Welltower Inc (WELL) 2024 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Welltower Fourth Quarter 2024 Earnings Conference Call.

(Operator Instructions)

I will now hand today's call over to Matt McQueen, Chief Legal Officer and General Counsel.

Please go ahead, sir.

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 it's projected results will be attained.

Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC.

And with that, I'll hand the call over to Shankh for his remarks.

Thank you, Matt, and good morning, everyone.

I'll review business trends and our capital allocation priorities and the team will follow the usual cadence.

We ended 2024 on a high note, delivering strong Q4 results as the company continues to fire on all cylinders, whether be it business fundamentals, capital allocation, a further strengthening of our balance sheet, our progress on the operating platform buildout.

The result was another quarter of solid bottom line growth with normalized FFO per share increasing 18% year-over-year, once again driven by our senior housing operating portfolio.

Just as important, however, is that we carried significant momentum into 2025 and expect another year of exceptional growth, which I'll get into shortly.

I'll also provide a brief update on the pillars of growth that I outlined 12 months ago that give us even greater confidence in our growth outlook for next few years, which we feel is positively spring loaded.

In our senior housing operating business, we continue to see strengthening tailwinds.

The fourth quarter delivered impressive results with nearly 24% same-store NOI growth.

This marks our ninth consecutive quarter of net operating income growth exceeding 20%.

Notably, we experienced exceptionally strong sequential occupancy growth in Q4, defying typical seasonal trends.

The sharp portfolio achieved average same-store occupancy growth of 120 basis points sequentially and 310 basis points year-over-year.

This robust performance, particularly during a period when moving activity usually moderates, stands out as perhaps the quarter's most significant highlight.

In fact, 120 basis points of growth in Q4 nearly matched the level of sequential growth we witnessed in third quarter, which is typically the strongest period of leasing during the year.

I would also note that on a spot basis, we gained 240 basis points of occupancy in the second half alone.

This momentum persisted through fourth quarter even during the holiday season.

In fact, we observed a pickup of occupancy growth during the week of Christmas, typically our slowest moving week of the year, something I've never seen in this business.

We also witnessed this momentum carry into January.

A period which we almost invariably experienced a sequential decline in occupancy due to seasonality.

The favorable end market environment, along with our team's superior execution has put us in an incredible favorable position to start the year.

This is reflected in our optimism for occupancy growth acceleration in '25 over '24, which was already one of the strongest years in the company's history.

At the same time, the trends related to RevPOR or unit revenue, or ExpPOR or unit expense, continues to move in our favor.

We remain focused on the spread between the two metrics which during the quarter reached 460 basis points, our highest level in our recorded history.

The outcome is another 320 basis points of operating margin expansion in our seniors housing operating portfolio.

Going forward, we expect sustained improvement in margins given high operating leverage inherent in the business and the benefit of the build-out of the operating platform while John will get into momentarily.

Putting this all together, we expect 2025 to be another year of exceptional net operating income growth.

Shifting to capital deployment.

We capped off a tremendous year of investment activity with the closing of $2.2 billion of transactions in fourth quarter at attractive economics.

Nikhil will provide more details, but as we described in the last quarter, the opportunity set for capital deployment continues to expand, given the widespread capital markets-related challenges in the sector.

To be clear, the fundamentals of senior housing business are extraordinarily healthy.

But for many owners, they continue to go overwhelmed by the impact of higher rates, persisted challenges in addressing upcoming debt maturities and other capital structure issues.

I would also point out that not only will this acquisition be solidly accretive to our growth in coming years, but also come with two often overlooked strategic benefits.

First, is the greater regional densification, which we described to you in the past, reflects our intention to go deep in our markets, not go broad.

Second, is accumulation of data received from these properties, which will further enhance the network effect we have already created within our data science platform, resulting in a wider and deeper moat for Welltower.

Each additional building added to a local cluster enhances the customer and employee experience resulting in strong overall effectiveness and efficiency, hence, a strong network effect.

These bolt-on acquisitions, in combination with our organic growth, drove 23% revenue growth, 26% EBITDA growth and nearly 20% FFO per share growth for the full year of 2024, and we achieved these results while meaningfully deleveraging our balance sheet.

While we are extremely proud of our recent results, we believe we're just beginning our journey to deliver long-term compounding of our share growth for our existing shareholders.

To illustrate this, let's revisit the five growth pillars that I introduced a year ago.

These pillars remain firmly intact, both starting our confidence in our multiyear growth outlook.

Moreover, we have since added a sixth pillar, which I'll also discuss shortly.

This expanded framework further strengthens our growth strategy and potential for long-term value creation.

First, the demand supply backdrop of senior living business.

From a fundamental perspective, we're at the very beginning of an extended period of outsized demographic-driven growth in the sector.

In fact, 2026 should be an inflection point in the end market demand.

The tailwinds which have propelled our business that is the growth of 80-plus population age cohort will only accelerate in the back half of this decade.

And I will remind you that seniors housing products that we're focused on are almost entirely private pay and needs driven in nature.

The fundamentals of our business are largely immune from geopolitical cross-currents, regulatory or policy changes and poised to weather any economic headwinds, better than most other sectors and industries.

While the end market demand will continue to rise even at a faster clip in coming years, the new supply remains muted.

The outlook for supply has gotten even worse in recent months as tariffs, immigration policy and higher rates will further dampen development economics, which remains nonexistent.

The demand-supply outlook alone should drive outsized growth for many years to come.

Number two, capital allocation.

Even after a company record of $7 billion of capital deployed in 2020 and putting $20-plus billion of capital to work over the past four years, our investment teams have never been busier.

The opportunity set is robust, actionable and visible, and we believe 2025 will be another year of above average capital deployment for Welltower.

To that end, we started the year with a bang and already have $2 billion of investments under contract for our balance sheet.

This is the strongest start of the year we ever had.

Our phones are ringing off the hook as it is sinking into the real estate world that the Fed does not control the long end of the car and hence, is not coming to rescue broken capital structures.

We continue to find attractive economics in our circle of competence where we can bet with house odds rather than gambler's odds, as we seek advantageous divergences in a specific niche amplified by our operating platform and our network of our best-in-class operating partners.

Number three, capital-light transactions.

Over the past few years, we have transitioned hundreds of assets to our strongest operating partners.

While these transitions can be challenging and occasionally near time dilutive.

They have proven to be tremendously successful with new operators generating significantly more cash flow from the previous operator.

For example, the Canadian portfolio, which we transitioned from Revera to Cogir at the end of 2023, witnessed approximately 800 basis points of occupancy growth since we announced the transition.

In 2024, we have also transitioned 68 properties from triple-net to RIDEA structures, allowing our shareholders to directly participate in the underlying cash flow growth of the communities.

Since I spoke with you last quarter, we agreed to convert an additional 16 high-quality senior housing communities from triple-net to RIDEA.

We'll continue to mine for opportunities for further capital light transactions.

Number four, digital transformation driving unprecedented structural change.

John and his team continue to make extraordinary progress on the build-out of the first true end-to-end operating platform in the senior housing sector.

And as we discussed on the last call, our efforts to digitally transform the business are beginning to bear fruit.

As we went live with our tech platform in the first set of properties in third quarter and subsequently rolled it out to additional communities in Q4 and then in Q1 of this year.

Implementation of tech stack is just one example of countless opportunities to improve virtually every element of senior housing business to enhance resident and employee experience.

Number five, our unleveraged balance sheet. 12 months ago, I mentioned that we will continue to experience further organic deleveraging of our balance sheet given our expectation for outsized cash flow growth.

Higher-than-expected cash flow growth and tactical funding of our capital deployment activity has driven a further reduction of our net debt to adjusted EBITDA to just 3.5 times.

Thus, we have created even greater debt capacity to tap into to fund external growth, further amplifying our out-year growth prospects.

Due to this massive debt capacity, coupled with $9 billion of liquidity and our reputation for being a clean shot in an industry where retreading counterparties is the norm, we continue to get first call from market participants when they need liquidity.

We can run our deal business in an old-fashioned Ben Franklin way because of our exceptional balance sheet strength.

A couple of weeks ago, we added a sixth pillar, and that's the launch of our private funds management business.

While we cannot provide any more details until the conclusion of this process, we believe this new pillar will result in significant revenue opportunities for Welltower shareholders.

The funds business also represents our first foray into creating a capital-light monetization of our data science platform.

To conclude, I'm pleased with our execution in 2024.

We have an exciting and frankly, very busy year in front of us in every aspect of our business, rarely within an industry to cyclical, secular and structural growth drivers come together to deliver a positive net vector leaping emergent effect that is unfolding at Welltower.

Our business is bustling with positive energy, ingenuity, vitality and new ideas to create per-share value for our existing investors.

While the outlook for commercial real estate remains foggy, in some cases, gloomy, with ongoing malaise due to higher interest rate environment, it is a clear and bright morning at Welltower.

And with that, I'll hand the call over to John.

John?

Thank you, and good morning, everyone. 2024 was another fantastic year for Welltower.

And based on our recent results and outlook, there appears to be no abatement in the momentum we're experiencing.

For the fourth quarter, we posted total portfolio same-store NOI growth of 12.8%, driven by our senior housing operating portfolio growth of 23.9%.

I'll first comment on the outpatient medical business, which remained stable in the quarter with year-over-year same-store NOI growth of 2%, at some level, the business is boring.

And yet at another level, it's incredibly stable, backed by top credit tenants with long-term leases delivering consistent returns.

Occupancy during the period was consistent at an industry-leading 94.3% and tenant retention remained strong at 93.6%.

As for 2025, we expect another year of stable same-store NOI growth of 2% to 3%.

Turning to the senior housing operating portfolio, our streak of unprecedented growth continues, having now posted nine consecutive quarters in which same-store NOI growth has exceeded 20%.

We are particularly pleased with the better-than-expected occupancy ramp during the quarter, which equated to 310 basis points of year-over-year growth.

I would also note that the 120 basis points of sequential occupancy growth, which Shankh mentioned, was one of the strongest we have witnessed in any quarter outside the post-COVID recovery.

For this strength to be witnessed during a seasonally slow period of the year is a testament to not only to the tailwinds driven driving the business, but especially to our proactive and dedicated asset management initiatives, which I'll detail shortly.

Revenue growth was strong across property types, but we witnessed particular strength at the two ends of the acuity spectrum between our assisted living and wellness housing portfolios.

In terms of pricing power, as I noted last quarter, rate growth remains healthy, and we expect another year of favorable growth in 2025.

On the micro level, rate growth is clearly impacted by occupancy level by unit type at each community, amongst other factors.

Therefore, as the assets in the portfolio lease up, their market rate will continue to rise to reflect the value proposition provided.

It's important to realize that the senior housing business is very different than the multifamily business when it comes to funding the payments.

The payments are generally funded mostly by assets for the relatively short period of time residents are staying at our communities, on average, about two years compared to the multifamily industry, where rental rates are limited by earned income.

I'd also note that the exponential rise in the value of homes, equity and fixed income securities and other assets over the past 50 years has provided many seniors in our markets the ability to comfortably afford the cost of senior living, which is much more efficient than home care, not to mention other benefits of senior living, including safer, social and active lifestyles and peace of mind for families.

Moving to expenses.

We remain encouraged by the trends which we are observing across all line items, but particularly with respect to labor.

This is best reflected by ComPOR, or compensation per occupied room, which increased just 1.2% year-over-year, representing one of the lowest levels of growth in our recorded history.

This is largely a function of the significant operating leverage inherent in the business, whereby most communities are now either fully staffed or approaching those levels.

And as occupancy continues to grow, the need to add additional staff has moderated, leading to higher flow-through or incremental margin.

The benefit of the building occupancy continues to be reflected in our operating margins, which expanded 320 basis points year-over-year, the second highest level achieved in our history.

While we have witnessed a substantial recovery in margins over the past few years, we believe that the runway for further margin expansion remains long.

Not only will we still -- not only are we still well below pre-COVID levels of profitability, but given our expectation for RevPOR growth to continue to outpace ExpPOR, we expect this margin expansion trend to persist well into the future.

Additionally, the operating platform initiatives, which are well underway to optimize our business should serve to further boost our margins while also improving the resident and employee experience.

This is no different than what has been experienced over the last two to three decades in many other property types across the commercial real estate universe.

On to our operating platform.

We made great strides in 2024, building a capital team with internal expertise capable of directly executing and/or working hand-in-hand with our operators and vendors.

The results has been fantastic.

For example, in one case, our elevator experts stepped in and corrected the scope of work related to nine buildings, recognizing a reduction of 49% in the cost of the work.

It's critical as an owner of real estate to have internal expertise and not be forced to rely on vendors to effectively run the capital decisions on the properties often making short-term decisions.

The team has been strategically taking advantage of the vacant units available as our occupancy continues to rapidly increase to renovate the units in advance of the increasing demand in the coming years.

Additionally, they have been executing numerous exterior renovations at our communities and modernizing the amenities where appropriate, including creating wonderful employee break rooms delighting our critical team members.

The positive impact on our site employees cannot be understated.

In one case, on a property visit, the employees hosted a small surprise party for me, including a special song and dance they had created in appreciation of Welltower's work.

After having put $20 billion of capital to work over the last four years and converting over 100 triple net leases to RIDEA, the capital team is rapidly executing capital plans for the acquired and transitioned buildings, which is a combination of value-add as well as planned capital.

Our value-add investment program, like all investments at Welltower is based on an unlevered IRR hurdle.

As I've mentioned previously, we expect elevated capital spend for a period of ultimately period of time, ultimately lowering to the ongoing capital run rate, which should be consistent with other residential properties such as the multifamily REITs.

On the technical front, we are in rollout phase with our main site level platform, and my team is hard at work with many other related workflows that will continue to improve the customer and employee experience and improve the margins of our business.

I'll reiterate what Shankh mentioned, 2025 should be another year of exceptional growth, and there's seemingly no end in sight.

Fundamentals of the senior housing sector remain terrific, and our efforts to transform this business through the operating platform are having a profound impact on our residents, employees and operators with the true bottom-line impact soon to follow.

As always, a huge thank you goes out to the Welltower team, including our operators for their tireless efforts to transform this business.

Finally, I want to recognize the amazing efforts by our operators, site employees and Welltower employees responding to the recent disasters, including the Southern California wildfires where they evacuated, transported and relocated residents and provided furnished units to many seniors who lost their homes.

Thank you.

With that, I'll turn the call over to Nikhil.

Thanks, John.

I'll start with a quick refresher on the market conditions, which continue to drive significant investment activity for us and then provide an overview of our 2024 transaction activity as well as color on our 2025 activity.

The US commercial real estate debt market continues to face significant headwinds with substantial maturities in 2025 and in subsequent years.

Total outstanding CRE debt stands at approximately $5.9 trillion with $1 trillion of loans coming due in 2025.

This compares to maturities of $700 million in 2023 and $950 million in 2024, without coming maturities exceeding $1 trillion in each year through 2028.

Banks hold just over 50% of this CRE debt with regional banks holding a disproportionate share of roughly 2/3 of these loans.

These regional banks, which are some of the largest lenders to the seniors housing sector, continue to face significant challenges due to persistently high long-term interest rates hampering refinancing efforts.

This is illustrated by the fact that regional banks with less than $100 billion in assets experienced 3 times as many loan modifications in the second half of 2024 compared to the first half.

Higher long-term rates further compound issues for these lenders due to larger unrealized security losses on their balance sheet.

This struggle is evident in the stock performance of regional banks.

In 2024, the KBW Regional Banking Index underperformed the broader US Bank Index by 29% and the S&P 500 by 12%.

Looking at other major lenders, GSEs hold the next highest share at 17% of total CRE debt.

I have previously mentioned that over one-third of the seniors housing loans on Fannie Mae's book are criticized and their original -- origination volume is at historic lows.

In addition, potential policy changes further complicate the situation with the GSEs going forward.

The CMBS market, which accounts for the next highest concentration of CRE debt continues to be similarly fickle as evidenced by a consistent monthly increase in the percentage of loans subject to special servicing throughout 2024.

Putting all of this together, the banks and other lenders have grown increasingly reluctant to extend loans and remain extremely selective in the limited instances in which they do.

Against this backdrop, we find ourselves in an extraordinary market environment, where many industry participants are compelled to divest assets, allowing us to acquire high-quality properties at attractive valuations.

Our competitive advantage stems from a powerful combination of three factors.

First, our industry-leading data science platform efficiently identifies the most compelling opportunities from large data sets enabling rapid market response.

Second, our team's expertise in swift and effective underwriting and due diligence.

And third, the scalability of our operating partners efforts bolstered by John's robust operating platform.

This synergy creates an enviable flywheel effect for Welltower, positioning us to capitalize on market dislocations.

While we don't have a crystal ball, due to the factors that I have mentioned, we anticipate these favorable conditions will persist for the foreseeable future, providing a sustained pipeline of attractive investment opportunities.

Moving on to our transaction activity. 2024 marked Welltower's most active year as we completed $7 billion of gross investment activity, comprising approximately of $900 million of development spend and just over $6 billion of acquisitions in loan funding.

Our acquisition activity spanned 54 different transactions with a median transaction size of $48 million.

Through these transactions, we acquired more than 12,000 units across 119 properties, with an average basis of $265,000 per unit for these properties at an average age of eight years, we acquired these assets at a substantial discount to replacement cost.

In the fourth quarter, our acquisition and loan funding activity totaled $2.2 billion across 21 different transactions.

After a relatively muted international investment activity in 2022 and '23, roughly one-third of our acquisition activity in '24 was represented by our international business, including our expanded partnership with Care UK completed in the fourth quarter, which represented roughly half of our investment activity for the quarter.

Our relationship with Care UK dates back to late 2021 when we transitioned 26 former Sunrise and Gracewell communities to Care UK.

Since then, occupancy has improved by more than 10% under Care UK's management and monthly NOI has doubled.

Under Andrew and Matt's leadership, the Care UK team has achieved this success by delighting their customers and providing exceptional service as demonstrated by a good or outstanding CQC rating for each of the original 26 homes.

Following our recent transaction in which the Care UK management team acquired the management platform from Bridgepoint, our partnership with Care UK now spans 72 communities across the UK.

Moving on to 2025.

The beginning of this year has been unprecedented in terms of acquisition activity.

We have not seen such activity in my nearly decade-long career at Welltower.

In less than 45 days, we have already closed on or have under contract an incremental $2 billion of acquisitions expected to be acquired on our balance sheet across 27 different transactions.

Thematically, these transactions continue our activity from last year, predominantly focused on our seniors and wellness housing businesses.

One-third of this activity is across our international business in the UK and Canada, and approximately 85% of these $2 billion in transactions were negotiated on an off-market basis.

This robust activity underscores our position as the preferred counterparty for those seeking certainty and rapid execution in the current challenging cat markets environment.

Our ability to close such a significant volume of transactions in a short time frame demonstrates our strong market position and efficient deal-making capabilities.

Our transaction model is simple.

Acquired communities in our targeted micro-markets, continue to build on our regional density with our aligned operating partners in those markets and treat our counterparties with fairness and respect.

It's no surprise that as soon as we complete a transaction, the conversation with the counterparty often quickly moves on to engaging on a subsequent tranche.

This is evidenced by the fact that more than two-thirds of our $2 billion in investment activity so far in 2025 is with counterparties with whom we have previously done business since the start of pandemic.

This fair and win-win approach gives our platform immense duration and positions us for continued success in the years to come.

I will now pass the call over to Tim to cover our operating results and guidance for 2025.

Thank you, Nikhil.

My comments today will focus on our fourth quarter and full year 2024 results.

Performance of our triple net investment segments, our capital activity, a balance sheet and liquidity update and finally, the introduction of our full year 2025 outlook.

Welltower reported fourth quarter net income attributable to common stockholders of $0.19 per diluted share and normalized funds from operations of $1.13 per diluted share, representing 17.7% year-over-year growth.

We also reported year-over-year total portfolio same-store NOI growth of 12.8%.

Now turning to the performance of our triple net properties in the quarter.

And as a reminder, our triple-net lease portfolio coverage stats reported a quarter in arrears.

So these statistics reflect the trailing 12 months ending 9/30/2024.

In our senior housing operating -- our senior housing triple net portfolio, same-store NOI increased 5.1% year-over-year and trailing 12-month EBITDA coverage was 1.12 times, marking a new post-COVID high in coverage.

Coverage in this portfolio continues to strengthen, now well exceeding pre-pandemic levels, as fundamentals align with those of our operating portfolio, a trend we expect to persist in 2025.

During the quarter, we finalized agreements to transition 16 [sigor]-operated properties from triple net to RIDEA, effective in the first quarter, bringing the total triple-net RIDEA transitions in 2024 to 68 properties.

Consistent with our strategy over the past two years, these conversions are expected to be highly accretive over time as Welltower assumes an equity position and these assets continue to benefit from the recovering fundamentals and industry's long-term secular growth.

For this operator specifically, the transition also unifies our entire relationship under RIDEA's structure, ensuring complete alignment across our relationship.

Next, same-store NOI, our long-term post-acute portfolio grew 2.6% year-over-year and trailing 12-month EBITDA coverage was 1.58 times.

Moving on to capital activity.

We continue to equity finance our investment activity in the quarter, raising $2.2 billion of gross proceeds.

This allowed us to fund $2.2 billion of investment activity and end the quarter with $3.7 billion of cash restricted cash on the balance sheet.

Staying with the balance sheet, we ended the quarter with a net debt to adjusted EBITDA ratio of 3.49 times, a 1.5 turn decrease from the end of 2023.

We intend to use cash on hand to fund both the additional $2 billion of net investment activity announced in last night's release and the $1.25 billion unsecured debt maturing in June.

As a result, driven by accretive investment activity and continued cash flow growth from our in-place portfolio, we expect to finish the year with net debt to adjusted EBITDA at approximately 3.5 times.

Reflecting on 2024, the combination of organic cash flow recovery and disciplined financing of our external growth led to a historic strengthening of our balance sheet.

The improving fundamentals of our business over the past two years have enabled us to deliver sector-leading per share cash flow growth to our shareholders while also harnessing the power of the early part of the cyclical recovery to build balance sheet capacity.

Looking ahead, as the powerful demographic trends in the next two decades begin to unfold, we remain as confident as ever in our ability to capitalize on long-term high ROI investments in people, technology and both digital and physical infrastructure regardless of the capital market backdrop.

Lastly, as I turn to our initial 2025 guidance, which was introduced last night, I want to remind you that we have not included any investment activity in our outlook beyond the $2 billion that has been closed or publicly announced to date.

Last night, we introduced a full year 2025 outlook for net income attributable to common stockholders of $1.60 to $1.76 per share and normalized FFO of $4.79 to $4.95 per diluted share or $4.87 at the midpoint.

Our normalized FFO guidance represents a $0.55 increase at the midpoint from our 2024 full year results.

This increase is composed of a $0.42 increase from higher year-over-year senior housing operating NOI, $0.03 increase from higher NOI in our outpatient medical and triple net lease portfolios, a $0.20 increase from investment and financing activity and the $0.65 of growth is netted against $0.10 of offsets, made up of $0.06 from increased G&A and other expenses and $0.04 from FX headwinds.

Underlying this FFO guidance is an estimate of total portfolio year-over-year same-store NOI growth of 9.25% to 13%, 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 15% to 21%.

This is driven by the following midpoint of the respective ranges.

Revenue growth of 8.5%, made up of RevPOR growth of 4.8% and year-over-year occupancy growth of 325 basis points and expense growth of 5%.

And with that, I'll hand the call back over to Shankh.

Before we go to Q&A, I want to touch on three topics that appear to be unrelated on the surface.

Number one, CapEx and capital team.

As John mentioned on the last couple of calls, he has built a 100-or-so person capital team at Welltower, creating internal capital and value-add expertise as part of our build-out of our operating platform.

This has helped us to become a real operating business focused on total life cycle cost over a long duration, not a deal shop that write checks.

We put a few pictures of the team's work towards the end of our business update.

I want to draw your attention to those because I want you to see philosophically what are we trying to achieve.

For example, look at our efforts to build what I call Costco breakrooms.

The site level employees at our communities work really hard, and we're trying to give them a really inviting and rejuvenating experience when they take their break.

In 2024, we finished more than 80 of these breakrooms.

While some of you might legitimately see this as expenditure, we see this as an important step to hire and retain talent.

I was recently reading a book on Walt Disney called Remembering Walt that talks about how Walt wanted to build a 120-feet tunnel of a railroad on a long S-curve as he liked mystery and love delighting his customers to joy and wonder.

The foreman on the job suggested to him that it was way cheaper to build its straight.

Walt said, it's cheaper not to build at all.

The only way you make lots of money for your shareholders over a long period of time is having a killer customer value proposition.

In our business, our residents first line of interaction, leading to that value proposition are site-level employees.

We cannot delight our customers without delighting the site-level employees.

If you don't believe me, please study the breakrooms at Costco and Jim Sinegal's philosophy: take care of your employees, and they will take care of your business.

You will understand why that company is such a long-term compounding machine.

Number two, technology platform.

When we talk about technology at Welltower, we mean two completely different things that sometimes get conflated.

One is our data science platform and the other is our operational tech platform.

Our data science efforts go back almost a decade that started with machine learning focused on structured data and then deep learning towards the end of last decade, focusing on unstructured data and finally, powered by AI in the last few years.

While we'll perhaps never win a prize for coming up with a new frontier model, our goal is to harness the power of these incredible technology advances in human history to make the right capital allocation decisions.

In other words, we're trying to disrupt how capital gets invested in world's largest asset class called real estate.

On the other hand, our operational technology efforts, which goes back to John Burkart's arrival to digitize and professionalize the business is set to disrupt how senior living operates as an industry.

When we are successful in the latter, it will make the former machine, our data science platform, even more powerful as it will feed every minute customer interaction data into our algorithms, not just transactional data and vice versa, creating a positive feedback loop.

While the individual goal of both of these platforms is to set to challenge the status quo of two completely different industries, the philosophical underpinning is the same, and that stems from the second law of thermodynamics.

The second law of thermodynamics holds the greatest thermodynamic efficiencies achieved by working with the hottest possible source and the coldest possible sink.

In other words, it is not about how fancy the underlying math or tech is, but the competitive niche where we're applying this where the contrast is the greatest.

To put it simply, we found two easier games where the competitive dynamic is still focused on either labor beta financial engineering in case of real estate investing or fundamental assumptions that work in a low or declining interest rate environment or fly by site, not by instrument in case of senior living operations.

And finally, number three, people.

I want to congratulate John Burkart, Nikhil, Tim, Matt, John Olympitis, Eddie and Patrick for their expanded role and promotions that we announced on January 2.

It is perhaps the single most important release from this company in years.

While I am not going to detail how their roles are expanding, which is described in the release, I would like to say I've never written something that I'm more proud of.

I will not remember a bunch of deal offers I wrote during the Christmas break.

I may even forget how freakishly good it felt seeing the occupancy growth during Christmas week, but I will never forget the pride I felt when I wrote that release during the holiday break.

Many of these extraordinary leaders joined me as associates and analysts and today, they run this firm.

Others have joined me later in to pursue this audacious dream to disrupt an industry or two.

All these individuals have been instrumental in creating what is known as today as Welltower, buying laying one air tight break at a time with an outsider mindset.

These exceptional leaders share two rare qualities that set them apart: the delayed gratification gene or an instinctive bias towards sacrificing immediate rewards for substantially larger future games; and two, fiduciary gene and innate desire to prioritize their owners' interest above their own.

Their leadership has been instrumental in fostering an exceptional culture at our firm.

The savvy leaders show up every day to win with quality such as a seamless way of deserve trust, shared sacrifices, unity of purpose, mirrored reciprocation.

These seemingly mundaned qualities in the right combination create a Lollapalooza effect of a culture where everybody is fully committed.

They go all in and they stay all in.

You might be able to copy our deals, but you cannot copy our culture.

So what do these seemingly disparate three items that I mentioned above, such as philosophy behind CapEx, technology, and people have in common?

Two things.

First, duration or otherwise known as longevity; and second, power law, otherwise known as exponential network effect.

These two, duration and network effect, are the most foundational architectural principles of nature.

And so they are the foundational backbone of our pursuit of target incremental, continuous progress of per-share growth for our existing investors for decades to come.

With that, I'll open the call up for questions.

(Operator Instructions) Vikram Malhotra, Mizuho.

Congrats on the strong results.

So I just had a two-parter just clarifying.

Just one on fundamentals.

Can you kind of give us a sense of the pricing power across occupancy bands within the SHO portfolio?

And then related to the comments on the pipeline, do you mind sort of giving us a sense of the $2 billion in acquisitions and the pipeline itself?

Like what are you acquiring -- what's the occupancy of what you're acquiring in that pipeline?

Nikhil, do you want to start with the second?

Yes, I'll start with the second one.

Vikram, so as I said in the prepared remarks, it's really a continuation of what we've been buying.

So it's similar metrics.

The $2 billion we talked about it's low 80s occupancy generally newer vintage assets.

Vikram, on a second question, assets that are 90-plus percent occupied, the RevPOR growth has been well into the sixes.

On the other hand, where the assets are below 70% occupied, they're roughly flat.

So everything goes sort of in between.

To give you a sense of gradients, I will say, maybe the 85% to 95% was closer to 6%.

And as I said, below 70%, it was close to 5%, which would expect a different spectrum of occupancy.

I would just add that as of year-end, over a quarter of the portfolio is still sub-80% occupied.

Jonathan Hughes, Raymond James.

Thanks for the prepared remarks and commentary.

The organic growth outlook, we know that remains strong, but I wanted to tie that into external growth in recent years.

As we move through this development cycle and see increasing fewer deliveries, which is obviously a good thing for existing properties, does that make buying properties with lease-up more challenging?

Is there fewer of them, which in turn would impact your growth as fewer get added to the same-store pool?

So much of the outperformance in recent years has come from acquiring those newer vintage lease-up properties.

And if we see less and less deliveries.

Does it become more challenging to sustain growth?

Yes.

I think Jonathan, if you look at the activity, that would suggest the answer is no because candidly, it's a complex operating business.

And without the right toolkits, you don't get the same outcomes from every provider that's running the buildings.

So we've had a long-term track record of success of finding under-operating buildings.

And the under operational element, A, is occupancy, because that's obvious today, but there are so many more layers, right?

So it's not just occupancy.

At the end of the day, what we care about is NOI and every single line item has room for optimization that we bring versus somebody else operating those buildings brings.

So we see a long runway to keep doing more of this.

Jonathan, I would just also add, don't forget the massive delivery cycle, oversupply cycle we have gone through post GFC sort of last decade, right?

So -- there are plenty of people who need help on the liquidity side, and we'll see what the market gives us.

(Operator Instructions) Joshua Dennerlein, Bank of America.

Call it what you want, but I'm really focused on culture as a long-term driver of outcomes.

And to me, a big picture of that culture is retaining talent I guess, Shankh, how do you think about retaining talent?

And is there a retention problem at Well today?

Okay.

So let me answer both of those questions separately.

So first is if you think about this is that, as I said, mentioned many times, retaining talent is my number 1 priority.

It's hard to find really good people who do not think of what we do as work, but take that as their life's work.

And there's a tremendous difference between the two.

This is a hard business.

It's a hand-to-hand combat on a 24/7 for all of us, right?

So it is -- all these results that you guys are seeing today has been a function of this entire team working together and build this trust.

And as I said, it's a seamless way of deserve trust, right?

And definitely, there's a lot of shared sacrifice with the unity of purpose that I talked about our North Star and everybody has bought in.

If they're all in, they stay all in.

That's a very hard thing to pull off.

So obviously, if you think about it, and that shows up on our -- clearly on our track record, being a public company, our track record is public.

So anybody can see what my team is capable of.

And so obviously, if you think about the demographics of the industry, whether it's private or public, you will see in that microcosm, a huge retirement wave is unfolding as we speak.

So obviously, there's a tremendous amount of demand for people who are really good at the job, right?

And not everybody is very good at the job.

There is a fundamental tectonic shift is happening in the real estate business, which last 40 years have been all about declining interest rates.

That game is over.

So if you think about that in that context, there is just tremendous demand for our people.

So let's just think about this.

Is there a problem of retention at Welltower?

The answer is a resounding no.

But that does not mean that we should not be acting in my capacity, I should not be acting before there's a problem.

There's an interesting interview we can go and see of Lee Kuan Yew, who was founded Singapore, who was the leader, was asked -- once asked by a reporter about a famous Mao quote where he talked about a single spot can create a prairie fire.

And Lee Kuan Yew said that only happens if the prairie -- the grass was actually dry.

All we are trying to do at Welltower, what I'm trying to do every day is to keep that grass wet.

Michael Griffin, Citi.

It's Nick Joseph here with Michael.

Just on the private funds management business.

I know you're targeting different stabilized versus non-stabilized assets.

I was hoping you could discuss kind of what the targeted IRRs are for both and then just the size of opportunity you see in terms of those stabilized assets versus those that still have more of a growth opportunity.

Nick, as we have -- I mentioned in my prepared remarks, that we have nothing more to add to the private capital business at this point, more than what we have said in the press release.

So we will give you more updates when that process is over.

Now from the perspective of -- if you think about it, we are fundamental buyers, from the Welltower balance sheet perspective, of unstabilized assets.

That's what we have always done.

We're growth investors.

We're not yield investors.

And we believe that now, bringing this private capital business, significantly expand our TAM.

That's all I can say at this point in time.

Nick Yulico, Scotiabank.

So in terms of the Senior Housing operating segment, I was hoping you could just break out how big the same-store bucket of assets will be this year versus the total pool.

And then for the non-same-store where I think there's often lower occupancy, how do you expect those assets to perform on NOI growth better -- is there better potential there versus same-store guidance you gave?

So why don't I start with the last part, and Tim will give you the first part.

Given that our overall portfolio occupancy is, give or take, call it, 85% and our same-store is, what, 87% plus, right?

That would suggest to you that non-same-store is very well occupied, right?

And so as occupancy goes up, you would expect that there -- the flow-through incremental margin that falls to the bottom line obviously starts to pick up, right?

So growth should be better.

But obviously, you will see -- but when those properties stabilize, you will get more pricing power.

So you're going to move hand over growth from occupancy to growth from rate.

Tim?

And then by the fourth quarter, we expect over 90% of the portfolio, current portfolio to be in the pool.

Austin Wurschmidt, KeyBanc.

Shankh, you mentioned in response to an earlier question that 90% plus occupancy RevPOR growth as well into the 6s.

I think with the occupancy gains expected share over 300 basis points, you should kind of be ending the year approaching that 90% level.

On top of the inflection in demographics next year and then the further rollout in the tech platform.

I mean, should we take all that detail to point to a reacceleration in RevPOR growth in 2026?

So Austin, just remember, we're also buying -- Tim, Nikhil just said that we're buying $2 billion of assets in the first six weeks at 80% or so occupancy, right?

So reported metrics gets all sort of jumbled up because of this.

But your idea of your question is the correct one.

I'll remind you of the comment I made, I think, last call, maybe the one before.

But in the last couple of calls, which is post 2026 summer leasing season, we should start to see a better rip or environment than we have seen sort of call it prior to that.

We shall see what the market will give us.

It's hard to predict where things go.

And so we are a fundamental believer.

It's not about predicting.

It's about positioning.

And we're in the business of duration.

If that takes one more year, we'll still be here, trying to push things forward.

John Kilichowski, Wells Fargo.

I'm trying to understand the outsized occupancy gain that you experienced this quarter and then the guide that you're giving -- do you think it's more to do with the acceleration of retirement age individuals?

Or do you think part of this occupancy gain is due to maybe a psychological effect where there's less and less opportunity now as you lease up to move into the facilities that you'd like to be in, and therefore, you're seeing sort of people being willing to move in a little bit earlier and therefore, maybe making the pace of occupancy gains that you're seeing sustainable into the future until you reach stabilization?

John, why don't I offer you a third choice, which is our execution.

You guys have data from sort of industry data.

You guys see other companies in the sector, which reported, I think, some of the data, but regardless, just look at that and you realize this is -- a lot of that what you say is right, but it is -- that does not describe the operational sort of alpha that we have seen in the quarter.

But we shall see what happens going forward.

Ronald Kamdem, Morgan Stanley.

Just a quick one.

Maybe touch on expenses a little bit in terms of an update on the labor market and any concern about sort of labor shortages and what you're seeing?

Ron, we always have concerns in a business where 60% of our capital stack -- I mean, our expense stack is labor, we always have concerns.

But as John mentioned, we are trying to see stabilization in that sort of the growth we have seen before.

We have tremendous amount of operational initiative, capital initiative and just in our communities to today to significantly bring down turnover.

We mentioned some of that in the slides on our business update.

You can see that we're seeing tangible impact.

But as I've said, it's not an easy business.

This is why you get outcomes in the tails, not a sort of industry beta, but we're super focused on it.

We shall see what the market gives us.

Rich Anderson, Wedbush.

Maybe a less exciting topic, but outside of senior housing, what do you feel like medical office and post-acute, what role do they play in the company today?

And by that, I mean, obviously, there's a lot of excitement around the growth profile of senior housing going forward.

But is it an out-of-sync sort of investment representing over 20% of the portfolio?

Is it a view to the future to sort of be in the business longer term because who knows where things will go 15 years from now?

Just curious your view on the stuff outside of the senior housing and what role it plays for investors today and in the future.

We're long-time investors and our OEM as well as our post-acute segment plays an extraordinarily important role as we think about portfolio construction.

And different -- you guys get excited about different parts of different asset class and their cycles around them.

We are thinking about how we create long-term sustainable earnings and cash flow growth on a per share basis over decades, and we're extraordinarily excited about those businesses.

We allocate capital in different parts depending on where we think that we can make the best risk-adjusted return on a long-duration basis.

And when the opportunities arise, we allocate capital.

But at this point, as I've said, that we're a debt player, a credit player in the skilled nursing business.

And obviously, on the OEM side, as I mentioned before, that I want to see where long-term inflation lands before I firm up my mind on how to allocate -- further allocate capital in a significant way or not.

That's where we are, and we're watching these things very carefully.

But there's no question, both of those strategies play a very important long-term role in our portfolio construction.

Juan Sanabria, BMO Capital Markets.

John, I believe you mentioned kind of elevated CapEx for a period of time and then kind of normalizing back to below where you were pre-COVID levels.

So I was hoping maybe you could provide a little bit more details or benchmarking of how you think long-term CapEx could trend once we get past this hump of kind of deferred or whatever type of spend that you want to execute on?

Yeah, I mean as far as for long-term run rate, the capital to date or previously was done less efficiently.

I've talked about that many times.

People made short-term decisions.

For example, you might replace a roof, but not do the skylights and the gutters, and then you come back and do both of those.

And you've got cost for mobilization, cost for tearing up the roof again to replace those.

And so what we've done when we've stepped in with the team and bringing in the internal expertise is to create the proper scopes and planning for capital to execute that.

That -- in the end, that lowers the run rate of the capital.

And as I mentioned, people are looking for reference points.

One reference point out there that's been out there for years is, for example, multifamily residential, what their run rate is on CapEx.

There's no reason why our run rate for ongoing capital would not be similar to that.

Our units are slightly smaller with less kitchen, a little bit more on the amenity side for sure.

But balance, it puts it into a zone for context.

On the value-add side, as I said, those are pure investments.

We could turn it on and off at any point in time.

And Nikhil and I are connected as far as what those investment hurdles are unlevered IRR investments.

Michael Carroll, RBC Capital Markets.

John, I wanted to circle back on your comments regarding the tech platform rollout.

Can you give us an idea of the timing of this?

I mean, what percentage of the portfolio has this capability today?

And should we think about the majority of your operators having this capability by the end of the year?

Or is it a longer more thought-out process than that?

That's a good question.

Yes, we're rolling it out over the next couple of years.

There's a lot of work that goes into doing that and doing it very well to make a seamless experience for our site associates.

So very focused on that.

And I am glad you asked because I've talked -- I spent a lot of time talking about the benefits of the platform as it relates to digitization and the improved customer and employee experience.

I haven't much spoke about the aspects of providing real-time actionable data, insightful data to the site employees.

So I'll give you just a little story on that.

When I was working my way through college, 1980s, I worked at a company called Price Club, which is the predecessor of Costco for those of you who remember.

Every morning, about 3:00 AM, the store manager would come to me with a computer printout, which showed all of the sales for every item on my aisle as well as the aisle in total.

So I could see if I place tide in the middle, if I place tide as an end cap, what the impact was on sales and then adjust my aisle accordingly to maximize my total sales for my aisle, very competitive process there at Costco.

And today, what we're able to do, we're at the very cusp of providing our employees with real-time actionable data, enabling them to positively impact the business.

So super, super excited.

We're going as fast as possible, but we have to do it right.

And so it does take a little bit of time.

And Mike, just remember, Nikhil is not making this process particularly easy by adding 10,000, 12,000 units a year as well.

So it's a running target.

Jim Kammert, Evercore.

I was intrigued by Nikhil's comments regarding -- it sounds like an apparent uptick in European investing activity.

Have you ever provided sort of the sense of scale of the opportunity set for Welltower in Europe?

And does that extend beyond the UK?

I don't think you heard it correct.

We are focused on in sort of, I guess, you can say in the European context is UK.

We -- I've said many, many times, we have no desire to go outside our circle of competence, which is US, UK, Canada, and his comments is entirely focused on the UK.

Mike Mueller, J.P. Morgan.

You have about $2 billion of developments in process.

Can you talk about how long to stabilize the properties upon completion.

And is that trending faster or slower than a few years ago, pre-COVID?

Yes, thinking about that development pipeline, that has predominantly been focused in two areas.

Active adult within our kind of residential portfolio.

And the OM.

OM as you know, is pretty much 100% leased for anything that we're developing.

Active adult has a shorter lease-up time frame than seniors.

So it's shorter, and that's kind of more like a 12-, 18-month type time frame.

Emily Meckler, Green Street.

Yes.

How does 2025 expected expense growth for the US senior housing portfolio compared to the UK and Canada?

And then have the increased employment taxes and increased minimum wage in the UK had any notable impact there?

Yes.

So OpEx growth in the UK is greater than the US, and it's like to your question on the impact of the combined impact of the two is the right way to look at it, right, because you get the kind of headline cost of living adjustment and then you've got the insurance impact.

So two of those are heightened, and that is causing higher OpEx growth there but we're also seeing great top line growth in the UK.

So it's offsetting some of that flow through, but we're still seeing positive growth.

Jonathan Hughes, Raymond James.

Can you talk in more detail about the outlook for senior housing development?

The fundamentals are as good as they've ever been.

There's a lot of visibility for demand in the next decade.

And why haven't developers or private equity rushed in to get projects started to capture that inevitable upside?

Is it lack of operators, financing?

I guess, what changes this.

Yes.

So Jonathan, I'm going to make my comments on average, there's always exception to average.

So just think about as an average.

I fundamentally believe that people do something an economic activity called development if there is development profit, right?

So you sort of have to think about.

So let's just dig into that.

I'm going to -- so first, I think there's a fundamental misunderstanding of what development profit is.

I hear -- I've seen some very interesting performance of developments that say, just take an example.

This is an example.

I can make an 8% yield five years from now and isn't that 200 basis points above, say, prevailing cap rate of 6%.

That is fundamentally -- people who say that have a fundamental misunderstanding of the most basic idea of finance called time value of money.

We make decision, development decision based on untrended yield, not trended yield.

Untrended yield as in what's today's cost, and what's today's market rents, right?

You can always buy a 6% and trend that and get rent growth for five years, and we'll get to 8%.

So that is sort of the fundamental sort of number 1 problem.

Number 2 problem, which I described you as sort of a Underpants Gnomes reasoning, if you have seen that famous South Park episode, and it goes like this.

You have a proposition 1, which is there is a lot of demand coming, right?

That's step number one.

Step number 3 is we should be able to make profit from that by developing more.

The step number 2 in the middle is missing.

And that missing middle is what we talk about.

What happens to cost?

What happens to your cost of construction, your cost of labor, your cost of sort of your rates, right?

All of these things.

Your exit cap rate, all of these things.

So if you just think through that, senior housing development business reminds me of that South Park episode, which is Underpants Gnomes episode.

If you haven't watched it, I will go and like you to watch that.

Third one is what is just straight up preference falsification.

I have talked to smart developers who understand that this idea of silver tsunami, they're trying to sell it to someone gave development capital, just what I call private truths and public lies, right?

So all I tell them to do is if you truly believe in that, why don't you just put your 100% of your own money and develop?

Why try to get other people's money to try to do that, which this business has two really, really bad episodes, one in the '90s, massive oversupply, lots of money lost, other people's money lost.

And the second is what happened in the last decade.

So if you just put it all together, you will see, all I say, just if the economics doesn't exist, I fundamentally believe it will not happen.

And if somebody is particularly excited about doing it, I recommend they do it on their own money, not get sort of an unassuming small bank who doesn't understand all the details and just get them and then obviously get them on the hook just like it happened in the last decade.

This does conclude today's call.

Thank you for joining.

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