Welltower Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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]
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.
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.
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.
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.
Thank you, Nikhil. My comments today will focus on our first quarter results. The performance of our total investment segments, our capital activity, a balance sheet and liquidity update, and finally, an update to our full year 2024 outlook.
Thank you, Tim. While we are very pleased with our execution thus far in the year, we're on the cusp of all important summer leasing season. So let's see what the market gives us. And while we are proud of our recent operating results we have reported, it's important to recognize that it's not by happenstance. This is not a commodity business with a narrow range of outcomes.
[Operator Instructions] Your first question comes from the line of Ronald Kamdem of Morgan Stanley.
Great. Just starting with the SHOP guidance range -- guidance rate almost 20%. Looking at the assumptions, it looks like the occupancy and RevPOR assumptions haven't really changed, and it was really sort of same-store expense driven. So I was just wondering if you could comment on some conservatism is baked into that? And any early indication in the peak leasing season?
Ron, as we have indicated, this is too early in the year. Just as you know, our annual results will be pretty much defined by what the summer leasing season gives us. 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.
Your next question comes from the line of Vikram Malhotra of Mizuho.
Maybe, Shankh and Tim, just -- can you just talk about perhaps your outlook for underlying FAD growth. FFO was strong, but FAD growth was even stronger in the quarter. Just how do you see FAD trending? And if you can dovetail that into the dividend, your coverage is very, very healthy. So I'm just wondering how do you use those free cash flow proceeds or perhaps even grow the dividend.
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.
I have nothing to add to that.
Your next question comes from the line of Nick Yulico of Scotiabank.
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?
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.
Yes. Nick, you are correct that we have raised capital to close, obviously, all the transactions. I want to make sure that you understand that, that $2.8 billion that we spoke of is not our pipeline, it's the deals that have closed or under contract to close. Our pipeline is beyond that, and it remains a very robust pipeline. That we think are very near-term actionable, we'll see where we end up. But that's sort of our view. Speaking of -- I absolutely subscribe to your view that we remain unleveraged.
Your next question comes from the line of Austin Wurschmidt of KeyBanc Capital Markets.
With respect to senior housing operators that have changed their strategy by pushing back the annual rent increases into the earlier part of the key selling season, I guess, how does that trend appear to be playing out so far from a retention perspective? And would you expect that benefit to potentially flow through to new lease rate growth?
Yes. So as it relates to the increases that are going out, there really hasn't been pushback. People understand what's going on in the cost side of the business. They appreciate the value proposition and so that has been going very smoothly. As it relates to market rents, again, we're seeing robust demand out there. So it's -- the 2 are related in the sense of -- obviously, the market drives the overall economics, but the -- it's not that renewals drive the market. The market drives the renewals at some level, and the market is strong. Supply-demand fundamentals work very well and the value proposition is there.
Your next question comes from the line of Jonathan Hughes of Raymond James.
On the increased expected headcount spending this year, can you talk about the investments being made in the analytics and/or operations team and the scaling potential to address the capital deployment opportunities?
Yes. As it relates to the ops team, we are finding tremendous opportunities to build out that team and do things more effectively 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].
Yes. I think, Jonathan, if you think about the sheer number of transactions that we do, but beyond that, everything we look at we can humanly impossible to do that without having incredible tools, right? So that's what -- and you've seen a lot of this, but the tools and the capabilities on our analytics team are the only reason what we do. And so they are an integral part of every step of the investment process from a pretty screen to shift through hundreds of buildings to them be able to predict the stabilized NOI for each building under different operators and find the right operator for those buildings. It's integral to what we're doing. So all the investments that we've made are paying off in space.
Your next question comes from the line of Juan Sanabria of BMO Capital Markets.
I just wanted to ask around the senior housing portfolio that non-same-store pool that Shankh mentioned was doing well. Just curious how many of those -- I think it's nearly 150 assets are in the transitions bucket, not in same-store, will be added over the course of the year. And how are those faring relative to the same-store pool? And should we expect those to be additive to growth as those are folded into same-store?
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?
That was essentially it.
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.
Your next question comes from the line of Michael Griffin of Citi.
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?
Yes. Nick, I think the answer to both of those questions is a simple, no. We haven't seen any new capital come into the business. And there's really not much capital out there that is not reliant on the debt market. And the debt markets are just completely [ open ], and then we expect them to continue to be focused for the foreseeable future. And that obviously plays into the development cycle as well. So we've actually seen the opposite rather than folks take on new predevelopment and new potential projects, folks are giving us on products that they're previously pursuing, disbanding teams and all of that. So to answer your questions.
Your next question comes from the line of Joshua Dennerlein of Bank of America.
John, I wanted to follow up on a comment you made on the operating platform and how a big part of the strategy is to create efficiencies to reduce the admin burden and put more time into care. I was hoping you could elaborate on where you are in building out this capability. And just in general, just provide more color on this aspect of the operating platform.
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.
Your next question comes from the line of Michael Carroll of RBC Capital Markets.
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?
Yes, I'll start with the broader question as far as plans for broader PLR, our focus is and always has been to drive value from a customer employee perspective and, of course, from a shareholder perspective. So it's not the process to say, let's create, a bunch of those types of partnerships. The objective is to drive value. In this case, the value is substantial. Our partner, Cogir and my partner, Frederick, are fantastic to work with. That is doing very, very well. The assets have embraced Cogir -- the teams have embraced Cogir and Cogir management -- and we're very satisfied and appreciative to all the work that is being done there.
Your next question comes from the line of Jim Kammert of Evercore.
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?
We're not going to give on specific operator-level performance on this call, which we never do. I'm not going to start that today. We'll tell you that it was a very broad-based outperformance from all of our operators, across 3 regions. And obviously, that's not -- as I said, is a happenstance, right? Some of the operating partners, you mentioned have done terrifically well for us over a long period of time, and that continues. But this is a very deliberate strategy that we put together years ago to go deep and not go broad. And that's as we continue to double down on this strategy.
Your next question comes from the line of Michael Mueller of JPMorgan.
Tim, a quick question. Was there a change in the same-store operating expense guidance for show? Because it looks like your same-store revenue drivers didn't change, but the NOI growth expectation increased?
Yes. Thanks, Mike. It did. So our expense -- our overall expense that were underlying our initial budget were 6.5%. So our revised outlook today moving down to 6% and the change 50 basis points lower.
Your next question comes from the line of John Pawlowski of Green Street.
Nikhil, when your team's underwriting new skilled nursing investments, can you give me a sense for kind of a range of EBITDA reductions you're potentially contemplating in your underwriting for staff mandates [indiscernible].
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].
[Operator Instructions] Your next question comes from the line of Rich Anderson of Wedbush Securities.
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.
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.
And your next question comes from the line of Wes Golladay of Baird.
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?
Yes, that is a domestic number we're talking about. We are seeing similar situations in our international markets. And one of them where particularly that market is challenged is U.K. and we're seeing significant opportunities in the U.K. And I think I mentioned that. And I think you will see us many granular transactions in U.K. this year to take advantage of that. Lack of credit, real estate -- health care real estate credit in U.K. If it is possible to be worse than the U.S., which is very hard today, it's probably U.K. market, debt market is worse than that of U.K. today. I mean U.K. debt market is worse than that of U.S. today.
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.