Welltower Inc. (NYSE:WELL) Q4 2023 Earnings Call Transcript
Welltower Inc. (NYSE:WELL) Q4 2023 Earnings Call Transcript February 14, 2024
Welltower Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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.
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 a reasonable assumption, the company can give no assurances that 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.
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?
John Burkart: Thank you, Shankh. Although most of my time at Welltower has spent doing the Welltower hustle, getting up every day, identifying and aggressively pursuing the opportunities that exist, focused on improving the customer and employee experience. I want to take a moment and reflect on how proud I am of the Welltower team for success in doing just that, improving the customer and employee experience, which in part is reflected by our performance. Focusing on Senior Housing for a moment, the Welltower team consists of our top operators and all of their employees, our key vendors, as well as the Welltower employees. We have all worked together to improve the customer and employee experience, which has resulted in fantastic results.
On top of the industry-leading Senior Housing same-store NOI growth for the full year of 2022 of 20.1%, our full year 2023 Senior Housing NOI growth was 24.4%. Often on earnings calls, you hear the words, tough cost. That’s certainly true here. Yet our guidance for 2024 same-store Senior Housing NOI growth at the midpoint is 18%. Therefore, based on our two full years that are completed and in the record books, 2022 and 2023, and our guidance of 18% in 2024, that indicates that the three-year compounded growth of our same-store Senior Housing NOI in 2024 will be over 75%. That’s something to reflect upon. Thank you, Welltower team. Now back to our business. Our portfolio generated 12.5% same-store NOI growth over the prior year’s quarter, led by the Senior Housing Operating portfolio with 23.7% year-over-year growth.
The Outpatient Medical portfolio produced same-store portfolio growth of 2.8% for the fourth quarter of 2023. This was driven by favorable operating expense management, increasing the operating margin by 220 basis points year-over-year to 71.4%. Notably, our proactive appeal process achieved favorable real estate tax reductions. The 23.7% fourth quarter year-over-year NOI increased in our same-store Housing Operating portfolio with a function of 9.7% revenue growth, driven by the combination of 5.5% RevPOR growth and 330 basis points of average occupancy gain and moderating expense growth. Expenses remain in control, coming in at 5.7% for the quarter over the prior year’s quarter. The strong revenue growth and expense control led to continued margin expansion of 290 basis points.
Again, our ExpPOR growth for the quarter set a record for the lowest growth in our recorded history at 1.7%. All three regions continue to show strong same-store revenue growth, starting with the U.S. at 9.4%, Canada and the U.K. growing at 9.7% and 14.1%, respectively. The strong revenue growth in each region, combined with the expense control, have led to fantastic NOI growth in the U.S., Canada, and the U.K. of 21.8%, 21.7% and 75.5%, respectively. We’re flying along with our integrated platform initiative, which will start to go live at our first operator in the first half of this year. I will not go into all the details, but I will say that our focus on improving the customer and employee experience is coming together very well. The integrations of the various modules will simplify the customer experience and reduce the labor around basic tasks, enabling our site teams to focus on what they love, our customers.
More to come in 2024. I will now turn the call over to Tim.
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.
Tim McHugh: Thank you, Nikhil. My comments today will focus on our fourth quarter and full year 2023 results, performance of our triple-net investment segments, our capital activity, a balance sheet liquidity update, and finally, the introduction of our full year 2024 outlook. Welltower reported fourth quarter net income attributable to common stockholders of $0.15 per diluted share and normalized funds from operations of $0.96 per diluted share, representing 15.7% year-over-year growth. We also reported total portfolio, same-store NOI growth of 12.5% year-over-year. Now turn 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 9/30/2023. In our Senior Housing triple-net portfolio, same-store NOI increased 2.2% year-over-year and trailing 12-month EBITDA coverage was 0.95 times. It is also worth noting that our trailing three-month coverage in this segment moved above 1 times for the first time since the pandemic. Next, same-store NOI in a long-term post-acute portfolio group grew 5.2% year-over-year and trailing 12-month EBITDA coverage was 1.36 times. Turn to capital activity. We invested $3 billion in acquisitions, loans and developments in the quarter, led by $2.1 billion of Senior Housing Operating investments. In the quarter, we continue to fund investment activity via equity issuance, completing a bought equity deal in November, which along with regular way ATM activity resulted in $2.8 billion of gross proceeds in the quarter, an average price of $86.20 per share.
This equity issuance allowed us to fund investment activity, along with the extinguishment of approximately $250 million of debt in the quarter and end the year with a $2.1 billion cash balance. Staying with the balance sheet, as we finish 2023, I want to highlight the balance sheet transformation that has occurred over the last 24 months. When COVID hit in 2020, we acted quickly to protect the balance sheet by securing substantial incremental liquidity, in large part by reducing cash outlays and taking advantage of strong asset values by selling long lease duration assets into a zero interest rate environment. These actions helped alleviate the impact of nearly 50% drawdown in Senior Housing Operating NOI that bottomed out in the first quarter of 2021, driving peak leverage to nearly 7.5 times ex-HHS funds.
After stabilizing the portfolio in the sevens in 2021, the combination of a strong recovery in Senior Housing performance and disciplined equitization of external growth over the last two years has allowed us to methodically lower leverage, finishing this year with 5.03 times net debt-to-EBITDA. Consistent with past commentary around the balance sheet, I want to underscore that despite the improvements in metrics, current leverage still does not reflect a full post-COVID recovery in Senior Housing Operating NOI, as our portfolio still sits meaningfully below pre-COVID NOI levels. A recovery back to these levels will drive leverage well below 5 times. In summary, in 2023, our post-COVID balance sheet recovery transitioned into a strategic repositioning, ending the year with substantially upgraded metrics from prior to the pandemic, an expectation for further improvement as our Senior Housing Operating portfolio continues to carry significant organic cash flow growth momentum into 2024.
This positions us with substantial capacity to continue to make systematically opportunistic capital allocation decisions to drive long-term shareholder returns in any market environment. Lastly, as I move on to the introduction of our full year 2024 guidance, I want to remind you that we have not included any investment activity in our outlook beyond that which has already been announced publicly. Last night, we introduced an initial full year 2024 outlook for net income attributable to common stockholders of $1.21 per diluted share to $1.37 per diluted share and normalized FFO of $3.94 per diluted share to $4.10 per diluted share or $4.02 at the midpoint. As mentioned in our release last night, our 2024 guidance contemplates no HHS or other government grants, so after adjusting for $0.03 received in 2023, the midpoint of our initial guidance represents 11.5% year-over-year growth.
This year-over-year increase in FFO per share is composed of a $0.33 increase from higher year-over-year Senior Housing Operating NOI, $0.02 increase from higher NOI in our Outpatient Medical and triple-net lease portfolios, a $0.04 headwind from higher year-over-year growth in G&A expenses tied mainly to the continued build-out of our operating platform, and finally, a $0.10 increase from investment activity and financing activity. Underlying this FFO guidance is an estimate of total portfolio year-over-year same-store NOI growth of 8.25% to 11.5%, driven by sub-segment growth of Outpatient Medical 2% to 3%, long-term post-acute 2% to 3%, Senior Housing triple-net 2.5% to 4%, and finally, Senior Housing Operating growth of 15% to 21%, the midpoint of which is driven by revenue growth of approximately 9.2%.
Underlying this revenue growth is an expectation for RevPOR growth of approximately 5.25% and an acceleration in year-over-year occupancy growth to 290 basis points. And with that, I will hand the call back over to Shankh.
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.
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