, 4 years, 2-year-old assets, but broken cash flow because that's normal for a business that had breaks even at 60% occupancy and your marginal sort of return, if you will, or your marginal or incremental margins sort of go hockey stake is normal for that period of time given how much occupancy we lost during COVID to have those kind of asset; great assets, broken cash flow because of what the occupancy is and how margins work in this business. That was 2 years ago, 3 years ago, that's what sort of we were seeing. Today, we are seeing broken capital structure, assets are generating the cash flow that you should be generating at 80% occupancy, 82% occupancy where the industry is, call it, 6%, 6.5%, whatever it is, the cash flow yield -- that's not the problem. The problem is the underlying leverage, which is now so far plus 350, 400 is at 9%. That's the problem and those loans are coming to you, you are upside down on a cash flow basis and your upside down on a leverage basis. And those are the ones that are transacting today. So frankly speaking, the number of trophy buildings, number of high-quality, high high-quality buildings, which core investor zone, the core [indiscernible] zone that we have seen in last, call it, 6 months even last 4 months, I haven't seen the 4 years before that, right? And so the quality of opportunities are going up pretty significantly, but it is up to you to decide what is the quality of assets we are buying. And we give assets, you can go and visit them, and I think you will come to the same conclusion. Did I miss any part of the question?

Operator:

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Shankh Mitra:

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

Juan Sanabria:

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

Nikhil Chaudhri:

Nothing meaningful.

Operator:

Our final question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.

Nikhil Chaudhri:

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

Operator:

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Welltower Second Quarter 2023 Earnings Call. [Operator Instructions]. It is now my pleasure to turn today's call over to Matt McQueen, General Counsel. Please go ahead.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I'll review our second quarter results and describe high-level business trends and our capital allocation activities. John will provide an update on the performance of our Senior Housing Operating and Outpatient Medical Portfolios. Tim will walk you through our triple-net businesses, balance sheet highlights and revised guidance. Nikhil is also on the call to answer questions. We are delighted to report results, which exceeded our expectations in both our Senior Housing Business as well as Outpatient Medical Segment. Let me first dig into the Senior Housing segment. The key drivers of this business, occupancy, rate and expenses all came in better than expected this quarter, supported by accelerating demand of our product and plummeting new deliveries. From a top line perspective, our Senior Housing Operating portfolio achieved approximately 10% growth on a same-store basis and 17.8% growth on a total portfolio basis driven by another solid quarter of year-over-year occupancy growth and significant pricing power. Last quarter, I discussed with you how the strong pricing trends, along with moderating expenses, resulting in significant margin expansions that we have been all waiting for. I'm pleased to report to you that this trend intensified in the second quarter as we saw revenue per occupied room or RevPOR growth of 7.3%, coupled with just 3.5% expense per occupied room or export growth, resulting in an approximate 25% operating margin, a level not seen since the onset of the pandemic. And while that still leaves significant upside before achieving our pre-COVID NOI margin of above 30%, we expect to meaningfully exceed our pre-COVID level of profitability over time through John's build-out of the operating platform. All regions and product types contributed significantly this quarter, resulting a 24.2% NOI growth for our senior housing operating segment. While Assisted Living continues to outperform independent living driving exceptionally strong results in the U.S. and U.K., Canada is also joining the party with 17.2% NOI growth. We firmly believe that our Canadian portfolio is finally in sustainable growth mode. In fact, we're in process of significantly optimizing our Canadian business, and have recently allocated a meaningful amount of investment dollars to the region. I'll comment on both in a minute. It is also important to mention that our Seniors Apartment business continue to drive double-digit NOI growth despite the broader deceleration in the apartment industry. We have put significant effort in the last 6 years to build our Wellness Housing business which now nearly totals nearly 17,000 units, and we are pleased to see that our thesis is playing out. All in all, we have finally exceeded $1 billion of annualized net operating income in our Senior Housing segment for the first time since COVID and believe we have a ton of growth left in the tank. At the risk of sounding like a broken record, I want to reiterate our core belief on how to make risk-adjusted return in Senior Housing. Unlike a lot of empirical years in the business, which either focuses on the location or the operators we believe it is a four-dimensional optimization problem of location, product, price point and operators. And we do this objectively through machine and statistical learning using our data science platform alpha. I'm delighted to inform you that we made perhaps the most significant impact in this pursuit through a mutually beneficial restructuring of our joint venture with Revera. Through a series of by sales, we materially simplified our balance sheet, and we matched specific products and locations with the right regional operators in order to achieve meaningful density in their local markets. In the U.K., we took 100% ownership of 29 premier communities, many of which are located in the Greater London market and consider some of the best care homes in the country. We transitioned this care homes from Signature to Avery and believe we have a material upside in this virtually impossible to replicate portfolio, which was 72.8% occupied at the time of transition to Avery at the beginning of June. Though two months does not make a trend, I am delighted to inform you that these communities are showing positive trends right off the bat under Lorna's leadership with current occupancy around 73.5%. In the U.S. We took 100% ownership of extremely well-located assets recently built by Sunrise in high barriers to entry submarket in the West Coast, East Coast and South Florida at a favorable basis and sold a minority interest in 12 other assets. We also moved management of 28 incredibly well-located California buildings to Oakmont, the California communities were 77% occupied when they are transitioned to Oakmont at the end of June. I fully expect this portfolio to be materially additive to our growth in 2024 under Courtney's leadership. As you can see in the case study on the Page 32 of our business update, highlighting previous Oakmont transitions in California. Courtney's team has taken occupancy from 64% to 90% in 2 years at these committees. Though this occupancy has far surpassed their previous high occupancy of 86% in 2016, I fully expect these communities will hit mid-90s occupancy in near future. All things being equal, that stabilization path should be faster for the most recent portfolio of 28 communities that they have assumed the management of. If not for the lessons learned previously, it will be for a higher starting point. And just after four weeks of operations under Oakmont, these properties are on a path to achieve approximately 100 basis points of occupancy growth in first month and are showing positive NOI traction in NOI out of the gate. And finally, Canada, perhaps the most exciting part of this yearlong effort to optimize our portfolio. Through though there is a multidimensional value creation opportunity in this effort I'm delighted to inform you that we are launching a new platform with our partner, Matthew Deguet in English-speaking Canada. As you know, Cogier, under Matthew's leadership is one of the best operators in the business, and we cannot be more excited about launching our first operating platform in a post PLR world. We will double down -- we'll double down on our investments in these communities, dramatically enhanced resident experience and materially improve employee experience, resulting in exciting long-term carrier growth opportunity. I predict this operating JV will witness rapid growth in very near future. The series of steps, which is known as Project Transformer inside Welltower is one of the most complex yet value-accretive transactions we have ever done. Under Eric Chung's leadership in Canada and U.K. and Ras Simon's leadership in the U.S., this multidimensional project will truly transform our company in the next chapter of its evolution. This transaction marks the conclusion of our 7-year journey of contract modernization as virtually all of our contracts are now in RIDEA 30 and RIDEA 40 structure. I cannot emphasize enough how important this milestone is for our farm as we have now full alignment with all of our key senior housing operating partners. We think or swim together. To continue this team of capital allocation, the favorable transaction environment that I described to you last quarter has resulted in an incredibly active summer for us. We currently have approximately $2.3 billion of deals under contract in 26 different off-market, privately negotiated transactions. Opportunities within Senior Housing segment represents the bulk of these transactions with approximately $2 billion of deals comprised of 8,900 units across all three regions. We estimate our investment in these deals to be very attractive, 30% to 40% discount of today's replacement cost, with accretive in-place cash flow and significant growth potential. While I don't like to get into individual transactions, I would like to highlight a transaction in Canada with our partner, Cogier. We're recapping Cogier's existing institutional investor at Propco in highly desirable SaaS portfolio, and Matthew is investing is equity going forward. This CAD 935 million transaction of both recently built and attractive stable assets are a testament to the power of our relationship in this industry. Eddie and his team has been working tirelessly over the past two years on this transaction, and we're delighted to inform you that we signed a definite documents three weeks ago. Additionally, following the completion of this deal and others under recently in a contract, we have achieved another company milestone having closed or signed over $11 billion of transactions since our pivot to offense in fourth quarter of 2020. But we are busier than ever with a robust feasible and actionable pipeline of opportunities that we're underwriting right now. Again, heavily senior housing, but we are also seeing some outpatient medical and skilled nursing opportunities up and down the capital stack. All of which we expect -- all of which we expect to keep us very busy for the rest of the year. Our deal teams didn't get much of summer vacation and looks like they won't get much of a Christmas holiday either as many of these deals will close in Q4. As I described last quarter, both debt and equity capital continue to rapidly evaporate from the commercial real estate space, we're getting hits left, right and center from counterparties who truly appreciate our handshake approach to the business where we can bring both cash and operator to the closing table. We're seeing that the banks are no longer willing to kick the can down the road and in fact, are showing willingness to sell their loan books partially or completely. A handful of these transactions have taken place and many more are brewing. The increased capital requirement directive from the regulators last week will only intensify this trend, and we are ready to help banks release their capital as they execute their other strategic priorities. Nikhil and Tim's cell phone number has been on full display in our full page ad of the American Banker Magazine since the summer of 2020. Please give them a call. I promise you they will respond within hours, not days as it is customarily acceptable standard in Senior Housing Industry. I predict Welltower will play a meaningful role in helping to recapitalize distressed commercial rest loan portfolios that fall within our circle of competence. And lastly, at the risk of stealing Tim's thunder, I would like to point out that our meaningful strengthening of our balance sheet over the last few quarters. Just in the last 1 year, our leverage has fallen from high 60s to mid-5s through a combination of outsized organic growth and prudent capital allocation activity. Were now armed with approximately $7.6 billion of near-term liquidity to address upcoming debt maturities and fund our various capital deployment opportunities. In summary, we have never been more delighted with our operating performance and have never been busier on the deal side and build-out of our platform. While no one knows what future may hold, my partners and I remain as optimistic as they were on the future of our business. And with that, I'll hand the call over to John.

Tim McHugh:

Thank you, John. My comments today will focus on our second quarter 2023 results. performance of our triple net investment segments in the quarter, our capital activity, a balance sheet liquidity update, and finally, our updated full year 2023 outlook. Welltower reported second quarter net income attributable to common stockholders of $0.20 per diluted share and normalized funds from operations of $0.90 per diluted share, representing 4% year-over-year growth or 16% growth after adjusting for HHS and the year-over-year impact from a stronger dollar and higher base rates on floating rate debt. We also reported total portfolio same-store NOI growth of 12.7% year-over-year. Now turning to the performance of our triple-net properties in the quarter, in our Senior Housing triple-net portfolio, same-store NOI increased 3.1% year-over-year and trailing 12-month EBITDA coverage was 0.88x in the quarter. Next, Same-store NOI and long-term postcute portfolio grew 6.1% year-over-year and trailing 12-month EBITDA coverage was 1.48x. Turning capital activity in the quarter. In May, we issued a $1.035 billion convertible note due in 2028. The note bears interest at 2.75% rate and is convertible at $95.41 per share. We intend to use the proceeds from the note to address our 2024 unsecured maturities coming due in the first quarter of next year. In addition to our convert offering, we continue to issue through our ATM to fund ongoing investment spend, raising gross proceeds of $1.76 billion since the beginning of the second quarter. This capital activity, along with continued growth across our business segments, including the solid post-COVID recovery within our Senior Housing Operating business helped drive net debt to adjusted EBITDA to 5.62x at quarter end, which represents well over a turn of deleveraging versus 1 year ago. As Shankh mentioned, we are seeing ample opportunity to invest our large cash balance. But even so, we expect net debt to adjusted EBITDA to remain below 6x on a pro forma basis post deployment and to continue to move lower as the senior housing operating portfolio continues to drive organic cash flow higher. Additionally, filing this intra and post-quarter capital activity, we have a current cash and cash equivalent balance $2.7 billion. Along with full capacity on our $4 billion revolving line of credit and $910 million of remaining expected proceeds from near-term dispositions and loan paydowns, representing approximately $7.6 billion in near-term gross available liquidity and $6.3 billion of liquidity when netting for the $1.35 billion of unsecured maturities we have in 2024. Lastly, moving to our full year guidance. Last night, we updated our previously issued full year 2023 outlook for net income attributable to common stockholders to a range of $0.73 to $0.84 per diluted share and normalized FFO of $3.48 to $3.59 per diluted share or $3.535 at the midpoint. Our updated normalized FFO guidance represents a $0.04 increase at the midpoint from our previously issued guidance. This increase in guidance is reflective of a $0.02 increase in expected full year senior housing operating NOI, a $0.02 increase from capital allocation activity, which assumes no further investments in the year beyond what has been announced to date and $0.01 from HHS and other out-of-period government grants received in 2Q. And these increases are offset by a $0.01 increase in expected full year G&A and interest expense. Underlying this FFO guidance is an increased estimate of total portfolio year-over-year same-store NOI growth of 10% to 13%, driven by subsegment growth of outpatient medical, 2% to 3%, long-term post-acute, 3% to 4%; senior housing triple net, 1% to 3%; and finally, increased Senior Housing Operating growth of 20% to 25% year-over-year. The midpoint of which is driven by continued better-than-expected expense trends, along with revenue growth of approximately 9.7%. Underlying this revenue growth is an expectation of approximately 230 basis points of year-over-year average occupancy increase and rent growth of approximately 6.7%. And with that, I will hand the call back over to Shankh.

Operator:

[Operator Instructions] Your first question is from the line of Jonathan Hughes with Raymond James. Your line is open.

John Burkart:

It's a really good question. A lot of it really is what I would call relates to leadership, and that's because a lot of a transition relates to execution. So having the outstanding partners that we have, working together as a team to anticipate opportunities and issues, connecting with people. All these issues, all these items are about people, so connecting with the people, the sites and finding it all out flawlessly and executing flawless is what's changing that game. There's a lot of details involved each of these -- in each of these situations, there's literally transition teams that are 24/7 focus 100% on all the details and then there's operating teams that are focused on the operations. So a lot of work, but ultimately, it's leadership that changes that game.

Operator:

Your next question is from the line of Connor Siversky with Wells Fargo. Your line is open.

Nikhil Chaudhri:

Connor, it's Nikhil. I'll take this one. So look, we're pretty pleased with the performance that we've seen so far. If you remember, there were a total of about 147 buildings that were being transitioned over of those 133 have already been transitioned to the new operators. And the results we're seeing are very encouraging. So if you look at those 133 buildings for the three months prior to the transition, those buildings on an EBITDA basis were losing roughly $90 million a year. three months later, first quarter of this year, and those same buildings that are making positive $70 million. Still a lot more work to be done, but the rapid turnaround has been really encouraging to see. And on the second part of your question, on labor, all the numbers, all the metrics seem to be following the broader trends we're seeing in our broader business that the labor situation is getting better by the day.

Steven Valiquette :

Thanks. Good morning. Congrats on the results as well. Yes. No, it's hard to answer for the whole industry. Your results are obviously incredibly strong in Senior Housing, but there are some pockets from some other players where maybe the occupancy was slowing down a little bit in the quarter. Just curious if you have any high-level thoughts on maybe why your results were separate from maybe some other players that did see occupancy decelerating a little bit? Is there any signs of price sensitivity in any pockets of the market? Just curious of your thoughts around that.

Operator:

Your next question is from the line of Michael Griffin with Citi. Michael Griffin, your line is open. [technical error] Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Shankh Mitra:

The answer is the Sunrise contracts are not what you described. We restructured a contract with Sunrise in 2011 -- 2021, sorry 2021 and Sunrise is fully aligned with us with the principal philosophy that we're seeing ensuing together. So many years ago, I have described that our fundamental philosophy under my team's leadership has changed from owning part of management company's equity to contract. That's what we have described. And as you can see in one of the slides we have described a 7-year long effort to transform all our contracts from sort of top line focused contracts to bottom line focus contract where we think and swim together and virtually all of our contracts are there today. So that sort of hopefully gives you an answer to your question. We do not believe and we haven't done in sort of having influence on our communities through owning part of management contract part of management companies. We do it through our contracts, and that's where you can see in the evolution of those contracts.

Michael Carroll :

Yep. Thanks. I wanted to touch on the Welltower Cogier, I guess, operating relationship. I mean how is that relationship going to work? And how should we think about the growth of that platform? I mean when you're growing into new markets, are you going to be doing that with Cogier or another operator? Or would you be doing that yourself?

Shankh Mitra:

From an expansion standpoint, my comment that I made that this joint venture will have rapid growth. That comment obviously means that you will see that we're expanding where we're very excited about Canada and doing lots of expansions in Canada that will come. We're focused -- you think about it in a very simplistic terms, this platform that we're launching, we'll be focused on English-speaking Canada. Cogier has a tremendous brand in the French Canada and we'll watch this together from that. Now what we do in U.S. is a different conversation. Just understand that our PLR is on independent living and majority of our exposure in independent living is in Canada. That's why we're starting this.

Vikram Malhotra :

Thanks for the question. Maybe Shankh or Tim, you talked a lot about stress in Senior Housing referencing obviously, Fannie Mae delinquencies. I'm wondering if you can just -- and then you outlined the $30 billion decade opportunity. I'm wondering if you can give us more color on kind of how you think about the funnel in terms of all these distressed opportunities coming whether it's operational or balance sheet distress. But how do you think about the funnel and filtering it down to what is actually actionable for Welltower, whether it is analytics-driven or strategic driven. And then just combining that actionable pipeline, you mentioned with sort of the long-term earnings power. You talked about double-digit NOI growth, but are there any [indiscernible] leaves you can share on kind of the earnings, the underlying AFFO is likely to grow over a longer time period?

Operator:

Your next question is from the line of Nick Yulico with Scotiabank. Your line is open.

Shankh Mitra:

Yes. So I'll start with the last. Obviously, these assets have both occupancy and significant margin growth potential. With the occupancy, obviously, as you understand sort of the flow-through mechanics of this business. Majority of the profitability in the business is after, call it, 80% occupancy because there's very significant fixed costs. So incremental margin, if you will, after 80% occupancy is, call it, 70-plus margin. And then as you get closer to 90% or 90% -- about 90% occupancy we're at kind of 90 -- your incremental margins approach 90%, right? So majority of the profitable hockey stick profitability in that kind of 10% plus occupancy range. So that's what's the driver of the growth that we think baked into this. So we like buying low basis, lower occupancy portfolio. That's sort of what we do. We do not like to pay a cash flow on a highly occupied high NOI, which drives into obviously results into high-basis assets. We just don't do that here. That sort of gives you the answer to the second question, right? Let's just talk about the first question, which is a very simple question. You should assume a year 1 in this batch of acquisitions, roughly around 6%, going into 7 plus, following the math I just described to you.

Jim Kammert:

Thinking at the business update on the Revera transition Pages 9 and 10, could you just provide what is a reasonable time line for that NOI capture and what capital you might have to spend to capture that NOI delta?

Operator:

Your next question is from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Shankh Mitra:

Yes. So one, we're not going to sit here and try to predict what will happen 6 months from now, but I expect a very strong rate environment in 2024 as well. What will that be exactly depends on a lot of things, but I have no reason to believe in a better environment of demand and supply, we're not going to have a strong pricing power. But we'll see when we get there.

John Pawlowski :

A question on funding going forward. I know funding secured for the deals you've announced that are under contract. I'm just curious how -- what you think the optimal funding mix, the next $1 billion of external growth is?

Operator:

Your next question is from the line of Ronald Camden with Morgan Stanley. Your line is open.

Shankh Mitra:

We have a lot of conviction on both continue to optimizing the labor side and other expenses. I would rather not get into what drivers you might get in the next 6 months versus 12 months, but I will point out that the utility side, the energy side, last fall was very, very significant hit. So at least as we lap going into '24, we should get from a year-over-year perspective and frankly, energy prices have come down, we should see some benefit. But we're not going to sit here and just try to predict what might or not might play out on, but I will say that you have heard from our prepared remarks that we're feeling very good about continued margin expansion, not just sort of going back to pre-COVID, but we do think that John will take these margins much higher over a period of time.

Michael Mueller :

For the loan portfolio, loan assets that you're looking at, should we be thinking of those as being straight debt deal at discounts or just more specifically targeted toward portfolios where you can ultimately get to the real estate?

Operator:

Your next question is from the line of Joshua Dennerlein with Bank of America.

John Burkart:

Yes. So the comments, if I remember correctly myself, was the COO called us and it was funny to me said, gee, you've done so much to increase leads. We're struggling in getting our hands around that in that pilot, and they definitely did get their hands around it. It's a staffing opportunity there. We're continuing to roll out -- move from pilot to rollout, and so we're pressing forward. And as I mentioned, we have another operator that's jumping on 100% on board and we'll be pushing forward their platform up with our venture up in Canada as well. We're seeing terrific results through the marketing efforts that we're applying. And what that does to pricing power, in essence, our focus is on maximizing NOI, right? So we're looking at combination between price, between occupancy, recognizing that occupancy comes with a price. So yes, we will push a little bit more on price and find the right point there, but it's what's providing our outstanding results.

Michael Griffin :

I know you've talked in the past about redevelopment industries you've undertaken at some properties. I'm just curious if you can give us an update on these redevelopments kind of what the expectation for growth in this platform is going forward? And any commentary there would be helpful.

Operator:

Your next question is from the line of John Pawlowski with Green Street.

Shankh Mitra:

We'll have to get back to you on that. But generally speaking, you have assisted living fail further. So obviously, it has longer to come back. Independent living didn't fall that far, but it has been coming back slowly sort of slowly. But specifically, our portfolio has changed materially since '19 as far as Independent Living and Assisted Living is concerned. So we will have to those numbers and get back to you. But clearly speaking, I will tell you, the Assisted Living continue to outperform, we are seeing Independent Living is starting to come back. And frankly speaking, Independent Living for us, like 75%, 80% is Canada, and it's just sort of more of a -- I don't know it's a product comment or it's sort of it's a country comment, right? We're seeing very strong performance finally coming out of Canada, and we expect that will get better as all this sort of optimization that we're talking about around the [indiscernible] will play out but I cannot tell you, John, is it that if a product thing or just a country thing because majority of Independent portfolio sits in Canada.

Operator:

Good morning, ladies and gentlemen. Welcome to the Welltower First Quarter 2023 Earnings Release Conference Call and Webcast. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. [Operator Instructions] And at this time, I would like to turn the call over to Matt McQueen, General Counsel. Please go ahead, sir.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I'll review our first quarter results and describe high-level business trends and our capital allocation priorities. John will provide an update on the performance of a senior housing operating and outpatient medical portfolio. Tim will walk you through triple-net businesses, balance sheet highlights and revised guidance. Nikhil is also on the call to answer questions. We're pleased to report another strong quarter with results that exceeded our expectations. Our strong performance was once again driven by outsized growth in our senior housing operating portfolio. We generated 23.4% same-store NOI growth, with both revenue and expense trends continue to move in the right direction. In fact, we produced our fifth consecutive quarter of double-digit organic revenue growth on the back of strong pricing power and occupancy build, with each coming slightly better than expected. But perhaps equally, if not more encouraging, is the margin expansion story, which has been driven by a significant improvement on the cost side. While we generated strong revenue growth in 2020, these gains were largely offset by pressure across the expense tax, which ultimately resulted a lost year in terms of partial growth. We are delighted by the progress made on various expense items, but particularly pleased by the sharp decline in agency labor or temporary staffing across the portfolio. Over the past few quarters, we have noted the headway our operating partners have made in net hiring, as JL employment rates have been weakening. This has ultimately translated into a meaningful reduction of prohibitively expensive temporary staffing, which -- with cost declining over 50% versus the first quarter of last year. Though we still have a long way to go to eradicate this problem which we largely attribute to committee leadership challenges, we believe that this trend along with strong pricing power will continue to be a tailwind for further margin expansion. From a product and geographic standpoint, while assisted living continued to outperform independent living, IL pricing is starting to strengthen. This is reflected in our Canadian portfolio, which is finally rebounding after a disappointing couple of years. We have seen standout performance from our operating partner Cogir, which has returned to almost 40% margin for the first time since COVID. We're grateful to our partner Mathieu Duguay and his team for their hard work and dedication. Sticking with that international team, our UK portfolio continues to produce strong revenue growth, and we're starting to see some green shoots on the cost side. During our call, I expressed my enthusiasm around the appointment of Lorna Rose as a CEO of a largest UK operator, Avery. Lorna is already making significant impact with a strong commercial acumen and impeccable leadership skills. We expect our UK portfolio to be a strong source of growth as we look at 2024 and beyond. Returning to the U.S., our largest operator Sunrise continues to produce strong top and bottom line results. There is meaningful embedded upside to this incredibly well located and virtually impossible to replicate portfolio which sits at mid-70s occupancy today. Also during our last call, I mentioned that we expect meaningful step function growth from a large regionally concentrated portfolio of StoryPoint. I'm pleased to report that Dan and his team has started the year off with a bang, as their no excuse culture and relentless focus on performance is paying off significantly. And last but not least, Oakmont. A year and a half ago we moved six well-located California properties to Oakmont and at that time, Courtney Siegel, Oakmont’s CEO made me a promise that our team would lease up this portfolio in two years. I'm pleased to report that the portfolio today sits at 86% occupancy, while NOI has gone up 13 times since then. Courtney has set a simple performance-driven culture at Oakmont. If you're not 95% occupied, you're not performing. I'm confident that I will be able to soon report to you that this portfolio has reached 90 plus percent occupancy level. Pursuit of higher standard is prerequisite of high performance. Last year, I described to you that we as capital allocators strive to create partial value by compounding over a long period of time. By doing what's right in the long-term for our continuing shareholders may result in short-term pain. Our proactive portfolio management efforts, which includes transition of properties to strongest operators is an example of this philosophy. I encourage you to look at the case studies within our business update presentation for more details on Oakmont success and the other key operators including Peace Capital, which has created substantial value for our shareholders following the transition of a portfolio of skilled nursing facilities two years ago. By operating these facilities more efficiently from an expense perspective while increasing quality mix, Peace has been able to improve EBITDAR by more than 75% relative to the pre-COVID levels. This point is further underscored by our COVID class of acquisitions and our further efforts to transition other assets over the last few years. We're just beginning to capture significant embedded NOI from these properties as they return to their pre-COVID NOI levels and higher. And in fact, we have achieved 20% of that incremental NOI in the past quarter alone. Shifting to the operating platform and asset management initiatives. As you know -- as you have come to know, Welltower -- at Welltower, we vehemently reject mediocrity and are in relentless pursuit of high standards. We continue to behave -- believe that there's an opportunity to recognize meaningful cash flow from our own portfolio as we optimize location, product, price point, and operators using our data analytics platform Alpha. To further add to this multi-dimensional optimization problem using machine learning, our operating platform initiatives are now becoming more tangible, moving from drawing boards to pilots, while a few weeks don't make it trend, we are optimistic that John and his team are on the verge of some real creative breakthrough more on that incoming quarters. In terms of recent operating conditions, while I don't like to fix it on short term trends, I want to mention the consistent rise in demand for our seniors’ product in Q1. Total volumes are up roughly 20% in the quarter, partially attributed to an easier comparison period last year due to Omicron variant, but also because of great organic demand as we enter another year of significant growth of the 80-plus population. Lease and tours have picked up further in April. While we remain confident in the prospect of business, I'd be remiss not to acknowledge the rising macroeconomic uncertainty as we approach the summer and fall leasing season. We're encouraged by what we are seeing so far, which admittedly is also the seasonally lowest -- slowest point in the year. Therefore, we need to see the -- what market gives us during the all important upcoming leasing season. The need-driven nature of our product gives me hope that we will outperform majority of the asset classes, not just real estate but it is also important for you to understand that we have no delusion of certainty. Moving to capital allocation, since our last call, U.S. banking sector has started to show some significant signs of strains, resulting in material declining trade flow in the economy. While no one is rooting for macroeconomic uncertainty, the current backdrop has certainly created a further expansion to our already attractive set of capital deployment opportunities. We remain disciplined and will not risk the enterprise that we built with blood, sweat and tears, but we remain optimistic that we'll be able to grow our portfolio with well located asset at highly favorable bases and in-place cash flow. To illustrate that point further, we acquired $529 million of asset during first quarter at a great basis and in-place cash flow. The K Street medical office building that we acquired in DC perhaps tells you how favorable the investment environment has become. We continue to see underwriting standards starting meaningfully, leverage levels decline, and banks are now requiring more commercial deposits and more recourse. As a low leveraged buyer, this backdrop is very beneficial for us. Our pipeline today is robust with opportunities to deploy capital across senior housing in all three countries, outpatient medical in the U.S. and data opportunities on the skilled side. Our team remains active and yet highly disciplined and price conscious as always. From a balance sheet standpoint, I wanted to quickly highlight the continued progress we made in terms of leverage and liquidity under Tim's leadership. He will get into more details. But I'm very pleased with significant deleveraging that we have achieved in past year with net debt to EBITDA falling almost a turn to 6.3 with further organic deleveraging going forward. And our ability to source over $1 billion of capital this year in the midst of a very challenging capital markets environment is a testament to the confidence entrusted in us by the banking community, the lenders, our investors and our other partners. With approximately $700 million of the cash on the books and undrawn line of credit, we are not only positioned to endure further capital market volatility, but also to deploy capital as opportunities arise. To summarize our optimism regarding the long-term growth trajectory of the business remains firmly intact. Top-line growth remains strong, expenses are moderating and our external growth opportunities continue to expand. While -- all the while John and his team are making progress in turning our vision of creating a world class operating platform into a reality. And with that, I will turn it over to him for an update on the operational element of the business and build out of the platform. John?

Tim McHugh :

Thank you, John. My comments today will focus on our first quarter 2023 results, performance of our triple-net investment segments in the quarter, our capital activity, our balance sheet and liquidity update, and finally our updated full year 2023 outlook. Welltower reported first quarter net income attributable to common stockholders of $0.05 per diluted share, and normalized funds from operations of $0.85 per diluted share, representing a 4% year-over-year growth and 13% growth after adjusting for the year-over-year impact from a stronger dollar and higher base rates on floating rate debt. We also reported total portfolio same-store NOI growth of 11% year-over-year. Now turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats reported a quarter in arrears. So, these statistics reflect the trailing 12 months ending 12/31/2022. In our senior housing triple-net portfolio, same-store NOI increased 0.2% year-over-year and trailing 12-month EBITDAR coverage is 0.86 times in the quarter. Next same-store NOI on our long-term post-acute portfolio grew 4.2% year-over-year and trailing 12-month EBITDAR coverage was 1.33 times. Turning to capital market activity. In the quarter we raised $413 million through our ATM program, which helped fund accretive investment activity during the quarter and maintain debt to EBITDA at 6.31 times at quarter end, a substantial decrease from 7.1 times at 3/31/2022. In March, we swapped $350 million of our $1 billion 2027 floating rate term loan to a fixed rate of 5.335% through March of '24, bringing floating rate debt to 13.6% of total debt and just 4% of consolidated enterprise value as of quarter end. We ended the quarter with $639 million of cash, full capacity under $4 billion revolving line of credit and $393 million of expected proceeds from near-term dispositions and loan pay-downs, representing $5 billion in near-term available liquidity. Over the last 12 months, we've seen leverage meaningfully improve from its post COVID peak, reaching the first quarter of 2022. As our senior housing operating NOI has started to recover, we have experienced beginning stages of a cash flow growth driven deleveraging. And we have amplified this organic leverage reduction, the disciplined approach to capitalization of our external growth pipeline. The result of this approach is a balance sheet that in its current form is poised to be substantially lower levered than it was pre-COVID as we continue to see senior housing operating environment recover. Lastly, moving to our full year guidance. Last night we updated our previously issued full year 2023 outlook, the net income attributable to common stockholders to a range of $0.57 to $0.72 per diluted share, and normalized FFO of $3.39 to $3.54 per diluted share or $3.465 at the midpoint. Our updated normalized FFO guidance represents $0.025 increase at the midpoint from our previously issued guidance. This increase in guidance is reflective of $0.02 of fundamental outperformance, mainly from our senior housing operating segment, roughly $0.005 of which is from subsidies received in Q1 and a $0.005 from investment activity completed in Q1. Underlying this FFO guidance is an increased estimate of total portfolio year-over-year same store NOI growth of 9% to 13%, driven by sub-segment growth of outpatient medical 2% to 3%, long-term post-acute 3% to 4%, senior housing triple-net 1% to 3%, and finally increased senior housing operating growth of 17% to 24% year-over-year. The midpoint of which is driven by better than expected expense trends to start the year, along with year-over-year growth expectations of revenue, approximately 9.5%. Underlying this revenue growth is expectation of approximately 230 basis points of year-over-year average occupancy increase and rent growth from approximately 6.3%. And with that, I'll hand the call back over to Shankh.

Operator:

[Operator Instructions] We'll take our first question this morning from Derek Johnston of Deutsche Bank.

Shankh Mitra:

So, Derek, you asked a lot of questions, so I'll try to -- I think I'll try to remember answer the question. Kisco is one of our best operating partners, and there are very significant opportunities to grow with Kisco. Whether that's through transition, that's through acquisition, that's through development, obviously, there's no question that they have absolutely hit it out of the park. So -- and we’re having all these conversations going on. As I've mentioned on last quarter’s call, I believe that we finally have figured out hopefully how to do transition very creatively as you -- sort of your words, but I think that's a good one. I think, I've given some examples in my script and Oakmont. Let me give you another example. Probably last year, this time, we announced a large set of acquisitions with our partner, StoryPoint. And the first tranche of that acquisition closed in Q3. So, let's think about it. So, these properties -- the first tranche, there's 18 properties, the StoryPoint took over from a -- on the existing operator. At that point, that end of Q2, it had 74% occupancy, call it circa $6.5 million, $6.4 million of NOI, annualized NOI. And nine months later, they started taking this over in July, you would think that through transition, and all of those obviously moving this asset NOI -- that it will be great win, if occupancy and NOI held. Nine months later, today -- not today, end of March and the quarter end, occupancy was at 2%, NOI was $16.2 million. That tells you what a great operator with significant focus can do. So, it is my belief that now you got, obviously, John and his team and with our premium operating partners, who have done this many times over, during the most difficult time of COVID has figured out how to do this extremely well and creatively. I gave you a bunch of examples. We obviously provided more case studies. And we do think that there is significant opportunities to enhance our portfolio by what I said, optimizing four things, right? It's an optimization problem, which is location, product, price point, and operator, right? So, that's what you know, obviously Swagat and Kevin and their team are trying to constantly do, and we're executing that with our premium operating partners.

Connor Siversky:

Question on labor for me. I can appreciate that Welltower, the operator base has made a lot of headway on improving labor sourcing methods across the portfolio and then the positive trends related to agency usage. And so I'm curious, what does the training schedule look like for a new hire in a senior housing facility? And can you provide any color or number as to what turnover levels look like currently compared to say this time last year? And then what your expectations or goals are related to that turnover metric looking forward?

Operator:

We’ll go next now to Vikram Malhotra at Mizuho.

Shankh Mitra:

Let me try to address both of those questions, and Nikhil will jump in if I miss anything. Okay? So let's just start with the second question first. We are always greedy when others are fearful, as you know. Where we're finding opportunities, as I mentioned, on my prepared remarks, that we see a substantial -- we have substantial actionable pipeline in seniors housing in all three countries. This is the first time we're seeing opportunities, not just in the U.S., but also in Canada and UK. So, we're very optimistic about senior housing opportunities in all three countries. And we are seeing substantial opportunities, albeit small deals. But as you know, Vikram, we're very focused on individual buying, individual assets, small transactions, outpatient medical in the U.S., right? So, that's sort of -- and we're seeing -- across capital structure, we're seeing opportunities on the debt side, in the skilled side of the business. So, that's sort of where we're seeing opportunities. First question, debt book. If you think about our debt book, you should think about our debt book in three different buckets. But before I get into it, I'll remind you that majority of these loans, right, just call it 80% of the book was originated after COVID. And we try to -- as we have discussed in many of these cases, so let's just talk about three buckets and you will understand. The first bucket is HC-One, you have specific question, I'll get to it. The second bucket is our partnership is related. And as I mentioned in previous call, these developments are structured as a participating means, right? That's the second bucket. Those are majority of the loans. If you take that -- go beyond that, the average size of the loan is like $12 million, right? So, we're focused on -- so let's just talk one at a time. We are very much focused on not just debt, but also last dollar basis of every bid, and possibly as a majority of these cases an equity feature that is attached to that debt. So let's talk about one at a time. We talked about the relative development pipeline, and that's obviously structured as a participating means. By definition that’s equity like structure. Second, HC-One, if you go back and see what we said when we did that, that is a whole loan, that is a senior loan, unlike a lot of the things that you see. It is not a mezzanine loan. There is no senior in front of us. We are the senior. The last pound basis of that loan is $32,000 pounds per debt, which tells you how low levered that loan is. But to your question, if we were to take that over, which is we have no intention of, but if we were to take that over, there is no senior loan that sits in front of us, right? Understand our last dollar basis, what the values are in UK. That sort of gives you a sense of what it is. But more importantly, if you go back and see what I said when we did the loan, we have actually a substantial amount of equity behind that in terms of warrants, right? So -- and then you go to the last one, there are some pure debt, there's a lot of participating prep, participating mezz. So, that's sort of the convention of the loan book. So, we are -- we don't land anywhere where we don't think the last dollar is not significantly beneficial to us. We hope the people who borrow from us will do substantially well. And from the equity participating nature of many of these loans, we’ll participate with them, not just get a return on and off our capital. Hopefully that's what's helpful for you.

Shankh Mitra:

And rates are substantial above…

Operator:

We'll go next now to John Pawlowski at Green Street.

Shankh Mitra:

So, I'm going to take that -- answer that question in two parts. First is asset management initiative and that asset management initiative that John has with his team, that you are seeing the impact on the agency labor and replacing that agency labor with permanent employees. And John mentioned many other sort of initiative that's going on to attract and retain talent, which would continue to reduce that number. The other side of that, your question is operating platform question. Here today, John is entirely focused on top line and we are seeing some signs of, as I mentioned on my prepared remarks, that we've just moved on few places from drawing board to pilots, and we're seeing some significant successes on leads and other situations that obviously we're not prepared to talk about it, that you're going to see on top line, not on the expenses yet. He will get to the expenses, but he's focused on the big ball today on the revenue side.

Michael Griffin:

Maybe turning back to capital allocation, I'd just like to get some color maybe around the MOB acquisitions. It seems like it's pretty opportunistic. I believe, you all were selling MOBs back in summer of 2020, when people were buying. Maybe some color around -- you list the initial yields here. The occupancy at least for the K Street one seemed kind low. Maybe Nikhil, in your underwriting, are you assuming maybe a stabilized high-80s, low-90s occupancy? And then, Shankh, as a capital allocator, if we go back to your third quarter prepared remarks about those -- those five sources of capital. Does any one of those, whether it's debt or equity, selling assets, does any one screen as more attractive right now?

Nikhil Chaudhri:

Yes. I think to answer your question on the MOB, if you look at the K Street, that's roughly 20% of the capital we deployed to large medical office this quarter. K Street -- and we're buying it at less than half of replacement cost with a 6.6% in-place yield at low-80s occupancy. And we've underwritten this to be beyond an 8% stabilized yield with occupancy with a 9 in front of it. I mean just think about the quality of the real estate, right? I mean, it's 3 blocks from the metro station; it's 2 blocks from the George Washington University Hospital. You've got top grade parking. I mean, it has high quality of an asset that you can get, and we're getting it with very healthy in-place yield with a lot of upside. The other two portfolios, they are core as they get. They've got healthy lease terms, high occupancy, above 95%, and very good affiliation with great health systems.

Joshua Dennerlein:

Tim, I would -- you mentioned there's more delevering ahead. Just curious if you could kind of expand on those comments and how we should think about the trajectory of that deleveraging?

Operator:

We go next now to Steve Sakwa at Evercore ISI.

Shankh Mitra:

John, do you want to take that?

Shankh Mitra:

I'll just add one point of color perhaps. First thing is, Steve, as I mentioned, as you think about pricing power, the initial phase of pricing power has been that our cost has been going up. And obviously, to bring back these communities to a profitable level or the only which -- only way this will actually continue to serve the community if they're profitable, right, over a long period of time is to increase pricing. And as I mentioned in last call that you will see the next 12, 18 months handover from pricing because cost has gone up to pricing power because we have no room to sell, right? And that handover will come. And so the second point is just understand that we're not focused on absolute level of pricing but we are focused on the difference, the delta between RevPOR and ExpPOR. That's what drives P&L, right? So keep those two in mind, and you will see where our focus has been and continue to -- will be. As we think as just understand our portfolio, it’s roughly speaking, half and half on an average basis and an average year is January versus throughout the year, right? And so we continue to -- as we roll these leases and market rate continues go up, we expect that pricing will continue to remain strong.

Michael Mueller:

Current development pipeline, it looks like it's about 15% outpatient medical office and the balance in senior housing. I guess, as you think about anticipated starts over the next few years, do you see that mix shifting dramatically between those buckets?

Operator:

We go next now to Michael Carroll of RBC Capital Markets.

Shankh Mitra:

So, we're not going to get on this call about contractual agreements and what kind of different levels of service and situations that might be going. We'll just focus on the fact that we have aligned interest with our operators. As always said, for years and years that the RIDEA 3 or the structures are all about thinking and swimming together, right? And there is substantial upside to many of these portfolios for us, but also for our operating partners. So this is -- we have different types of arrangements with different people. We're not going to obviously get into on this call. But understand, at the end of the day, the goals are very simple. We're trying to create a very good environment for our residents. We're trying to create an environment for our employees to stay and -- turnover, resident satisfaction, employee satisfaction and frankly, owner satisfaction. That's the goal. And if we can match those goals, it will be great for us and it will be great for our operating partners

Austin Wurschmidt:

Shankh, you highlighted a robust investment pipeline with opportunities across all your regions. I know you're return-driven as you consistently highlight. But given the pricing power you're seeing in IL in Canada or the acceleration in growth you highlighted in the UK, heading into 2024, are returns more attractive in those regions today? And are you considering kind of leaning in, I guess, more international versus domestically in the senior housing side?

Operator:

We go next now to Steven Valiquette at Barclays.

Shankh Mitra:

So I was trying to add value -- added color to the question that previously was asked. Tim already gave you our view of RevPOR increase as we sit today, right, 6.3% increase that we talked about. So, I was trying to provide more color as we think about long term. Long term, we're focused on the spread between RevPOR and ExpPOR. By no means, I'm trying to say that we're seeing anything in that sort of -- around us that says that pricing power is cooling down. In fact, it's powerful. And I think John probably mentioned that. All I was trying to point out that long term without thinking about is it 6%, is it 12%, is it 3%? The way you're going to get the P&L right, which is ultimately what we are focused on, is the spread between that RevPOR and ExpPOR, right? So, that's what I was trying to answer. We do think that we'll see significant pricing power continue, as I mentioned, half of our portfolio gets renewed at different points in the anniversary cycle and street trade continues to go up. Hope that's helpful.

Nick Yulico:

Just turning to the guidance, I want to make sure I'm understanding this right. So in terms of the NAREIT FFO guidance range coming down, there's various normalized items, expenses that are being added back to normalized FFO. A lot of that’s transaction costs, promotes. I know you guys break this out. But just trying to understand what's driving that. It's a pretty regular line item going back for the last year? And how we should think about -- is this still going to be other transaction costs hitting the P&L for the rest of the year, but it's just not in your NAREIT FFO guidance right now? Thanks.

Operator:

We'll go next now to Ronald Kamdem at Morgan Stanley.

Shankh Mitra:

Let me try to take the first one, and John, why don't you take the second one? As I mentioned on my prepared remarks, assisted living continued to significantly outperform independent living. The only thing I was trying to highlight that after underperformance, independent living is starting to pick up, particularly in Canada. And that's what we are seeing starting to come through our Canadian numbers, right? But if you just look at an absolute performance between the two, there is no question that assisted living has been outperforming. And if economy continues to weaken, on a given rolling 12 to 18-month period, my guess is that it will continue to outperform very significantly, given the need-driven nature of the business.

Operator:

We go next now to Michael Griffin at Citi.

Tim McHugh:

Yes, Michael. So, the -- what we've provided is the pool change. I think one thing you're noting is that we've seen kind of export pick up from fourth quarter to the first quarter. And we gave the number on what first quarter would have been based on the fourth quarter pool, as you noted in the footnote. And then just on the pickup in general, the reported same-store number in 4Q, 1Q, it's actually because we continue to expand the same-store pool. So, you've got 95% of our operational properties that we've owned for more than four quarters in our same-store pool now and a lot of the transitions that came in were from the UK. And U.K., we've just seen expense growth run higher than the rest of the portfolio, largely driven by utilities, which we've talked about a lot on this call. So, some of the increase you're seeing just in 1Q is from that mix shift and inclusion of more UK properties.

Operator:

We go next now to Juan Sanabria at BMO Capital Markets.

Shankh Mitra:

So, I'll try to address first part of your question. So, acuity actually went off I would say, in 2020, right? If you didn't absolutely need it, you would avoid the product pre-vaccine. So we obviously have seen acuity gone up in 2020, but since then, we have seen acuity sort of normalize. So, I'm not sure that I subscribe to this idea that acuity across the board for the industry has been going up. In fact, someone just asked earlier in the question pool about Kisco. I was with the Kisco team last week and Kisco’s CEO was talking to me that acuity -- they have seen acuity actually gone down, right? So probably gone down for some, gone up for some, but I do believe that acuity has normalized from that 2020 peak levels as we have seen vaccine come into play. You want to answer the second?

Operator:

We'll take our final question this morning from Vikram Malhotra at Mizuho.

Tim McHugh:

Yes. So, I'll start with your first question on senior housing and John can add any color on the MOB side. So for senior housing, yes, you're correct. We came in -- our first quarter results were better than expected as far as how agency came down. And of course, some of that benefit gets netted out with full-time employees coming on, but net-net, we ended up in a more favorable spot for compensation. And as I kind of noted in my guidance outlook, that's largely what's moving our outlook for the year is just a better trend coming out of Q1 on expenses with that being the main piece and the assumption revenue kind of holds given that we're moving into the revenue building months as we speak.

Operator:

Thank you. And ladies and gentlemen, that will bring us to the conclusion of the Welltower first quarter 2023 earnings release conference call. We'd like to thank you all so much for joining us this morning and wish you all a great remainder of your day. Goodbye.

Operator:

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Welltower Fourth Quarter Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Matt McQueen, General Counsel. Please go ahead.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I will review fourth quarter and the year and describe high-level business trends and our capital allocation priorities. John will provide an update on operational performance of our SHO and MOB portfolios. And Tim will walk you through our triple-net business, balance sheet highlights and 2023 full year guidance. Nikhil, our newly appointed CIO, is also on the call to answer questions. While we are happy to bring back full year guidance after three years, I'll point out that many macro and business uncertainties remain. I would recommend investors and analysts to focus on 2023 exit run rate to understand the earnings power of this platform and not overly emphasize the calendar year guidance. I have mixed emotions as I reflect back on 2022. As I've described to you in my prior calls, our results frankly underwound our expectation during the first half of the year. While we don't like to fix that on short-term stock performance as we believe, an appropriate window to gauge our performance is at least three to five years, you should so to measure that [ph] for generating an unsatisfactory return -- total return in 2022. But remember, a stock is a fractional ownership of a business and not a ticker. We view our fellow investors as partners for the long haul and continuously strive to improve the prospects for long-term compounding of this business. In spite of some of the headwinds that we experienced in 2022, my team and I are pleased with the underlying improvements we have seen in this platform and our talent base, resulting in a strong rebound of performance in fourth quarter and farther improving momentum being carried into 2023. Our recent progress is only the tip of the iceberg of many of our initiatives, will truly manifest themselves in the year -- next year or two, which I'll go in a minute. While overall macro headwinds persist, we have seen a considerable improvement in the key indicators of the unit economics of the business as reflected by expense per occupied room or EXPOR or revenue per occupied room, or REVPOR. On the expense front, we have seen significant progress on addressing certain challenges we have faced over first year plus, most notably on the agency and temp labor situation. In fact, export has moderated to -- in Q4 to 3.4% driven largely by a deceleration in compensation per occupied room or COMPOR to 2.6%, the lowest level we have seen in our recorded history. At the same time, REVPOR, again, the revenue per occupied room, remain a consistent bright spot for us, increasing 7.5% in Q4, a clear reflection of strong pricing power resulting from our premier locations, product and operator base. As I mentioned on our last call, one of our largest operators pulled forward January rental increases in Q4. Even without that, our Q4 REVPOR would have exceeded 6% plus, reflecting a broad-based strength across our portfolio. And while we achieved record REVPOR growth in 2022 of 5.5%, we expect to surpass this level of growth in 2023. While we achieved an impressive 19% SHOP NOI growth in 2022 and expect circa 20% NOI growth in 2023, I believe we're only at the beginning of a multiyear double-digit NOI growth, resulting from a long runway of occupancy gain, rate growth and operating margin expansion. And despite significant macro uncertainty already weighing on the fundamentals of many other sectors, our confidence in future growth of our business is supported by the need-based nature of our asset class along with a favorable demand-supply backdrop, which is getting better every single day. I'm pleased to report that 2023 is already off to a great start with January move-ins up 16% of our '19 levels, representing a meaningful acceleration from the fourth quarter. Forward-looking indicators are also showing promise in January with our total volume -- tour volume across our senior housing operating portfolio is up 25% year-over-year. I would be completely remiss to ignore perhaps one of the most important milestones in the 53-year history of our company, and that is the Private Letter Ruling we received, which permits us to both own and self manage independent living assets. The PLR provides us significant flexibility in operating our assets, and its timing coincides almost perfectly with the build-out of our industry-leading operating and asset management platform, which John and his team have been tirelessly working on. We remain optimistic that farther investment in our platform will not only result in a better margin profile of our assets, but also will meaningfully benefit the third-party operating partners across the senior living spectrum, who we choose to do business with in the future. We continue to see a tremendous opportunity to professionalize and modernize the operating side of senior living business, following our instinct where there's mystery, there's margin. And our PLR gives a significant ammunition to accelerate the pace for what Welltower 3.0 might look like. I want to thank Mike Garst, our tax team and many others whose efforts have led to this game-changing achievement. Before turning to investing environment, I want to highlight the addition of Retirement Unlimited, or RUI, to Welltower's roster of exceptional operating partner. RUI is one of the best operating performing senior housing operator in the East Coast with the highest program quality programming and care standards. RUI has consistently maintained occupancy levels at north of 90% and with hardly any use of agency lever over past few years. We announced today that RUI has assumed the management of our first community together in Alexandria, Virginia, with plans to meaningfully grow our relationship in near term through acquisitions, transition and development. We are extremely excited and humbled to partner with the Fralin and Waldron families and RUI’s all star President, Doris-Ellie Sullivan, and welcome them to Welltower family. In terms of other growth partners, it was exactly a year ago when we announced our partnership with David and Simon Reuben, along with their acquisition of Avery Healthcare in the UK. As you know, Reuben Brothers is one of the most sophisticated, forward-thinking and well-capitalized global investors with the reputation of attracting best-in-class talent and technology platform. Our thesis was validated when Reuben Brothers attracted Lorna Rose, one of the most well respected operating -- senior housing operating executive in UK to join Avery as the company’s CEO view in December. Lorna has spent 25 years in the industry and was most recently with Barchester, one of the UK's largest senior housing platforms. Next, on the capital allocation side, we have rarely seen a favorable environment across all our product types in all three countries we do business with in. There are 20-plus-billion of exit cue for core real estate funds and then perhaps even a longer one for non-traded REITs. This along with the challenging debt market, give us an enormous advantage to buy the right product at the right location at the right basis. Please note that while we are underrunning by more than $0.5 billion of EBITDA from pre-pandemic levels, we just reported debt metrics that are better than Q4 of 2019, along with more than $5 billion of near-term liquidity -- available liquidity. We have many avenues to access and deploy capital that I've described before, and we remain busy on all fronts. But our North Star remains consistent and simple. We strive to create per share value for our existing owners by compounding over a long period of time within our circle of competence, which we define as the area where we can assess and allocate capital with house odds rather than gambler’s odds. With that, I'll pass it over to John.

Tim McHugh:

Thank you, John. My comments today will focus on the fourth quarter 2022 results, the performance of our triple-net investment segment in the quarter, our capital activity, our balance sheet liquidity update, and finally, our outlook for the year ahead. Welltower reported fourth quarter normalized funds from operations of $0.83 per diluted share, representing 7% year-over-year growth after adjusting for prior period government grants and FX headwinds. We also reported total portfolio same-store NOI growth in the quarter of 12.9% year-over-year. Before getting into our segment results, I want to provide an update on our recently closed ProMedica restructure and the go-forward reporting treatment. In late December, we announced the closing of our restructure joint venture with ProMedica Health System and our newly formed joint venture with Integra Health. The ProMedica Health System JV consisting of 58 private pay assisted living assets will continue to be operated under a lease with ProMedica Health System and it is now part of our senior housing triple-net reporting segment. The Integra Health joint venture, consisting of 147 skilled nursing properties, comprised of a property joint venture and a master lease with Integra Health. The lease commenced upon closing in December adds to the first tranche of the property JV with Integra acquiring 15% of Welltower's stake in 54 of the assets for $73 million. As previously expected, subsequent to year-end, the second tranche of assets closed in January, Integra acquired 15% interest in another 31 assets for $74 million. The remaining 52 assets are expected to close in the second half of the year. As for the underlying operations, the subleasing of the portfolio is progressing in line with expectations. 75% of the beds have already transition management with the remainder of the portfolio waiting on state specific approvals. We will continue to update the market as the progress of management transitions in addition to underlying property level fundamentals. Now turning to the performance of the rest of our triple net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats reported a quarter in arrears. These statistics reflect the trailing 12 months ending 9/30/2022. In our senior housing triple-net portfolio, same-store NOI increased 4.3% year-over-year and trailing 12-month EBITDA coverage was 0.86 times in the quarter. Next, same-store NOI in our long-term post-acute portfolio grew 4% year-over-year and trailing 12-month EBITDA coverage was 1.34 times in the quarter. Turning to capital market activity. In the quarter, we settled $1.5 billion of previously raised equity through our forward ATM program, helping to bring debt to EBITDA down to 6.3 times at year-end, a substantial decrease of nearly 7 times at year-end 2021 and below pre-COVID levels of Q4 2019. For the year, we settled a total of $3.7 billion of equity to fund $3.7 billion of net investment activity, allowing us to continue to deploy capital into a desiccated private market while materially delevering the balance sheet. Looking forward, we ended the year with $722 million of cash, full capacity on our $4 billion revolving line of credit and $383 million in expected proceeds from near-term dispositions and loan pay-downs, representing $5.1 billion in near-term available liquidity. Before moving on to our 2023 guidance, I wanted to add more context to Shankh's earlier commentary around the opportunity provided to our company by last year's Private Letter Ruling. Nearly 14 years ago, Welltower structured first day of management agreement, giving a direct economic exposure to senior housing operations. Over the last five-plus years, we built a better and stronger alignment within this contractual structure, ultimately reaching a point in 2021, where we can generate meaningful ROI through centralized human capital and technology investment at Welltower. We hired John Burkart and started to build the team around him. The PLR we received last year allowed us to meaningfully accelerate that effort as the ROI friction is entirely removed under self-management. This Welltower platform investment is evident through G&A. With greater than 80% of our expected year-over-year increase in overhead costs being driven by technology investment and new position additions in '22 and '23, focused primarily on asset management, data analytics and technology. We continue to believe that the opportunity to both modernize operations and drive efficiencies through scale in our business is vast and creates a sustainably strong cash flow tailwind when combined with the demographic-driven demand of the next decade plus. Lastly, moving to our full year guidance, which we are reintroducing for the first time since COVID uncertainty began impacting our business in March of 2020. Last night, we provided an outlook for 2023 of net income attributable to common stockholders of $0.57 to $0.75 per diluted share and normalized FFO of $3.35 to $3.53 per diluted share or $3.54 at the midpoint. As mentioned in the release, our 2023 guidance contemplates no adjustments for other government grants we receive in the year. So, after adjusting for $0.07 of nonrecurring government grants received in 2022, we are guiding for 5% year-over-year growth. This year-over-year increase in FFO is composed of $0.36 from growth in our senior housing operating portfolio and $0.03 from growth across the rest of our segments. These are offset by $0.04 of prior mentioned higher G&A and Welltower platform costs and $0.19 of floating rate interest and foreign exchange headwinds. Underlying this FFO guidance is estimated total portfolio year-over-year same-store NOI growth of 8% to 13%, driven by subsegment growth of outpatient medical, 2% to 3%, long-term post-cute 2% to 3%, and senior housing triple-net of 1% to 3%, and finally, senior housing operating growth of 15% to 24%, the midpoint of which is driven by revenue growth of approximately 9.5%. Underlying this revenue growth is an expectation of approximately 230 basis points of year-over-year average occupancy increase and rent growth of approximately 6.25. And with that, I'll hand the call back over to Shankh.

Operator:

[Operator Instructions] We’ll take our first question from Jonathan Hughes at Raymond James.

Shankh Mitra:

Yes. Jonathan, you asked a very, very good question. So, as I think about -- if your question is specific to senior housing industry, I see that -- obviously, we have most of the operating partners that want to do business which we already do business with. So expansion of new operating partners is less of a focus and going deep rather than going broad is our focus. We are looking for striving for regional density with our existing partners across the different countries, right? Now, we have, I mentioned before that we have -- there are operating partners in the business, there are operators in the business that we have admired for a very long period of time. And this is a long dating process. It takes a long time for both parties to understand how we can add value to each other, right? Capital is a commodity. Just capital, us bringing capital to an operating partner, frankly speaking, in any relationship is not enough. And for our perspective, so we bring in data analytics and other operating platform initiatives that John is doing to the equation. At the same time, we want to understand whether these operating partners are thinking about the business or where the business is going 10, 20 years from now, not where the business was 10, 20 years ago, right? There's a significant mind shift that is needed in the business. And frankly speaking, as I mentioned a few minutes ago, we need higher standards, higher standards of employee engagement, higher standards of customer service and higher standard of how we treat capital and what we -- and how we deliver results for the capital. And those are the type of operating partners and business partners that we're looking for, and we're grateful that we have a fundamentally a fantastic roster of these people to drive business with. Now going to the second part of your question, from an investment volume standpoint, I want to reemphasize, you're going to see a majority of the investment volume with existing partners as well as sort of the partners that we have already announced in the last couple of -- two, three years.

Michael Griffin:

Maybe just on transaction activity. I mean, Shankh, I know you've always talked about how you're an unlevered IRR focused investor. I'm curious if you've seen any change and maybe hurdle or return rates that might get you more excited about one property type relative to another. I know you seem pretty positive in your opening comments, but any additional clarity there would be helpful.

Operator:

We'll move next to Jeff Dennerlein (sic) [Josh Dennerlein] at Bank of America.

John Burkart:

Yes. I'll start and Tim may want to comment. I'm not definitely -- for clarity, not commenting on Tim's guidance. But, I think what we're seeing and what we're trying to show is the returns are already coming through. I mean, if you look at what's going on from an aggressive asset management perspective, you see that in the agency move and what the team has done, which is tremendous amount of blocking and tackling. The additional work that we're doing really relates to scaling those things. And partly why we included that in the deck is I came in and I had a view of things from my gut, you might say, so to speak. And I probed around and got confirmation, and then we started workflows and now that that's proving out, and that's what we wanted to show because that is critical. We were right. There is tremendous opportunity here. And the more I got into it, the more opportunity I see. When you look at J squared, this exponential opportunity, it's huge. My view is where I'm working right now is across the whole platform, as I mentioned, and Jerry will be able to focus in on individual items and execute highest of all levels, which will speed up our process. So bottom-line is we're already delivering numbers. It will continue for many, many years and it ultimately relates to significant margin improvement across the board.

Operator:

We'll move to our next question from Mike Mueller at JPMorgan.

Shankh Mitra:

Mike, I was just not going to sit here and try to speculate what might or might not happen, but I will repeat what I've said before. If we went back to pre-COVID occupancy and pre-COVID margin, I will be really disappointed. If that's where we end, we'll be disappointed.

Derek Johnston:

In addition to the REIT community, a lot of generalist investors are closely following WELL. So, I know we touched on it in the opening, but can you expand on this favorable Private Letter Ruling with the IRS. I think around 45,000 independent living units are not really being designated as healthcare facilities and/or subject to RDEA. [Ph] And so what does that mean, right? And importantly, how the decision may drive further earnings growth, especially given the beefed-up asset platform? Thanks.

Shankh Mitra:

I'll just add, Derek, one thing to that. Just as I mentioned before, we're working towards regional density and going deep and not going broad with our existing partners, right? So, think about it, I don't know, just -- you will see the future is with our select operating partners, strategic partners, we're going to have bigger density or higher density and a bigger scale in a market and with our investment in the technology platform and the operating platform with our operating partners, the ability to execute on the ground I think, again, this is going to be not only a great win for our owners, our assets, but also a great win for the select operated partners that we'll choose to do business with going forward. So, it is a very much of a focus on win-win, and that's the way business got to be.

Michael Carroll:

How has Welltower's relationship changed with its existing independent living operators since the PLR announcement? I mean, are they more willing to work with Welltower, given certain goals or targets, or has there been any noticeable change since that was announced?

Operator:

Next, we'll go to Ronald Kamdem at Morgan Stanley.

John Burkart:

Look, I think with the new operators, we've transitioned to at least 16 operators so far. And by the time the dust settles, it will be north of 20 operators. But all these transitions have happened over the last month, 1.5-month. So, it's too soon to have numbers and performance conversations about their performance, but overall transitions have been smooth. And in the upcoming months, we'll have better data to share on performance trends. But for now, the focus has been on getting the buildings in the right hands. And as you'll see, with 16 to 20 operators that the focus has been very deep and very sharpshooter-esque where you want to find for every single asset, the right operator. So, that's been the top priority so far.

Steve Sakwa:

Shankh, I was just wondering if you could talk a little bit more about the investment opportunities that you're sort of seeing out there? And sort of the distress in the system, you guys were obviously very active last year. I'm just curious what it takes to sort of shake the tree and how the returns might have changed kind of looking forward on the new deals?

John Burkart:

And I think the other thing I'll add is we just go through a lot of pain and effort to try and be the highest quality counterparty for someone to deal with. Whether it is the speed of execution, whether it is across the time frame of a transaction sticking with what we started off saying initially, the deal was, and in times like these, it just makes us the preferred counterparty. And so, there's a lot of recognition for that across the Street. And it's times like these that we really are able to shine. So, very excited about our pipeline for the year.

Rich Anderson:

If I could just -- on the PLR, very, very interesting indeed -- just some thoughts around it. Does this mean that we should see sort of a pace of investment from you guys to bring managers in-house for what you have currently? And how much of the IL portfolio that you have today didn't qualify? Will there be cut changes there to have them pass the test so that they also can qualify for the PLR ruling? Thanks.

John Burkart:

Yes. I mean, that's said perfectly. And I would just add in a sense of the speed, you can only imagine we're moving and we have been moving extremely fast to address the opportunities that we see. We'll definitely build on success. It's not exactly -- what Shankh's saying, it's not about going out and trying to control everything, it’s about creating success that drives value to all the various stakeholders. So, that's where our heads are at. And in the end, there'll be a little bit of the lag in the sense of where we spend money on G&A versus where we start to offset that because of reduced fees because we're just moving it like the multifamily, moving the property management services on to the book. So, a little bit of a lag there, but ultimately, it will offset and the improvement will be in margins.

Juan Sanabria:

Just wanted to hit on the SHO -- same-store NOI growth guidance Shankh, I think you mentioned in your opening remarks about the exit run rate and focusing on that. So maybe hoping you can provide a little color there? And should we assume that there's any incremental transitions in '23? You mentioned RUI having growing -- going forward through transitions as well. So just curious if you could maybe just comment on those two moving pieces.

Juan Sanabria:

The cadence of the exit run rate.

Operator:

We'll move next to John Pawlowski at Green Street.

John Burkart:

Yes. No, glad to. I'm not aware of any pushback. It's not to say, of course, when a rent increase goes out, there's not a discussion. But in the sense of defining pushback as a market response to that, no, I'm not aware of that. I think, the -- our partners have done a phenomenal job of communicating the increases and the reasons behind those increases. And I think our residents understand that they don't want to see important services and care cut. They want to have what they paid for, the best of that, and we're just not aware of any issues there.

Operator:

We'll move next to Vikram Malhotra with Mizuho.

Shankh Mitra:

Let me try that. So first on CapEx I do not believe, other than inflationary changes, anything change from a CapEx standpoint, right? So just understand that we bought predominantly in the last two, three years, new assets. We bought one or two portfolio as the value-add portfolio. And when we bought it, for example, the Holiday Atria portfolio, we told you exactly what we underwrote to spend on CapEx, right? We bought in an extremely cheap basis. And we told you exactly what that CapEx needs are and how we plan to invest. So from that perspective, as you think about going forward, I do not believe -- outside those couple of value-add investments that we have done, and we told you otherwise, when we have done it, we do not believe the business’s CapEx needs outside the sort of inflationary increases that are happening anything has changed. Now, I think John has a very large plan, a very big plan to reamenitize the portfolio and sort of fundamentally changing what the value proposition might look like. Obviously, we'll do that if think that we're getting fantastic return on that incremental investment. But from a regular CapEx perspective, I don't think anything has changed. From a pricing power standpoint, I don't think -- what else I can add other than to what I said to John's question and the earlier question, which is we are feeling very good about the pricing power across all our countries and across all our product types. As you know that Canada has been a laggard, feels like Canada is starting to catch up. UK and U.S. has been strong and continue to be strong. So, we're feeling pretty good. John, do you want to add anything to that?

Shankh Mitra:

Vikram, I missed one part of your question. I'll just tell you that from a pricing power standpoint, this is something I mentioned in the last call that we are -- despite our average occupancy of the portfolio, call it, circa 80%, there's a significant part of the portfolio, call it, give or take, half of the portfolio, 45% of the portfolio is in that high-80s, mid- to high-80% occupancy. There, the pricing power changes to raising price because have no rooms to sell, right? So there is a dynamic that's going on and increasingly we'll get to the point as we move average occupancy for the portfolio, more and more properties within the bucket that you will get to that pricing power because, frankly, you have no room to sell. So that transition is happening and will continue to happen in '23.

Michael Griffin:

I just wanted a clarifying question. I don't recall if I heard this earlier, but on the assets that continue to be operated by ProMedica, the assisted living and memory care. What is the coverage on those? Do you happen to have that handy?

Operator:

And we'll go next to Derek Johnston at Deutsche Bank.

Shankh Mitra:

Let me try to take part of that and Tim will take part of that question. So, we do not view this as a low-hanging fruit, but we do view this as a fruit that can be plucked, right? So there's a lot of effort that's going on. Tim will tell you what's modeled. Frankly, I don't know. But I will tell you that this is -- agency labor is a function of, frankly, weak management. That's just what it is, weak leadership. And we're working with our best-in-class operators to get the right people in the right place so that we should, over a period of time, see that improvement. As I've said, coming below 4% is an achievement when you start from 9%, but by no means, I want you to think that I'm actually happy with that number. That number needs to be substantially lower. And we need to really get full-time employees in the communities. This is not just a question of cost, but also, as John alluded to, it's also a question of culture and the customer experience.

Operator:

We'll move next to John Pawlowski at Green Street.

John Burkart:

Yes. So, I'll comment on what would need to happen, but not necessarily the speed at which. But if you look at it, I mean, one way to look at it is really just to simplify the world a lot and to say what would happen when a company -- from my past experience, when the two companies merge, you look and say, okay, if I step into their systems and start to fly the plane with what they have, that could happen pretty fast, right? That's not that complex. And so, the timing of it could be -- can be faster if we wanted it to be faster by stepping in that way. Obviously, what -- going back to what we're building, as I've mentioned previously, we're using largely existing modules. There's some creative stuff going on right now with the team. But generally, it's existing modules that are out there. And so, that doesn't take that long either. So, the speed can go fairly fast. The bigger issue is we're focused on success, and we're focused on working with people to deliver the success. It's not about us necessarily doing it. It's about us delivering success for all the stakeholders. So, that's where my mind is at. But the speed could go pretty fast.

Operator:

And that does conclude today's question-and-answer session. I'll turn the conference back over to management for any closing remarks. And that does conclude today's conference call. You may now disconnect.

Operator:

Hello. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Welltower Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there’ll be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Mr. Matt McQueen, General Counsel. Please go ahead, sir.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. Today, I would like to describe our capital allocation priorities, ProMedica Senior Care transaction and the rapidly evolving capital markets environment. I will also review some high-level business trends before handling the call over to John, who will provide details on operational trends and a brief update on our operating platform. I'm very pleased with the progress we have made since we last spoke 90 days ago, despite a flattish earnings trends on a sequential basis, driven by several existing headwinds, including FX, interest rate and utility expenses, our underlying business is actually improving meaningfully and setting up for the coil spring recovery that we hoped for. In our senior housing operating business, same-store revenue is up 10.8% year-over-year, driven by strong occupancy gains, and most importantly, pricing power. 5.3% same-store rate growth is the best we have seen in our recorded history and I want to remind everyone that we're compounding already industry-leading rate growth from last year. From these early trends, I believe you will see a further improvement in Q4, which will create a strong setup for 2023. However perhaps what I'm most excited about is the progress we're making on the labor front with compensation for occupied unit is up 4.3% year-over-year, the lowest level of growth we have reported since the beginning of pandemic. Our operating partners are experiencing a significant surge in applications, which has translated into strong increase in net hiring. In fact, in September, total portfolio monthly contract labor spend was the lowest since August of 2021 and subsequently improved in October. We believe this trend will continue into year-end outside the normal pickup agency use during the holiday season and into well into the next year. We strongly believe the labor market is changing for the better, and it will help our sector to be a total standout amongst all real estate sectors next year on a relative basis. SHO portfolio same-store NOI growth was 17.6% in the quarter, led by U.S., which posted third quarter of 20-plus percent growth and assisted living product reported same-store NOI growth of an impressive 25.1%. Let me highlight three operating partners for you, that provide further insight into why I'm so pleased with our progress over the last 90 days. Number one, Oakmont. As you recall, we transitioned 10 top California assets to Oakmont in August while we expected some initial disruption to occupancy NOI during that transition. In actuality, we recognized an immediate benefits due to remarkable performance from Courtney's team. These assets have experienced a slight increase of NOI and occupancy despite challenges that are normally incurred during a transition. This is the first time I've seen a transition with no negative P&L impact, apart from the six assets we transition to Oakmont last year. I expect these properties as well as the other assets that we transition to Oakmont to add significantly to our 2023 growth. If you're visiting San Francisco this month for NAREIT Conference, I recommend you to join our property tour and experience firsthand the remarkable job this team has done. To my earlier point on shift of labor market during the summer, open positions across Oakmont platform was 16% of total jobs. It is down to low single-digit at this point. Number two, StoryPoint. StoryPoint is one of our best operating partners perhaps will be the source of biggest NOI swing next year, with a billion dollars of investment with low occupancy properties, which is generating approximately 2.7% yield in Q3. StoryPoint made remarkable improvement a top line on both occupancy and rates, but the properties have not generated a significant NOI in 2022, as these properties were just over the breakeven occupancy and agency cost was very detrimental. Their open positions are now down more than 50% through the end of October and we expect 80% reduction of agency by the end of this month. We believe that stabilized NOI for this group of portfolio is about circa $80 million, which will be substantially achieved in 2024. While will not close this gap in 2023, I expect will make significant strides next year, and really over the half year way mark. We cannot be more pleased with execution Dan and the team has pulled off. Number three Sunrise. Sunrise is our largest operator due to a national presence Sunrise experienced significant labor challenges and has had to rely on contract labor for last many quarters. Jack and his team has made remarkable progress in this area over the last 60 days. Contract labor down 52% from year-to-date run rate and I believe sunrise will be the biggest contributor to contract labor improvement in the coming months and quarters. Given strong rates Sunrise benefit from in this incredibly well located Welltower building, we should see extremely strong NOI growth contribution from Sunrise. While we're encouraged - very encouraged by these trends, and our fourth quarter guidance of 21% growth at the midpoint, I'll remind you that we are at the very early inning of senior housing recovery. We’ll remain as excited as ever about the growth prospects in coming years and the 80-plus population growth will continue to accelerate and as new construction in the sector will come to come to near a standstill. In fact, 2023 should see 4.5% increase in 80-plus population. As you may have observed only 2,700 units got started in Q3. And frankly, I don't even understand how these people will make any money in development. While new development should continue to come down, assuming people want to develop to make any money. Another interesting phenomenon we're observing is that the thousands of units have been taken offline either because of obsolescence or because of higher and better use like behavioral health. As of 9/30, almost 15,000 units were taken offline on a TTM basis. I also want to highlight consistent and steady performance of our outpatient medical group under Ryan's leadership. Our retention rate for the quarter is a remarkable 92.7% and rent spreads are ticking up into the mid-3. Both new and renewal leases -- for both new and renewal leases, I'm pleased that our weighted average escalators are now about 3%. I'm also pleased that the low interest rate environment and the wall of capital that drove 2% to low 2% escalator seems to be a thing of the past. Kelsey-Seybold, which is our largest MOB tenant, and also represents a very significant portion of the Helmand pipeline was acquired by United Health during this summer. The significant credit upgrade of our largest tenant and our development client represents a meaningful value creation for our shareholders. The most significant change we observed in this, however, in the MOB space, is the remarkable widening of cap rates. I've stayed like a broken record for a long time that MOB cap rate made no sense to us, given where the forward view of inflation was relative to underlying growth rate on the cash flow. I'm pleased to see other capital sources are now waking up to the ugly realities of real return on capital in this inflationary environment. There was nothing wrong with this asset class except price. And I relieved to see that has finally changed billions of dollars of transactions were consummated at low cap rate, often which short-term floating rate debt, the party's over with - is over with capital structure and cash flow, as many of these vehicles are now upside down. We'll be observing the space closely in coming months and quarter. Now, I would like to discuss our recent restructuring of a lease with ProMedica health system. I'm not going to bore you with the details our fundamental thesis of this investment in 2018. I laid it out, clearly when we did this transaction, we didn't predict COVID and the impact and its impact on the cash flow portfolio, and frankly, were underwhelmed by the execution. But the fundamental investment thesis of the original transaction should still protect our shareholder’s capital, that basis, and appropriate structure are critical to any real estate investment. While we have historically relied on our operatively to drive cash flow and that yield, we never make real estate investment decision based on yield. We believe success in real estate investment over a long period of time, is a function of right basis and staying power. If you own an apartment in New York City for $400,000, while everybody owns equivalent apartment for $1 million, you can still charge rent for that unit and generate strong returns. That is such a simple yet perhaps one of the most overlooked concept on Wall Street. The cacophony of noise around ProMedica as negative dark coverage over the last few months have reached a fever pitch. And we honestly understand and empathize with this Pavlovian response as the history of healthcare REIT sector is full of remedies, such as massive red cards, or disposal of assets at fire sale prices that result in significant value destruction to shareholders. Even though I'm personally humbled by the cash flow deterioration in the ProMedica portfolio, let me repeat that we are not experiencing a rent cut on a cash basis, and our investors are the beneficiary of a satisfactory total return to date. And that goes back to an incredibly favorable basis and structure. To continue my metaphor previous metaphor, Manhattan apartment rents might come down from 5000 to 4000 in a bad year, but we never hypothetical even charged 4000 as we bought our unit at such a low price. That is why our rent is now going up not down after this transaction. And I continue to believe it remains below market and will be a source of future value creation. As I mentioned in our last call, ProMedica has made significant strides in reducing its operating losses, which are farther narrow the last 90 days to both occupancy gains and lower labor cost contract labor costs particularly. Integral or its parent entity which we have done multiple transactions previously, has successfully executed many turnarounds, including those involving at our assets and we sold it to them in last couple of years and is well positioned to return these assets to its previous glory using a regional operating strategy, just like they have done over the last couple of years. We are looking through integrates parent entity and the owner for the downside protection through subordination of their equity as well as significant other guarantees and will subsequently share significant value creation with us. But I cannot overemphasize that the fundamental idea of below market rent basis equals to below market rent is not about ProMedica, it is about our belief how we invest and protect our shareholder’s capital. If a business has demand growth, and you can own it for significantly less than what it costs to build, the low leverage capital structure, it is challenging for me to see how lose money in most scenarios. We remain partner with ProMedica, albeit on its surface on a much smaller scale and we'll be delighted to see the significant credit improvement of this important institution in Toledo. Finally, let's discuss the current capital markets environment, which excites me to no end. Before I go into what we might do in the future, let's discuss what we have done in the past under this leadership team. If we go back and read all our comments about capital deployment in the last few years, you will notice a few attributes, one, was unlevered IRR buyers and we underwrite significant cap rate expansion at exit. Hence, the recent rate increase doesn’t fluster us, just as we have never chased low rates down under the guise of low cost per capital. Two, our unrelenting focus on basis relative replacement cost, and as a result, we seriously dislike low cap rates in stabilized occupancy scenarios. Nothing has happened so far, even in this turbulent capital markets backdrop that require us to change how we invest capital. We are experiencing historic volatility in the treasury market, in every part of the -- with every part of the yield curve inverted right now, with significantly the most important two to 10 curve is as inverted as it was during Paul Volcker's time 40 years ago. One approach for us would be to ride out the storm in a shelter and do nothing. But those of you know as well, know, we're unlikely to do so. We maintain a fairly favorable capital position and a war chest due to our extremely talented capital markets team under the leadership of Tim. Despite our unfavorable public cost of capital on a spot basis, today, we have no dearth of global institutions who want to partner with us. And let me remind you, again, a simple capital allocation framework I've described to you before. Every company effectively has four choices of raising capital, one, tapping internal cash flow, two, issuing debt, three, issuing equity and four, disposition of existing assets. It also has five essential choices of deploying that capital. One, investing in existing assets, two, acquisitions, three, buying debt at a discount, four, paying a dividend and five, buying stock at a discount. You can loosely call the first set of choices as selling, but the right description would be sourcing or raising capital, you can loosely call the second set of choices as buying, but perhaps the correct description will be deployment of capital. Following the same line of thinking loosely speaking, consistently, buying low and selling high creates value for shareholders. In a more wholesome and thoughtful description, optimizing these choices from this menu of sources and uses in a tax efficient manner, creates meaningful value for continuing shareholders on a partial basis. Our goal is to maximize partial value and partial cash flow, not to become the biggest or the most revolutionary. Our capital allocation team on both sides of the balance sheet is poised to pounce on these great manual opportunities, while the most volatile and interest rate environment in four decades has put in front of us. And at the same time, John's team is just getting started on the journey of cash flow and platform optimization. With that. I'll pass it over to John. John?

Tim McHugh:

Thanks, John. My comments today will focus on our third quarter 2022 results. Performance of our triple net investment segments in the quarter, our capital activity, our balance sheet liquidity update, and finally our outlook for the fourth quarter. Welltower reported third quarter normalized funds from operations of $0.84 per diluted share, representing 6.2% growth over the prior year period when adjusted for HHS funds received and changes in FX rates. Marking our second consecutive quarter of year-over-year growth since the start of the pandemic. We also reported our second consecutive quarter positive total portfolio same-store NOI growth, the 7.2% year-over-year growth. Turning to our triple-net lease portfolios. As a reminder, our triple-net lease portfolio coverage and occupancy stats reported a quarter in arrears. So these statistics reflect the trailing 12 months ending 6, 30 2022. In our senior housing triple-net portfolio, same-store NOI increased 1.6% year-over-year, below the low end of our guidance range, which is primarily timing related. Trailing 12-month EBITDA coverage is 0.83 times in the quarter. Next, same-store NOI and our long-term post-acute portfolio grew 3.1% year-over-year, in trailing 12 month EBITDA coverage of 1.31 times. And lastly health systems, which comprise of our joint venture with ProMedica Health System. Had same-store NOI growth of positive 2.75% year-over-year, and trailing 12-month EBITDA and EBITDAR coverages were negative 0.01 and negative 0.6 respectively, as operations continue to be impacted by higher agency utilization costs in the second quarter relative to the prior year. What are these coverage figures in context of our announcement last night, trailing 12-month ProMedica senior care EBITDAN coverage of negative 0.01 implies trailing 12 month EBITDAN of negative $1.6 million relative to $106.68 million of cash rent paid in the trailing 12-month period ending 6, 30 2022? The transition of the skilled nursing business will bring the remaining ProMedica senior care EBITDAN back to profitability with the trailing 12-month coverage of nearly two times relative to the remaining rent and the 58 assisted living facilities they will continue to operate. Thus, the transition to Integra Health has a dual benefit providing us a well-capitalized strategic partner to focus on the skilled nursing properties while also leaving ProMedica senior care a substantially better financial state following the transaction. Turning to the capital market activity. In the quarter we continue to enhance our balance sheet strength by utilizing our ATM program to raise approximately $760 million afford equity an average price of $80.12. We settled 9.1 million shares for total proceeds of at $842 million to fund $1 billion of net investment activity, leaving $1.5 billion of unsettled forward ATM as of 9, 30. Post quarter end, we settled additional ATM proceeds to fund investment activity and pay down $850 million of total debt. $817 million of which was floating rate. Post that pay down, we have the full $4.0 billion available borrowing capacity on our line of credit, and no one secured maturities until 2024. We expect to finish the fourth quarter with consolidated net-debt-to EBITDA below 6.5 times for the first time since 2020. From liquidity perspective, in addition to $4 billion, we pass in line of credit we have $1 billion of cash and forward equity and $580 million remaining near term dispositions and loan pay down proceeds and a 4.6 yield representing $5.6 billion of total near term liquidity. Lastly, moving to our fourth quarter outlook. Last night, we provide an outlook for the fourth quarter of net income attributable to common stockholders, of $0.08 to $0.13 per diluted share, and normalized FFO of $0.80 to $0.85 per diluted share, or $82.5 at the midpoint. As mentioned in the release, our fourth quarter guidance contemplates no HHS funds to be received in the fourth quarter. So after adjusting for $1.5 of non-recurring items, including HHS funds receiving the third quarter were effectively flat for sequential FFO. The sequential change is composed of $0.02 from sequential increases in senior housing operating portfolio and $0.01 from sequential increases in outpatient medical and senior housing triple net. These are offset by $0.03 of interest expense and foreign exchange headwinds. Underlying this FFO guidance, is estimated total portfolio of year-over-year same-store NOI growth of 8.5% to 10.5%. Driven by sub segment growth of outpatient medical, 1.5% to 2.5%. Long-term post Q 2.5% to 3.5%. Senior housing tripled net, 5% to 6%. And finally, senior housing operating growth of 18.5% to 23.5%. Driven by revenue growth of approximately 9.5% year-over-year. Underlying this revenue growth, is expectation approximately 200 basis points of year-over-year occupancy increase and rent growth approximately 7%. And with that, I'll hand the back the call back over to Shankh.

Operator:

[Operator Instructions] Your first question comes from the line of Vikram Malhotra with Mizuho.

Shankh Mitra:

I'll take the pricing power, John, if you take the flu, that's great. So from a pricing part standpoint, Vikram, if you just look at what we said at the beginning of the year, nothing really changed, except if you think about what happens is in the industry, not at least for our portfolio, you've got a lot of renewals in the beginning of the year. And this year, we got very strong pricing, obviously. And given that the gap between where market rent is as well as where your renewal rates are obviously with the rents that are rolling off, there's a gap over a period of the year that sort of comes down, right, that's sort of what happens in the normal year. What we have said this year, given that market rents have been rising at a faster rate than annual rates, first time, honestly, like a decade. So we have seen that gap close down pretty meaningfully, and you're seeing RevPOR increases are actually getting better through the year. You adds on top of that, that we are seeing some early renewals for next year in that sort of, call it, another 10-ish percent range, and we expect that obviously, we'll do similar type of pricing increases as we come to next year, you will see that pricing power will continue to hold up and RevPOR rate increases will continue to hold up. So we're pretty excited about it. But remember, pricing power also comes in many forms and substances, right? So you have occupancy of the portfolio and many parts of the portfolio is getting to a point overall portfolio might still be at 80% occupancy, but there is segments of the portfolio is well above high 80s and 90% occupancy, where it starts to get pretty meaningful pricing power because you have no innings to sell anymore, right? So as we get into that environment more and more, I believe that you will see sustainable pricing power. I have no crystal ball on exactly what the macroeconomic environment would be next year. But as we sit here today, we feel very good about pricing.

Operator:

Your next question comes from the line of Derek Johnston with Deutsche Bank.

Shankh Mitra:

Good morning, Derek. I think I laid out pretty clearly what our possible capital deployment opportunities look like, buying back shares is one of them. And frankly speaking, as you know how we think, we are unlevered IRR buyers. And we look at everything from that lens or you can look at from the basis lens, and you will see that we find our stock to be very, very attractively priced, and we'll measure that against every other opportunities we have. I cannot predict on timing. That's just not -- we just don't do that, as you know. But we know -- you know how we think. We think through a lens basis to replacement cost, and we think through an eye of total unlevered IRR. And if you do those calculations, you will come to the perhaps the same conclusion that we have come through.

John Pawlowski:

Thanks for the time. John Burkart, as operations recover in the SHO portfolio, in between AL versus IL, do you expect structurally different margins between the two businesses once fundamentals fully stabilized?

Shankh Mitra:

John, you didn't ask for my opinion, my $0.02 on this topic is that you will see more improvement in AL than IL, but you'll see improvement in both. But you asked the right person, that question.

Wendy Ma:

Hi, good morning. Thank you for taking my questions. So could you please give us some color about the moving trends of different senior housing project types like IL, AL and the senior apartments? And also given the current slowdown of the housing transaction market, have you observed any slowdown of your independent living move-in?

Wendy Ma:

And also -- sorry, can you give some color for different senior housing types like IL, AL and also the senior apartments?

Operator:

Your next question comes from the line of Dan Bernstein with Capital One.

Shankh Mitra:

Yes. So Dan, we haven't seen lenders are foreclosing on medical office loans yet. But my comment was if you -- it's just called the convexity of the situation, right, when you have very, very low rates, and people buying cap rates that are in that environment makes sense and then treasury card moves 200, 300 basis points. The treasury cards sitting on top of or above the cap rates that you are paid that's a prior upside down convexity situation, and that's the comment I was making, it takes time for lenders to foreclose, it takes time. But we are starting to see some meaningful increase in the cap rates there, which is interesting. We're not yet to talk about whether we are going to look at that and execute on that yet. We have lots of opportunities that we see on a relative basis. We talked about, obviously, senior housing is one of those. Nothing changed. I'm specifically pointed out in MOBs because that has changed. Senior housing as an opportunity was there for last 18 months and when executing on it, nothing changed there, right, and continues to be super attractive. On top of that, to the earlier question Derek asked, our stock isn't really attractive. So we look at every opportunity and think about what's the unlevered IRR on a risk-adjusted basis and what's the sort of execution risk as well as obviously the frictional cost that comes with the execution risk. But is the way finally first time in years has become interesting. And yes, but it's interesting at a price. And that price is likely a lot lower than most what you think.

Ronald Kamdem:

Just 1 2-parter. Just looking back at the slide in the deck, on the long-term $543 million embedded NOI. My question is just on that $230 million that comes from getting back to 4Q '19 NOI levels. Your comments sounds like you're pretty constructive on sort of margin improvement still with sort of the acceleration you saw in revenues relative to expenses this quarter. Can you just remind us how you're thinking about the margins of that $230 million versus sort of the 4Q '19 level is part one? And if I could take in a part two, which is just on the ProMedica consideration, about $0.5 billion, how much of that is the 15% stake that they're giving up? And how much of that is sort of the working capital.

Shankh Mitra:

On the consideration, it's roughly half and half.

Michael Carroll:

Yes, I just wanted to touch on the new SNF JV. I know you just kind of highlighted the rough size of the operating reserves ProMedica is going to be providing. But how is that going to be distributed to the new operators? Are they simply earmarked to fund near-term cash flow losses during the transitions? And what happens if these new operators don't actually need to access those reserves?

Operator:

Your next question comes from the line of Tayo Okusanya with Credit Suisse.

Shankh Mitra:

Tayo, extraordinarily good question, and thank you for your comment there. I'll just add one thing to that not only the rent is going up also the previous tenant being close to $0.5 million on the table. To make sure that these properties are taking care of going forward. So we think our partner for that. So I'll just add to the question of why we didn't go and find the offers. Our mantra is to get close to the operators, but that's in the senior housing business. I fundamentally believe in the expertise, and we have worked with Integra and its parent company on many of these transactions before. There's no caution that they are significantly better in the skilled nursing business than we are aware and will ever be. So we are sharing and for creating that value, I've mentioned in my script that we're seeing very significant upside that they can create with them. And return, they're providing us the downside protection, which is very important for us. So you think about it, you got to do in life, what you are best at. Think about from an op standpoint, we think we understand operations of senior living, the wellness housing business as well as MOB business. And we want to partner with people who we fundamentally believe on the other hand, are very good in other businesses, and that's what you're saying. Fundamentally, it is sort of going through the decision-making is going to the people who are the best at what they are good at. At the same time, it sort of cut the risk reward in terms of who creates value. It's just as simple as that. As I've said before, you can see the value still remains at very attractive basis, what you can get to. You know the total rent, you know what market sort of rent sort of constant of significant business is, and you can divide it to a value and you will see that value is still extraordinarily attractive and thus, the rent is extraordinarily attractive and remains below market. So there will be hopefully a lot of upside as the regional operators bring this portfolio back to his previous Glory, which we actually -- this is not a guess. We have -- we kill how many assets we have transacted, Medicare assets we’re transacted with Integra and its parent. About 21, 21 assets. We have seen them doing it. And we are going on an execution path that we have seen in the last couple of years. So fully, there's a lot of value to be created for residents, for employees, for capital, and that will be shared between the two parties. But it is fundamentally the belief of they're giving us the downside protection for which they should enjoy very significant upside that they create -- on the other hand, for us, it's all about where we sit in the risk spectrum. So it's a win-win-win for all three parties. ProMedica wants to focus on its core business, and wants to be in the higher margin business and that's the leadership that they are taking that forward. There's a very significant improvement in their credit. For Welltower, it's obviously a great day for some value realization as well as, obviously, taking this portfolio to the hands where we can create another round of very significant up step of values. For Integra, they can ping it at a very attractive basis. And obviously, they're creating the value that they will share the upside with us. So it's a win-win-win on all fronts.

Michael Mueller:

Hi. We appreciate the expanded development disclosure. But what's the time frame that you see for ramping the developments from the 1.6% initial yield to the 7% stabilized yield?

Operator:

Your next question comes from the line of Nicholas Yulico with Scotia Bank.

Shankh Mitra:

Very good question. The escalators remain the same, 2.75%. And the GAAP impact, as we mentioned, will be roughly neutral to slightly accretive. One of the leases are remaining the same lease ManorCare, the Aramco senior living lease is going to 10 years. So you have a negative GAAP impact there. So net-net, you will be roughly neutral to slightly attractive.

Austin Wurschmidt:

Hi, good morning. Curious, first off, if there were other partners you approach for the ProMedica joint venture. How do we think about you going from a health system investment with feeders into these assets to the more regional operator approach? And then just lastly, I'm curious, kind of going back to 2016, 2017, wasn't the plan to ultimately exit the SNF business. And so curious how you think about the strategic direction of that segment of the portfolio?

Austin Wurschmidt:

Yes. I was just curious if you approached any other partners beyond just Integra for the new joint venture.

Operator:

Your next question comes from the line of Juan Sanabria with BMO Capital Markets.

Shankh Mitra:

One extraordinarily good question. As you know, we get really excited about basis and were USD, we raised capital in USD, our expenses are mostly in USD, capital structures and USD. And we think about basis in terms of USD. And as you can figure out, U.K. on a U.S. dollar basis has never looked more attractive and Canada also looks pretty attractive. But U.K. particularly given what happens to the currency situation, it's extraordinarily attractive. If you add on top of that, that you don't have a super functioning debt market in U.K., like you have the agency support in U.S. and Canada. It's a very, very interesting market. I have never seen U.K. opportunities as cheap as it looks today from the U.S. dollar investor. And that probably perhaps goes for any asset class, anything even for shoppers. So you're picking up the right thing, we're absolutely thinking about it.

Richard Anderson:

Thanks, good morning. Congrats on the ProMedica Integra transaction. The market seems to be rewarding you for that resolution. But the way I look at it is your kind of married ProMedica in 2018, but you signed a prenup, and that protected your downside. And all this is based on basis and it's all clear and understood. But now you're selling 15% to Integra, what happens to base for that 15%? In other words, 85% I assume, stays put -- but are you selling -- are you upping your basis and eliminating some of that “prenup” component so that if there is a disruption going forward with Integra and its regional partners, that you still have an equal amount of protection should something go wrong here? Because a transition isn't a silver bullet. It usually -- it sometimes works, but sometimes not. So I just want to get a gauge in the future in terms of how you're protected going forward? Thanks.

Operator:

Your next question comes from the line of Michael Griffin with Citi.

Shankh Mitra:

Nick, first, congratulations for getting the top job. We have been a big fan of yours for a long time, and obviously, thank you for your question on the call today. So look, I've mentioned very, very clearly that we do not consider ourselves a skilled nursing expert. If we did, then we would not bring in our partners in this deal, who we consider knows the business better than we do. So I will leave that to our partner to execute the strategy, which we have mentioned, as Nikhil just mentioned, that we have done just from these portfolio 21 assets before, we'll leave it to them to maximize where, in this case, is this sort of a structural protection is what we are after, not maximizing value through operators. That's what they're bringing to the people in this case, and we remain focused on our core businesses, where -- whether it's senior living, whether it's well in housing or medical office, and that's what John is spending all this time.

Steven Valiquette:

Great, thanks. Good morning. Just sticking with ProMedica for a minute here. I guess 1 of the expected operational synergies from ProMedica acquiring the ManorCare SNF assets in the first place was likely centered around good flow of patient referrals from ProMedica hospitals into a lease of the ManorCare SNFs where it made sense geographically. I guess I'm curious, with hindsight, it that part of the strategy plays out the way everyone thought it would maybe just perhaps the underwhelming execution that you alluded to, Shankh, was just more a function of just tough industry dynamics for SNFs overall? And also under the new agreement then, does ProMedica patient referrals to the SNFs under Integra's operating control stay intact going forward as part of the strategy for Integra to turn things around is really to maybe widen and expand the Medicare post-acute referral sources to improve the occupancy?

Nikhil Chaudhri:

Yes, I think from a clinical programming perspective, I think this portfolio ManorCare ProMedica has always been good at providing good clinical programs, and they work closely with hospitals across different markets, whether it's for medical hospitals or not in creating programming that serves the need for the local hospitals. And that programming stays in place. And obviously, as new operators come in, they'll decide if they want to keep that in place, scale that back, enhance it. But this whole platform has been known to have incredible clinical programming and that stays in place.

David Rodgers:

Yes, maybe for John Burkart. John, as you obviously grow occupancy in the SHOP portfolio, you have more and more assets that are likely now at kind of stabilized occupancy. Can you talk about the margins at the stabilized assets? And if they stabilize to pre-COVID levels. And then any delay between the occupancy stabilization and margin that you're witnessing in that larger group of assets?

Operator:

Your next question comes from the line of Josh Dennerlein with Bank of America.

Shankh Mitra:

As Tim mentioned, those assets actually a decent amount of profitability for them. And ProMedica, that is part of ProMedica strategic, obviously, planned, and those are, as you know, high margin businesses, and they have been even before COVID and we expect they will continue to come back to -- remember, where pre COVID assets on mid-80 to person occupancy was generating high 30% margin. So I expect as you sort of come back from the COVID and get that occupancy stabilize. Frankly speaking, I will venture a guess that will be the best sort of margin part from all of ProMedica's businesses. So look, I mean, that's where we stand today, and there's no reason to believe that those assets will not. As you can see, as part of this recovery from these occupancy levels in the business, margins are coming back. I'm not happy with where margins are today, and we're seeing obviously a lot of signs of improvement that we discussed. But the margin of this business should come back to a much higher level, and ProMedica should enjoy that like everybody else in the business.

Operator:

Good morning. My name is Chantal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Welltower Second Quarter 2022 Earnings Call. As a reminder, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Matt McQueen, General Counsel. You may begin.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I'll review high-level business trends and describe our capital allocation priorities before handing the call over to John, who will detail the operational trends and provide more details on the operating platform that he is building. Our total revenue is up 29% year-over-year, driven by both organic revenue growth and contribution from significant capital deployment activity over last 18 months. On a same-store basis, our senior housing operating portfolio revenue is up 11.5% year-over-year, driven by a 5% occupancy growth and a 4.5% REVPOR growth. All this translated into a 15.4% same-store NOI growth in Q2. Our annual EBITDA is back above $2 billion. Annualized in-place SHOP NOI is at $895 million. Though shy of $923 million of pre-pandemic numbers, our revenue has surpassed pre-pandemic levels. However, I'm not happy with these results, which I would characterize mediocre at best. Why? Because the size of our portfolio is much bigger today, given the significant amount of capital deployment over the last 18 months and yet our quarterly results are not reflecting the cash flow that this portfolio is capable of generating. I'll give you a few things to reflect on. First, we have about 120 senior living -- senior housing properties that are generating negative cash flow today. In other words, if we just shut down these buildings, our earnings would be significantly higher. Clearly, we would not do such a thing as they were recently developed or going through a value and repositioning program. Hence, the timing mismatch. Second, while I don't like to fix it on short-term trends and instead focus on long-term prospects of the business, I'll offer a few observations on the second quarter. We started the quarter with results coming in better than expected, only to get hilt simultaneously by multiple challenges primarily related to another COVID spike during the last couple of weeks of June. Only this time, we didn't see it coming as the testing requirements have been lowered in recent months, particularly for those residents who are not experiencing symptoms. In instances where few residents or team members develop symptoms and an entire building would be tested only to find out many asymptomatic residents and staff actually were COVID positive. This created some disruption to move-ins, but particularly impactful to the use of agency labor in June. Our operators are walking through as we speak and made very good progress in July. Let me dig into some recent trends even a bit more. From a demand standpoint, we always see first half of July as two last weeks, similar to the last weeks of December as families celebrate 4th of July weekend and don't usually move parents and grandparents in. This July, we lost an additional week. And as a result, almost a whole month was shut from a move-in perspective before we gain significant traction later in the month with tour activities returning to the levels experienced in June. We and our operators have a few theories of why that might be the case. One, the hyper-positivity rate of COVID over 20%. Despite people on a reporting to government, families know from home testing they're COVID positive and are delaying move-ins as they wait for this wave to subside. And number two, travel. Summer travel has surged as families took advantage of looser COVID restrictions. Again, I would describe this as our conjecture because we don't know for sure. But we are clearly seeing broad-based demand recovery continues, particularly towards the second half of the month in terms of leads and tours, which led to a recent rebound in move-ins across the portfolio over the last couple of weeks. On the cost side, it is important that you understand the progress we made on the agency labor. In the U.S., most of our operators are decreased from June to July, resulting largely from a favorable net hiring trends. The July books have not closed yet, we're expecting a decline in agency labor expense in high-single digit from month of June. In terms of net hiring, our operators have continued to make significant momentum with July increase alone in headcount nearly equal to the net hires of past six months of the year combined. As a result, we're already starting to see benefit of this trend, which should reduce the dependence on agency labor in the second half of the year. The downside of high-frequency data is that you get a lot of noise. And I strongly believe that's what you're seeing in the numbers today, a lot of noise. I encourage my team and will encourage you not to confuse any short-term high-frequency noise whether good or bad as a signal and project that into the future prospect of the business. For a few quarters, I've been talking about the run rate earnings or the true earnings part of this portfolio being significantly different from our current reported earnings. Clearly, some of the anticipated second half growth has slipped into the next year, but this should only be a timing mismatch. As we focus on '23 and '24, I continue to believe that this earnings power will shine through. Before I move on to the capital allocation priorities, let me make a comment on ProMedica. When we bought HCR ManorCare portfolio out of bankruptcy, we did not outsource our underwriting to rating agencies. Clearly, there was no way for us to predict a global pandemic or a day when almost every hospital system in the country would lose money similar to what happened in Q1 of this year because of COVID. We got comfortable because our basis of $57,000 per skilled nursing bed, we saw very minimal risk of permanent capital loss, which is at the core of how we think about risk. Of all the structuring bells and whistles aside, which we're very proud of, we fundamentally believe investment basis not cash flow in a given building at a given point in time determines investment success. Having said that, the ProMedica team has been able to make reduced agency labor almost by half over the last four months and significantly narrowed their operating losses. We have below market basis, and thus, below market rent here. I remain very comfortable with our rent and longer-term expected IRR from this investment that we discussed with you when we did this deal four years ago. Turning to the capital deployment. I cannot overstate how favorable of an environment we find ourselves in today. During the second quarter, our off-market, privately negotiated transaction machines kept humming, having deployed an additional $1.1 billion of capital. Today, there is definite stress in the lending environment given the significant rate and credit volatility and increasing recession talk. Cap rates are going up across the board and most institutional capital is waiting to see where the chips fall. We're seeing many high-quality opportunities, and we think the environment will only get more favorable as Fed continues to raise rate at a rapid clip. Our pipeline remains robust, having replenished after all of our Q2 and Q3 closings. Our fundamental investment thesis remains intact. One, we need to buy at a favorable basis relative to replacement cost; and two, we need to be able to add value through our platform. We're not spread investing deal junkies and instead remains laser focused on total return or unlevered IRR. I continue to believe this year will be a record year for Welltower from a capital deployment standpoint. Cost of capital has surged for everybody, including governments and access to capital remains very sparse for most people. In this environment, we remain in a very favorable capital position with $2 billion-plus of equity capital that is raised but not settled and almost full availability of our $4 billion line. Sellers who did not like our price six months ago are realizing that glossy broker package and nonbinding LOI are not cash in a bank. This environment reinforces the value of a counterparty like Welltower, which always acts on a very simple principle. We say what we do and we do what we say. And in that vein, as our long-term investors have come to expect from us, we exercise utmost discipline on every transaction we look at, large or small and will not chase any deal. As we have said in the recent past, price is the price, and we only act in a manner that creates long-term value for -- part share for our owners. With respect to capital deployment over the last 18 months, some of you have asked me if I'm satisfied with the performance of these properties. In many cases, in the case of many of these acquisitions, including some larger ones, the answer is no. The same-store challenge that I have described above are accentuated in many non-same-store properties, which are being repositioned through operator changes. However, I do believe that we have turned the corner as we approach the completion of our operator transition and system integration for the COVID class of acquisitions. We should see significant progress from these properties as we enter next year. Please recall, we make investment decisions based on long-term IRR with an exit cap rate going up every single year from the duration of the ownership. And we feel strongly about achieving those return targets as we have discussed with you. As frustrating as near-term challenges of operator transition might be for reported earnings and trust me, I share those frustrations with you, we have to do what's right for long-term interest of our owners. I will give you two examples. Vintage and Gracewell, two of the most ill-fated HCN acquisition from many months ago. Despite some of the most coveted locations and CapEx plans, these assets did not live up to our expectations. We finally pulled the plug over last 12 months, frankly, because we're not permitted to do so earlier. Our Gracewell assets were transferred to Care UK and the Vintage assets were mostly transferred to Oakmont with one each to Kisco and Cogir. Oakmont has already made incredible progress with the first tranche of the asset they received last fall, with occupancy up 13%, and I believe you will see this repeated in the most recent tranche as well. Care UK is having similar success with Gracewell assets taking occupancy above 80%. And I believe they will be stabilized or get close to it in 2023. We made similar decisions for our other properties, which come with some short-term pain. But as we capital allocators strive every day to create per share value by compounding over a long period of time, while we hope near-term priorities do not conflict with those long term, practically speaking, we often encounter situations where those time horizons diverge. And it is critical for our investors to understand that at these crossroads, we'll always follow the path to long-term value creation at the expense of short-term gains. The good news is that -- all of these, as my partner, John Burkart, would say, is baked in the cake. With that, I'll hand the call over to John, who will describe to you perhaps the most exciting set of initiatives that will transform the business as we know today and creates tremendous value for our residents, team members, operating partners and most importantly, our shareholders. John?

Tim McHugh:

Thank you, John. My comments today will focus on our second quarter 2022 results, the performance of our triple net investment segment in the quarter, our capital activity, a balance sheet liquidity update; and finally, our outlook for the third quarter. Welltower reported second quarter net income attributable to common stockholders of $0.20 per diluted share and normalized funds from operations of $0.86 per diluted share, which included $17 million of Provider Relief Funds from the Department of Health and Human Services, approximately $11 million or $0.02 per share more than was assumed in our initial guide for the quarter. This quarter represented our second consecutive quarter with a year-over-year normalized FFO growth since the start of the pandemic, a positive 8.9% or 7.7% when normalized on HHS funds received and year-over-year changes in FX rates. We also reported our second consecutive quarter of positive total portfolio same-store NOI growth of 8.7% year-over-year growth. Turning to our triple net lease portfolios. As a reminder, our triple-net lease portfolio coverage and occupancy stats reported a quarter in arrears. These statistics reflect the trailing 12 months ending March 31, 2022. In our senior housing triple-net portfolio, same-store NOI increased 9.9% year-over-year, driven by improvements in rent collections and leases currently on cash recognition and the early impact of rental increases tied to CPI. Trailing 12-month EBITDAR coverage increased 0.01x to 0.83x in the quarter. Next, our long-term post-acute portfolio grew same-store NOI by positive 2.8% year-over-year and trailing 12-month EBITDAR coverage is 1.31x. And lastly, health systems, which is comprised of our ProMedica Senior Care joint venture with the ProMedica Health system, which had same-store NOI growth of positive 2.75% year-over-year and trailing 12-month EBITDAR coverage was negative 0.29x as operation continued to be impacted by high agency utilization in the first quarter. Turning to capital market activity. We continue to enhance our balance sheet strength and position the company to capitalize on our robust and highly visible pipeline of capital deployment opportunities by utilizing our ATM program to efficiently fund those near-term transactions. At the start of the second quarter, we sold 18 million shares via forward sale agreement at initial weighted average price of approximately $87.67 per share for expected gross proceeds of $1.6 billion. We currently have approximately 22.5 million shares remaining unsettled, which are expected to generate future proceeds of $2.0 billion. Taken together, our unsettled equity proceeds includes some committed OP units on pipeline deals and $257 million of expected property dispositions and loan payoff proceeds, totaled $2.3 billion in equity capital, providing ample capacity to fund our current investment pipeline. During the quarter, we closed on an amended $4 billion unsecured revolving line of credit, along with an upsized term facility comprised of a $1 billion USD term loan and a $250 million CAD term loan. At quarter end, when factoring in cash and restricted cash balances, our liquidity position exceeded the $4 billion of borrowing capacity on our line of credit. And when combined with the previous mentioned $2.3 billion of unsettled equity proceeds and expected disposition proceeds, we remain in a very strong liquidity position. Lastly, moving to our third quarter outlook. Last night, we provided an outlook for the third quarter of net income attributable to the common stockholders per diluted share of $0.12 to $0.17, and normalized FFO per share of $0.82 to $0.87 or $0.845 at the midpoint. This guidance includes $7 million with HHS funds expected to be received in the third quarter. Excluding HHS funds, guidance represented a $0.005 increase at the midpoint from 2Q normalized FFO. This $0.005 increase composed of $0.025 from incremental SHO NOI growth and SHO investment activity and $0.01 from performance across the rest of our investment segments and from lower sequential G&A costs. This is offset by $0.03 of higher floating rate interest costs and unfavorable FX rates. Underlying this FFO guidance is estimated third quarter total portfolio year-over-year same-store NOI growth of 7% to 9%, driven by subsegment growth of outpatient medical 1.75% to 2.75%, long-term post-acute of 2.5% to 3.5%, health systems of 2.75%, senior housing triple net of 5% to 6%; and finally, senior housing operating growth of 15% to 20%, driven by year-over-year revenue growth of 10%. Underlying this revenue growth is an expectation for approximately 400 basis points of year-over-year average occupancy growth and continued robust rate growth. We continue to be pleased with the momentum of the top line recovery in our senior housing operating portfolio, driven by a combination of rate and occupancy growth. As I remarked last quarter, as we realize the recovery in our core portfolio, we have made the conscious decision to steadily allocate capital to distress under-operated and often initially diluted properties, along with high-quality development projects. While this capital allocation is the effect of offsetting some of our core growth today, it should substantially amplified in years to come. And with that, I'll hand the call back over to Shankh.

Operator:

[Operator Instructions] Our first question comes from Michael Griffin with Citi.

John Burkart:

Yes, Michael, I'll start with that and then Shankh can come in. I think the point on NAREIT and the guidance change there, I think Shankh spoke to this in the script. But we've tightened guidance at NAREIT based upon the trends that we saw and those trends reversed towards the end of the quarter and up towards the lower end of that range. So I hear you on the high frequency of data and frankly, what we've been trying to do give updates because the longer-term view has been tougher to project. And given COVID is a backdrop, right? And we've been trying to balance essentially since we've been able to be able to provide less of that long term need to provide more of that short-term information. And I will speak for Shankh, if you can give a comment on this. But I think part of the commentary on the short-term noise is just trying to see the long-term trends continue to be strong in the recovery side. And we're certainly focused on that, and we continue to evaluate that piece of it. And although we understand the market's need for frequent updates on data, we're trying to make sure that you see how we're looking at it and keeping our long-term focus on kind of the core fundamentals of the business.

Operator:

Our next question comes from Vikram Malhotra with Mizuho.

Shankh Mitra:

Vikram, I'm not going to get into sort of giving you guidance on pricing power in particularly for next year's pricing power. But I will tell you that we are seeing that Street rates are significantly accelerating. There has been talks -- not talks. I mean I was in the UK for a few weeks. Our UK operators are talking about giving a midyear pricing increases in September, October time frame. I've not seen that before. There are some talks of U.S. operators thinking about something of that nature. But most importantly, Street rates are just going up very significantly. So all this should translate into continued pricing power in our portfolio, especially if you look at next year, demand supply is even more favorable, right? But we're trying to optimize the revenue growth and frankly, so from our standpoint, we think that pricing power should continue. As you can appreciate that we had pricing power last year, right? So we obviously had REVPOR growth. We continue to push that, and we'll -- as we move forward, you'll see that we'll continue to push that pricing power. As I've suggested before, the two types of pricing power that you should see. Frankly speaking, the one you are seeing today is arises from the need of pushing pricing because of cost inflation, and that's sort of we're sort of going through that. But as we stabilize different buildings, you will see another set of pricing power which is we're raising prices because we don't have a lot of rooms to sell, right? So hopefully, you see a lot of that going through next year.

Daniel Bernstein:

I just wanted to ask something quickly about the differences in labor cost growth between AL, mem care and IL wellness and how that's factoring kind of into your capital allocation of what you want to buy and invest in?

Operator:

Our next question comes from Jonathan Hughes with Raymond James.

Tim McHugh:

Yes, I'll start with that, and then John can add anything. Part of it is, we have been certainly in 2022 playing a bit of catch-up in the costs of senior housing space and just the buildings being less accessible over 2020 and 2021. And then efficient for us a lot of the acquisitions we've made have had substantial value-add opportunities. So we've highlighted that with some of the larger ones and explicitly stated how much kind of redevelopment capital or value-add capital we put into it. But I think that's what's driving that right now is a combination of a little bit of deferred or catch-up capital from a period of time in which the buildings were for safety reasons less accessible. And on top of that, we put a lot of capital to work into opportunities that have high return value-add investment.

Operator:

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Shankh Mitra:

Well, Austin, we're not going to give you a number on how much capital -- how much cash flow that's losing today? Maybe I'll talk to Tim and see if we can kind of quantify that for you. Should they grow faster, the answer is obviously, yes, right? They are losing money because they're at a lower occupancy. And as they stabilize over, say, a number of years, just from the base they're coming out of, and if you think about the trajectory of the margin, they should grow faster. But a lot of these properties have been recently built or we bought the properties at a very, very low occupancy, right? So if you look at the last tranche of, for example, the StoryPoint acquisitions we did, I think the average occupancy was like 40%, right? So if you think about it, average age of the portfolio, I think that we bought is between 2 to 4 years, and they're at 40% occupancy. So there's no question there's a lot of those buildings that opened in last year, 1.5 years, and we bought a lot of these things, right, from developers from multifamily developers from banks. They're just a drag. But the point here is they're not a sequential sort of a linear progress to your NOI growth, right, as they go from a negative sort of margin to the margin inflection and that sort of margin grows after you hit the J curve, right? So that's sort of the way to think about it. I mentioned that for you to understand that something very simple, right? Just take an example of our East 56th Street property. That property opened 7.5 months ago. It's what? It's probably low 30% occupied today. And our average rate of those residents that we have received, of the people who are living there is $23,000, $24,000, okay? Clearly, that has negative margins. But you would think about it as we thought about that property when we developed it, we're getting significantly high rates and trajectory of East sub is doing better than we thought. Still that's a negative value add. So as you think about negative value, as you think about putting a multiple on our income understand that you are valuing 120 buildings at a negative value. That's all, right? So I'm not going to add anything more to that at this point, but something to just reflect on what's sort of dragging on our earnings and cash flow today.

Derek Johnston:

On John Burkart's operational initiatives, what's his team hoping to accomplish and really to build confidence these endeavors can bear fruit. How are you guys measuring success? And what's the upside here?

Operator:

Our next question comes from John Pawlowski with Green Street.

Shankh Mitra:

I think, John, that's a very fair comment, which I should -- we talked about July was obviously a very positive month for net hiring. And we hired -- for the portfolio overall, our operating partners have hired as many people in July as they did six months ago. But what we haven't told you that hiring puts us finally to a 2% plus above what the total number of employees were last year. We should have added that. It's a fair question -- comment from year end. So as you recall, this whole agency sort of cost drama started about a year ago, and we have finally worked our way through that with this July hiring we're finally about 2% above where total employee count was on a net basis above last year. So what you're saying is possible, but I would say probably unlikely as we are finally seeing, as I said -- I talked a little bit about that that -- our operators have been talking about the overall availability of labor is increasing in June, it feels like, again, I'm going to be very careful how I describe it because it is not that we know everything that's happening. But it feels like that finally that labor market is on the mend from -- at least from an availability, for sure, it's on the mend. And hopefully, that translates into price of labor in not a distant future, but at this point, at least, we're hopeful -- not just hopeful, we're seeing it in the numbers that agency lever, which were obviously pretty ugly number in June, but came down in July. And hopefully, obviously, there's net hire numbers in July, you'll see that should impact pretty positively as we get towards the end of the quarter.

Steven Valiquette:

I wanted to actually touch on the study that you just answered, but I guess the -- just to frame it slightly differently, not to get redundant here. What percent of total open positions across all the senior housing were filled in July? If you think of it that way, are we talking 75%, nearly 100%. I think that's 2% above where you were before, it's still kind of hard to, I guess, frame that perfectly in our own minds. So another thing is just on the double staffing, what's the typical time period of training where you have that double staffing? Are we talking weeks or months? Just any rule of thumb would help around that, too, as we think of magnitude of potential expense reduction for 3Q versus 4Q, et cetera?

Operator:

Our next question comes from Mike Mueller with JPMorgan.

Tim McHugh:

Yes, yes. And I will -- on the REVPOR side, I think the way to think about it is we talked about this last quarter, but we get a large amount of -- half of our portfolio roughly resets on Jan 1. So you see that occurred -- that part of the portfolio actually happened to also be heavily weighted towards our higher acuity unit types. The Jan 1 increases tend to be the daily billers. The daily billers are the part of the business that have your higher acuity assisted living weighting. So you saw those increases in the first quarter and what you're seeing now kind of spreading from the first quarter to the second quarter is we've talked about in this business, historically, you've seen kind of 10% or high single-digit roll-downs between move-in and move-out rates. A lot of it's acuity related, but that's actually -- that got as wide at 20-plus percent last year and it started to tighten into the mid- to low single-digit range. So you're seeing some of those Jan 1 increases I'd say bleed off a little bit with there is still some negative leasing spreads on that, and that's being offset by annual increases that are hitting throughout pretty much evenly throughout the year and the other half of the portfolio.

Operator:

Our next question comes from David Rodgers with Baird.

Shankh Mitra:

Yes. So I'm going to be -- I'm going to repeat what I said before. First is to understand, a lot of that portfolio has a skilled nursing, which has been impacted, obviously, very significantly. And it has been a very significant hit from agency labor in that portfolio. What we report is a one-quarter lag sort of a four-quarter average type of EBITDAR. What I mentioned -- if you look at -- reread the transcript, you will see that the improvement that they have seen has happened really in the last four, five months. And that they have significantly narrowed their loss as occupancy has gone up and agency labor has come down, right? So that's sort of the overall underlying picture of what's happening. It is very important for you to understand, as we have described before, that rent doesn't come from the four-walls of [indiscernible], right, that rent -- with the only reason we did that transaction, -- they -- and we mentioned this before, that rent was guaranteed by the market share, right? So that's very important for you to understand where that lies. As I mentioned again, I'm going to say this again, as I've mentioned before, right? We fundamentally believe that below-market basis translate into below-market rent, like there's nothing -- there's no special insight into that. If you have a low basis and your market rent constant, you will get to a level by market rent, right? So on an average basis, for example, on the average bed rate, the ProMedica portfolio is roughly around $7,000 per bed of rent. If you look at any other skilled nursing provider, let's just take an example of Omega, you will see the average rent is about $10,000, right? So that sort of gives you a sense of if everything was exactly the same, the rent is 30% below, right? So they sort of give you order of magnitude. I'm not talking about specific because it's hard to compare assets from portfolio one to portfolio two, but that would give you a sense, which gives us a lot of comfort that about, a, first, our income from that portfolio; and b, what we strive to do, which is to achieve long-term returns as we deploy capital. And as I mentioned, I'm going to mention it again, I remain very comfortable that we're not losing our sleep over that income or that return from that portfolio. That’s all I am going to say.

Nicholas Yulico:

I was just hoping to understand for the operator transition assets in senior housing. What's embedded in the guidance for the third quarter about any incremental sequential NOI drag there since I think you said those assets are not in the same-store calculation.

Operator:

Our next question comes from Rich Anderson with SMBC.

Shankh Mitra:

Yes. So let's just -- I'll take the essence of your question, and there's no debate about the fact that for -- specifically for third quarter, and I mentioned this in my script that some of the growth has leaped into next year because we're not getting that growth in the third quarter. Why? Because we lost the month of July, right? So if you lose your traffic that much in first half of the month, it's very, very -- it's almost impossible to recover from that as you think through the sales cycle of tours translate into sales, right? So it's very important for you to understand that last month with sort of -- it's a very important month, right? So we got an average occupancy growth in that month, as John said, about 40-plus basis points, there should have been double that. And that's was not the case because we got hit. So the only good news here, as I will suggest to you, and I think John mentioned this in his script, that we started first, call it, first 10 days, first 15 days of July, but tours were 40% below June, like with just the market just went away. By the time we ended the month, we caught up on a cumulative basis almost to the 95% of June. So if you think about, you start at a 40% hole, and you end up at a 5% hole, that sort of suggest to you, there's a remarkable progress made in the second half. And that's sort of we're seeing that now the move-ins are coming back on back of the tours. But by no question, but absolutely no question, Rich, that we -- because of this COVID hits are sort of, just call it, try to be specific on something that it can be that we saw between mid-June to mid-July, has hit our June numbers on an expense basis, which sort of recovered in July or at least hopefully recovered a lot in July, and it hit revenue because all the tours went away. It hits revenue in July. I hope that sort of gives you a sense of how this wave hit us and how that translates from one side of the quarter from the other side of the quarter.

Michael Carroll:

John, I know you're hesitant to provide too many details on your data plan, but I wanted to touch on your comments in your prepared remarks that Well is initiating on a data analytics pilot that's expected to roll out over the next six months. I guess what does this actually mean? And how does this different from the company's current data analytic programs that you have right now?

Operator:

Our next question comes from Juan Sanabria with BMO Capital Markets.

Shankh Mitra:

So Juan, I think the way you should think about it for the COVID class of acquisitions that we have done, the transition, operator transition, system integration, all of those things are reaching nearing completion, right? So they are nearing completion. Now from the perspective of what you are asking, which is more of a philosophical question than a planning question, right, we are of the belief that you have to earn your keep if you want to manage our properties. It's very simple, right? Managing our properties, which had substantial amount of capital is a given. And you see that in all other businesses, whether it's a competitive business, whether just take an example of multifamily, right? And if you look at people who are managers, fee managers, they expect to earn their right to manage for fee. And frankly speaking, in senior housing business, there has been very significant amount of complacency, and we have not seen that. So as long as people perform, we have absolutely no desire to move assets because it's disruptive. No one wants to do that. But if people don't perform, there will be transition. It's a lot of capital -- for our shareholders' capital are tied up into these buildings, but we're not going to see it tear and take underperformance. That's just not what we do. Near-term underperformance because something happened to an asset completely understandable. But as John mentioned to you, some of the basic operating standards are expected. And if people don't perform, they're not going to be in our portfolio.

Michael Bilerman:

It's Bilerman, again. I just had two quick follow-ups. Shankh just on ProMedica, who is funding the operating cash flow losses today? Or is the entity just taking on increased debt for that? So maybe you can just talk through the capital structure and how all of that's happening. And then secondarily, just going back to my opening question about sort of longer-term and focusing on all of the initiatives and investments that you've made, I think Burkart, when you were at Essex, you've put out a three-year plan, and I remember UDR and Aimco and there was a lot of that, do you think the company would benefit a little bit about -- you have done a lot of sending out all of the impacts and opportunities to start to understand the earnings as well as the asset value, NAV, because it just feels that the market is focused to short term and you can provide a lot more details. You've dropped little things like the transition, the $120 million negative cash flow, but actually getting the details and really putting the building blocks to your three-year return based on everything that's involved, I think, would be really helpful. So if you can address those two things, that would be good.

John Burkart:

Yes. I mean I will continue to provide more insight into the platform. And as I'm a very simple person, as you know, I call it the [indiscernible]. Literally, we'll start all the way from traffic, i.e., web and that type all the way through sales force management, all the way through the operating platform, the ERP, so to speak through every other aspect of the business, HRIS, et cetera. And we'll start to lay out more information. I will say from the past the -- my experience -- the companies typically aren't laying out specific time lines for dollars. You lay out paths as to what you expect to accomplish and how that will positively impact the business, but not necessarily time to dollars, and I don't intend to do that. But I'm glad to give more clarity over time. We're running extraordinarily fast at this point in time, and we'll provide some more detail on the coming calls and at NAREIT, et cetera.

Operator:

We have reached the end of the question-and-answer session. This concludes today's conference call. You may now disconnect.

Operator:

Hello, and welcome to the Q1 2022 Welltower Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce General Counsel, Matt McQueen.

Shankh Mitra:

Thank you, Matt, and good morning, everyone. I'll describe our capital allocation priorities in the rapidly evolving investment environment and review high-level business trends before handing the call over to John, who will detail operational trends. A little over one year ago, our seniors housing operating business witnessed a powerful inflection point with occupancy gains and pricing power sustained through the remainder of the year despite Delta and Omicron variants. This momentum continued into first quarter of this year and translated into the first period of year-over-year bottom line growth for our company since the beginning of pandemic. Our total portfolio revenue is up 32.7% year-over-year, driven by both organic revenue growth as well as a significant volume of high conviction capital deployment during the last 18 months. On a same-store basis, our Senior Housing Operating portfolio revenue is up 11.2% year-over-year driven by a 4.6% occupancy growth and 4.6% rate growth. Encouragingly, we saw sequential pricing growth was 4.3%, the fastest growth recorded in our history despite only half of our operators pushing through in-house rent increases on Jan 1 schedule. All of these translated into 18.4% same-store NOI growth in Q1, an impressive number that surpassed our expectations. We're all very encouraged by the speed at which free trades are moving up. And we expect same-store NOI growth will accelerate into the second half of the year, barring another COVID spike, all of this setting up to be a powerful earnings recovery that we anticipate in 2023 and beyond. Before I turn into investment environment, I want to make two things here that are very important for multiyear earnings growth path. Number one, in 2018, when we converted our Brandywine Senior Living lease to RIDEA, I mentioned the two other portfolio we had in triple net structure that we hope to convert. One of them was Legend Senior Living. After many years of discussion with Tim McCannon legendary Founder and CEO, I'm pleased to report that we have converted this relationship to RIDEA. Recall that we had an 88% and 20% profit JV between Welltower and Legend. At conversion, Tim contributed a portion of his propco, five brand-new assets and has agreed to a future development agreement to create a powerful 93%, 7% equity partnership going forward. Finally, after years of persuasion, we have convinced him that we can grow the pie using our data analytics platform so significantly that will still be better off this by owning a smaller portion of the pie. A partner of our company since '90s, Legend has paid every single dollar of rent that was owed to Welltower regardless of the coverage on a given day. Though these deals is dilutive to our FFO in 2022 due to significant agency leverages today, we expect cash flow relative to the previous rent will breakeven in beginning of 2023, and our shareholders will enjoy upside from thereon. We hope for extraordinary partnership over last week -- had extraordinary partnership over the last three decades, and we hope that it will continue for many more to come. This transition, along with acquisition and future development partnership exemplifies our sole focus on enhancing long-term value of the portfolio and is indicative of the potential earnings subside in the portfolio that can be captured through a simple cap rate or multiple valuation methodology. Number two, historically, our SHO business focused on managing managers and assets. Now that we have significantly upgraded our operational capabilities, including through the hiring of John Burkart, our COO, our focus in the SHO business will mirror the real estate and management services that we provide in our medical office business or what an apartment rig does with an understanding that we're limited in providing care services in a health -- qualified health care property. This fundamental shift in our approach has a profound impact on how we think about our role in the operating step. This is particularly important as we think through the most important part of that operating platform, which is the technology staff. John will get into the details as part of his script, but we are delighted that he is in full scale development and implementation of a true operating platform at Welltower. John is working closely with some of our best operating partners to launch this, call it RIDEA for now, but honestly, that doesn't do our new approach justice. As to the scale and impact, we think his plans will have on the customer experience and value creation overall. Needless to say, we expect this multiyear initiative will have a tremendous impact on our earnings growth trajectory and long-term compounding machine that we are setting up at Welltower. Now let's talk about capital allocation. As you know, my team is extraordinarily focused on allocating capital to create part share value for existing shareholders. The keyword is existing. We'll favor our existing shareholders who have been our partners to think and thin, especially through thin. We are fiercely protective of their interest on a per share basis, and won't act in a manner that does not create significant value for them. Because we're extremely transparent and genuinely dislike drama, I will mention to you that Welltower is the Party F referenced in theHTA HR merger proxy couple of weeks ago. Every week, we call owners of assets and express our interest to buy them at a price. This was no different. I am genuinely disappointed that HR Board and management did not engage with us, but that is their prerogative. It is completely up to their shareholders and the Board, which presents our shareholders to decide how to maximize value. Because of the many rumors circulating and the reports and articles about this, I'll mention a few things before moving on to much more important items. Number one, we're fair win-win people, we offer to buy the Company on public information at $31.75 per share, plus a breakup fee of $163 million from a which, as you have seen, the market bodes a significantly value destructive for our analyst reports. We believe that our cash offer provided better value to HR shareholders than the HDA merger, and it was fully financed and were prepared to move within days. I read research notes that described our unfair pricing relative to what might be in market cap rate. Please understand that we did not offer to buy an asset, we offer to buy a company that we are willing to pay for assets and pay a breakup fee that company out for company's existing shareholders for potential dilution that will respect and analyst community has been writing about. I hope this will stop mischaracterization of our offer and our intent. Number two, Welltower always has and always will honor its agreement with third parties, including that with HTA. In fact, HTA itself piloted our NDA with them by providing -- by first disclosing it to HR and then later to the public in the joint proxy. Further our NDA with them does not contain a standstill that will apply us to making an offer for HR as a stand-alone entity. As you would expect, we signed it with HTA in order to access information regarding HTA and its properties, therefore, the standstill only applies to HTA and its properties. Our proposal was expressly conditioned on HR not completing their HTA transaction. Number three, we have never chased the deal and never will. We buy everything at a price and sell everything at a price. Although I'm disappointed that HR did not engage with us, as our offer -- we thought our offer would result into a superior outcome for HR shareholders, I have no intention of being hostile. I personally like Todd, I called him and expressed our interest. We didn't buy shares in the public market, nor did we act in anything but a friendly way. They did not engage. Under these circumstances, we have nothing to do here. Number four, contrary to what some analysts might have written, this deal would not have been dilutive to our senior housing growth. You don't know what proportion of equity, debt or joint ventures we might have contemplated for the transaction. But even if you think we were to do this entirely on the balance sheet, it would be a rather simple exercise. Look at the NOI bridge in our business update, divide that NOI by existing number of shares, calculate the additional shares required by the HR transaction to calculate dilution on a part share basis and then add back the accretion from the deal. You will see our existing shareholders would have covered ahead. We look at every single investment through the lens of opportunity costs. Specifically, we have to satisfactorily answer three questions that Buffett has taught us. And then what compared to what at the expense of what. This is not different. And number five, we're not disappointed nor we are concerned about our growth of our senior housing business. While the contrary, in fact, we just reported 18.4% same-store NOI growth and expected to meaningfully accelerate in the second half of the year. Now that I have put all these rumors to let's talk about the 30 or so owners who did engage with us to create win-win partnership transaction. Year-to-date, we have closed $1.2 billion of acquisitions across 21 different off-market or privately negotiated transactions. This is a remarkable stat given the pace of activity last year. I find it difficult to talk about specific deals as it feels like picking your favorite children, but I still mention a handful of transactions to give you a sense. We bought 700 units at our three large communities in Washington State with Cogir to expand our partnership with Matthew and Dave. Dave Eskenazy is one of the best in the business, and I'm glad that he's now back full time at Cogir U.S. as a CEO. We're also expanding our partnership with purchase of another property in Brentwood located in the East Bay of Northern California. All properties were bought at significant discount replacement cost. For example, the Brentwood asset contains large units, and it was bought for $320,000 per unit. We believe the replacement cost in East Bay today is easily significantly north of $500,000 units. Additionally, we are significantly deepening our relationship with Dan and his team at StoryPoint with the acquisition of 33 communities in Michigan, Ohio and Tennessee in their backyard. With a median vintage of 2016, we're extremely pleased with the average price of 197,000 units, which is meaningful discount replacement cost with 63% of current average occupancy this sizable deal will be dilutive to our 2022 FFO per share, but properties are anticipated to generate significant occupancy, margin and cash flow growth in 2023 and beyond on the StoryPoint's enhanced operating platform. This is another example of us choosing the right long-term investment decision and cash flow growth of our GAAP earnings situation, another thing you hear from us consistently. In another transaction, we announced we're expanding our partnership with Courtney and our team at Oakmont with seven new assets in extraordinary locations in California. Courtney and her team are at the absolute top of operating echelons, and we cannot be happier to grow this partnership together. Separately, within the medical office space, we bought four building property portfolio on the campus of one of the strongest hospitals in Birmingham, Alabama for a 5.5% cap rate in an absolute net lease structure at a great basis. Given the absolute debt structure, we expect unlevered IRR to be high single-digit range. We're also under contract to buy two large beautiful MOBs, one in San Francisco Bay Area, another in Sacramento MSA for a high 5% going-in cap rate at a great basis. Again, we expect to generate high single digits in IRR in both cases. In terms of the financing market, in the last 30 days or so, we have seen a massive shift with property level leverage down 15 points, cost doubling and interest only disappearing from the market, both in seniors as well as in MOBs. This is starting to have a tectonic impact on asset pricing. To put bluntly, I have not been this excited about our acquisition prospects since Q4 of 2020. About six weeks ago, an investor, whom I respect very much asked me if I'm optimistic about the next $7 billion of acquisitions, as I was about the last $7 billion of acquisition that we did since pivoting to offense in 4Q of '20. I instinctively answered what I truly believe that we're driven by value, not by volume, which is this investor took it as a no. Today, that answer will be on equivocal yes. Yes, we are excited about the figuratively net $7 billion as we are when we acted on the last $7 billion. To that effect, our pipeline today is roughly $1.5 billion of deals in process across 20 different off-market or privately negotiated transactions. Several of these are potentially operating unit transactions, which we expect to be very popular with the sellers. Please recall that we define our pipeline as transactions that are already under contract. In addition to this, we're negotiating another couple of billion dollars of acquisitions across several other transactions. While we may not eventually succeed in convincing sellers to agree to our price, please note that we don't need any given transaction. Price is the price. We see cracks in the market and are focused on where the puck is going and not where the puck might have been. The value of a party that never titrates and doesn't request debt has really been higher. In more trust systems in nature, such as coastline, cloud, no matter how much you scale up or scale down, you notice a remarkable sale similarity property. You noticed that in same everyone in nature. For example, in Florida cauliflower is same as cauliflower. This phenomenon is called fractal geometry. This is the same idea that our drive time polygons and isochrones are based on if you have seen our data science presentation. Interestingly, organization history is full of company to grow successfully through small bolt-on acquisitions in their advantageous niche only to present themselves on strategic acquisitions that get them in trouble. David Packer, the founder of HP brilliantly said, more businesses die of indigestion than starvation to discuss this phenomenon. At Welltower, we don't have strategic acquisitions. In fact, sales similarity of mother-nature is highly visible in our investment philosophy. No matter how small or big a specific investment is where after the same, driven by the same factors. In all cases, we're buying, number one, a reasonable basis relative to replacement costs; and number two, where we can add value by driving operational improvement. We are not spread investing deal junkies. We have true total retail investors and are optimistic that 2022 will be one of the best years in the Company's history from an acquisition point. With that, I'll hand the call over to my partner, John Burkart, our Chief Operating Officer. John?

Tim McHugh:

Thank you, John. My comments today will focus on our first quarter 2022 results. The performance of our triple net investment segments in the quarter. Our capital activity our balance sheet liquidity update; and finally, our outlook for the second quarter. Welltower reported fourth quarter net income attributable to common stockholders of $0.14 per diluted share and normalized funds from operations of $0.82 per diluted share, which was above the midpoint of our $0.79 to $0.84 per share guidance. Despite our results only including approximately $600,000 of HHS funds versus the $6 million expectation we had previously forecasted as part of our guidance. This quarter represented our first with year-over-year normalized FFO growth since the start of the pandemic. And when excluding provider relief funds received in the respective periods, or $0.82 per share represents 15% year-over-year growth versus the first quarter of 2021. We are also pleased to report that total portfolio same-store NOI growth turned positive in the quarter. With 8.9% year-over-year growth, which compares favorably to guidance of 7%. Turning to our triple net lease portfolios. As a reminder, our triple-net lease portfolio coverage and occupancy stats are reported a quarter years. So, these statistics reflect the trailing 12 months ending 12/31/2021. In our seniors housing triple-net portfolio, same-store NOI increased 6.9% year-over-year and exceeded our expectations, driven by improvements in rent collections on leases currently in cash recognition and the early impact of rental increases tied to CPI. Trailing 12-month EBITDAR coverage was 0.82x and with a sequential improvement, mainly driven by the conversion of Legend Senior Living today in the quarter. As indicated last quarter, we expect coverages to continue to move higher through the rest of the year as the positive inflection point we started experiencing our SHO portfolio in the first quarter will be reflected in our triple-net coverages on a one-quarter lag. Next, our long-term post-acute portfolio generated negative 1.8% year-over-year same-store NOI growth and trailing 12-month EBITDAR coverage was 1.3x. We completed $6.7 million of long-term post-acute sales in the quarter bringing our total sales in the last 12 months to $525 million and a blending cap rate is 7.5%, with an additional $202 million under contract for sale at quarter end. As a result, our long-term post-acute portfolio represented just 4.8% and of total in-place NOI at year-end versus 10.1% at the end of 2020, a 530 basis point decline driven largely by the exit of our Genesis relationship. And lastly, health systems, which is comprised of our ProMedica Senior Care joint venture with ProMedica Health System, had same-store NOI growth of positive 2.75% year-over-year and trailing 12-month EBITDAR coverage was 0.02x. As a reminder, this lease is backed by the full corporate guarantee from ProMedica Health System. Turning to capital market activity. We continue to enhance our balance sheet strength and position the Company to capitalize a robust and highly visible pipeline of capital deployment opportunities by utilizing our ATM program to efficiently fund those near-term transactions. Since the start of the year, we have sold 21 million shares via forward sale agreement, an initial weighted average price of approximately $89.9 per share for expected gross proceeds of $1.9 billion. We currently have approximately 19.5 million shares remaining unsettled, which are expected to generate future proceeds of $1.8 billion. Additionally, we are seeing significant interest from potential sellers to accept OP units as consideration, providing further investment capacity. Taken together, our unsettled ATM proceeds, potential OP unit issuances and $352 million of expected property disposition and loan payoff proceeds provide ample capacity to fund our current investment pipeline. During the quarter, we issued our second green bond comprised of $550 million of 10-year unsecured debt maturing in 2032, with a coupon of 3.85%. Following a similar discipline in our equity funding strategy, this is our fourth unsecured issuance since March of 2021, bringing total debt issuance over the span of $2.3 billion with an average duration of 9.5 years and average coupon of 3%. At quarter end, when factoring in cash and restricted cash balances, our liquidity position exceeded the $4 billion of borrowing capacity on our line of credit. And when combined with the previously mentioned $2.1 billion of unsettled ATM proceeds and expected disposition proceeds, we remain in a very strong liquidity position. Lastly, moving to our second quarter outlook. Last night, we provided an outlook for the second quarter of net income attributable to common stockholders per diluted share of $0. 20 to $0.25 per share, normalized FFO per diluted share of $0.82 to $0.87 per share or $0.845 at the midpoint. This guidance takes into consideration approximately $6 million of HHS funds expected to be received in the second quarter. Guidance represents a $0.025 increase at the midpoint from our $0.82 per share number in 1Q. This $0.025 increase is composed of a $0. 04 sequential increase in our Senior Housing Operating portfolio NOI, $0.01 incremental increase in HHS funds and is offset by $0.025 of increased interest expense, lower foreign exchange rates, particularly the British pound, and dilution from development deliveries. Underlying this FFO guidance is estimated in second quarter total portfolio year-over-year same-store growth of 8% to 10%, driven by sub-segment growth of outpatient medical, 2% to 3%; long-term post-acute 2% to 3%; Health System, positive 2.75% and senior housing triple net 7% to 8%. And finally, senior housing operating growth of 15% to 20%, driven by revenue growth of 11% and underlying this revenue growth is an expectation of approximately 500 basis points of year-over-year average occupancy increase and continued robust rate increases. We continue to be pleased by the momentum of the top line recovery in our senior housing operating portfolio, driven by a combination of rate and occupancy growth, setting the stage for a multiyear recovery to average occupancy in the portfolio at 76.4% at quarter end, nearly 1,100 basis points below pre-COVID levels and nearly 1,500 basis points below peak occupancy levels. We've described as recovery in the past as a coiled spring with both secular and cyclical tailwinds behind it. When we started to see the spring release in the core portfolio, we have made the conscious decision to steadily allocate capital to distressed, under-operated and often initially diluted properties, along with high-quality development projects. While this capital allocation has the effect of offsetting some of our core growth today, we will sustainably amplify it in the years to come. In short, we're working hard to keep that spring coil even as we start to realize the power of the earnings growth it can drive. And with that, I'll hand the call back over to Shankh.

Operator:

[Operator Instructions] Our first question comes from the line of Vikram Malhotra with Mizuho.

Shankh Mitra:

Okay. Let me answer both of those questions separately. It's not too in. So first, let the answer the MOB question. We like all asset classes at a price. I've always said, even if you look back two quarters ago, we said it makes no sense to us that people buy MOBs in the high 4% cap rate range and after CapEx, you're in the low 4s, when you foresee in the breakeven market, how financing market was going to change, right? I'm just surprised that people are surprised this happened. Now you are in a situation where your financing cost is higher than your cost of -- your return on equity at that kind of pricing, which is a real estate is called Death Cross, right? That is the harbinger of obviously what's to come on the asset pricing side. That just doesn't make any sense to me why would you buy something at those prices with that growth related to inflation. Nothing has changed. Look at Vikram, what we just bought. We bought one MOB at an absolute triple net lease, which obviously means we're not responsible CapEx, call it, 5.5%, which is an equivalent triple net, will be close to a 6%. And we bought two others in California, that's high 5s, right, where we think that we can get to an unlevered high single-digit IRR. So that makes sense to us. So it is all about pricing, not exposure that determines your investment success. Second point, obviously, the pricing power. We're -- obviously, we talked about how we think in-house pricing increase would be, and that's obviously very necessary to offset all the costs that we have seen in the system. I'm particularly encouraged that what we see is street rates are moving. Street rates have moved, I would say, first quarter, we have seen high single digit. In April, we have seen some operators street rates well into double digits, right? So that, along with, if you think about half of our -- roughly speaking, half our residents on not Jan 1 scheduled, right, to receive -- they are on a schedule of anniversary rate. So if you put those two together, we'll see sustained strong pricing power through the year, which we're very, very excited about.

Steve Sakwa:

Shankh, I was hoping you could maybe just expound a little bit on the distress that you're seeing in the transaction market. And I realize that you're not necessarily focused on initial cap rates, but I'm curious, when you look at your underwriting, have the unlevered IRRs that you think you're going to achieve change at all? And just trying to get a better flavor for the activity levels and just maybe how return hurdles might be going up for you?

Operator:

Thank you. And our next question comes from the line of Derek Johnston with Deutsche Bank.

Shankh Mitra:

Derek, we don't want to get into month by month, but you're -- obviously, the way you were thinking about this question is the correct one. We have seen steady improvement through the quarter, and we have seen significant improvement post the quarter, right? So if in or coming in, we have seen that, which is, frankly -- so what sort of gives us confidence that we think where things are continuing in the second quarter as well as in the back half of the year. This is obviously I want to -- I said this -- and I'm going to say this again, we're not in the business of predicting COVID. All bets are off if you have a massive COVID spike again. But that's what we're seeing in normalized market conditions, things are improving rapidly. I don't know, Tim, do you want to add anything to that?

Operator:

Thank you. And our next question comes from the line of Joshua Dennerlein with Bank of America.

Shankh Mitra:

Yes. So what's most attractive about Oakmont is Oakmont is one of the best operators in the business. I mean -- so we -- I mean, look at -- we have mentioned this before, -- they're one of the first ones to come back to sort of 90-plus percent occupancy range. If you look at Oakmont's portfolio performance, it'll be hard for us to believe for kind performance that there was a pandemic that good in operation. Now going back to the point, what else is very attractive. We disclosed, obviously, I think, a couple of quarters ago, that we signed a long-term partnership development partnership with them. So we're very excited about that. We think we're going to create significant value for Oakmont principles as well as well as Welltower shareholders for us to come. And CCRC, so we did not bring Oakmont to the CCRC, it's a CCRC that Oakmont developed in currently with a lot of -- obviously, this is not just entry-level CCIC. There's also a lot of rental units in there. So, we thought they do an extraordinary job of that. And as we always said, just don't think about these things as this moniker, CCRC, this that, the RIDEA triple doesn't change what fundamentally the business is. These are large campuses. New things that we got at a basis and at a cash flow and see a potential growth of cash flow that we think we can make a lot of money. So that's what we see about the partnership. We also bought four traditional rental model together that we think obviously is going to create meaningful growth as well. A lot of these assets open to 2021. So, you are not going to see probably a very significant amount of earnings contribution in 2022, but you will see potentially significant amount in 2023 and beyond.

John Pawlowski:

Shankh, I wanted to go back to your comments about no intention of going hostile on HR. Forget HR for a moment, I'd just like to better understand your philosophical views on hospital takeouts broader than HR. So if the price is right, are you interested in going to hospital or do you have philosophically against it?

Operator:

Thank you. And our next question comes from the line of Rich Anderson with SMBC.

Shankh Mitra:

Okay. You asked three questions. I'll see if I remember all of these. So, first is, I will say that we invest, and I think I said this before, and I'm going to say this again, we invest -- and if there are two conditions that get satisfied. One, we think it's at a reasonable basis relative to replacement cost; b, we think we can add significant value on the operational side. These are the two things that needs to come together for us to invest capital in no matter what the specific one is. My view of this hasn't changed. I'm not going to get into buy this, sell that that do this. It just not -- that's not just -- that's not appropriate for a conversation. It just depends on what asset you're talking about, right? So we're not going to obviously get into that. But I will tell you, what I have mentioned in my prepared remarks. At the price, you know for us, we do everything at a price. At the price that we offered we thought HR shareholders will be much better off than going with the HTA merger. That was our opinion, right? And that the price was for the assets as well as releasing them from a potential transaction, which all of you have described as a significantly dilutive deal and market voted as such, right? So you got to think about asset plus liability, not just assets. That is a fundamental mistake of characterization of what's happening here. Regardless, that's not, as I said, that each of our shareholders and their Board, which is representative of the shareholders progress, not ours. So it is very inappropriate for us to keep talking about something, but there's nothing to talk about, right? We're much more focused, as I said, about 30, 40 other owners who are very happily engaging with us to see how we can transact, how can we have a win-win transaction. And I don't have anything more to add to that.

Adam Kramer:

It's Adam Kramer on for Rich. And congrats on a really strong quarter here, and I appreciate all the commentary. I'll kind of keep this on aside from HR and kind of ask about April occupancy trends within SHO. Anything you can add about kind of sequential trends in April or second quarter to-date, I think, would be really helpful.

Operator:

Thank you. And our next question comes from the line of Nicholas Joseph with Citi.

Shankh Mitra:

We need to be comfortable to see that COVID is not around us.

Michael Carroll:

I wanted to stay on, I guess, or touch on the seniors housing pricing power topic. I mean, how much higher can RevPOR trend RevPOR growth trend, particularly when the occupancy gets back into the high 80s or even the low 90% range. I mean, I'm assuming there's only so high you can push rates on the existing residents, but would this dynamic help push street rates higher and then that could drive RevPOR higher. I mean, how should we think about that?

Operator:

Thank you. And our next question comes from the line of Nick Yulico with Scotiabank.