Welltower Inc. (NYSE:WELL) Q1 2024 Earnings Call Transcript

Welltower Inc. (NYSE:WELL) Q1 2024 Earnings Call Transcript April 30, 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: Thank you for standing by. My name is [indiscernible] 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. I would now like to turn the conference over to Matt McQueen, General Counsel. You may begin.

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 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. I’m very pleased with the strong start to the year as we delivered nearly 19% year-over-year growth in FFO per share with contributions from all parts of our businesses. But I remain particularly excited of how the Senior Housing business which continues to surpass our expectations. Despite continued uncertainty with respect to the direction of the economy and turbulence across many sectors within commercial real estate, the demand supply backdrop for Senior Housing gets better with each passing day.

We, along with our operating partners are proud yet humbled to provide an important solution for the rapidly growing number of seniors who makes the choice to live in a curated and purpose build [ph] environment. And while this demographic [indiscernible] end market demand continues to strengthen, the new construction remains extraordinarily difficult, pushing off any impact of new supply many years into the future. In terms of our Q1 results, we posted another quarter of double-digit same-store revenue growth coming in 10.3%, driven by strong occupancy and rate growth. While Q1 is usually a seasonally weaker period than Q4, same-store occupancy grew 340 basis points year-over-year basis which represented an improvement from Q4. This is a strongest growth we’ve seen in our history other than Q1 of 2022 when the comp year was a negative number as we lost occupancy in Q1 of 2021 due to COVID.

We also saw outperformance on the rate side. Reported same-store RevPOR or unit revenue growth of 4.8% was dragged down by the Leap Year impact of an additional day in February. However, adjusting for this extra day, RevPOR growth remained strong at 5.6%. Overall, same-store expenses were up 5.7% and unit expense or ExpPOR was up 0.4% driven by same-store compensation expenses up 5.4% or just 0.1% on an occupied room basis. Reported ExpPOR was understated because of the Leap Year impact and otherwise would be up 0.9%. Regardless, we are very pleased with the underlying trends as unit revenue growth far outpaced unit expense growth, resulting in another quarter of significant margin expansion. And this combination of strong revenue and moderating expense drove same-store net operating income growth of 25.5%, marking one of the strongest quarter in our history.

This growth was broad based with all three regions posting year-over-year same-store NOI growth in excess of 20% with growth in the U.K reaching nearly 50%. From a product standpoint, our independent living and wellness housing portfolios delivered another quarter of extraordinary growth. But our assisted living continued to — continued a streak of strong outperformance, and as for our non-same-store pool, we’re even more pleased with the performance of these assets as numerous properties we transitioned within past year have seen a strong improvement in performance, while some recent acquisitions have also outperformed. We continue to mine for opportunities within our own portfolios to effectuate further triple net or idea conversion, or operator transition in an effort to enhance the resident and employee experience, where we believe financial performance will eventually follow.

We’re confident that this informational feedback loop created through this continual focus on employee and customer is a longtime driver of lower risk and superior operational returns. We don’t always get the community and the manager combination right in the first go, but it is our responsibility to try again. Status quo is not an option for us. Speaking of conversions, I’m pleased to inform you that we are in process of converting eight additional well located communities from triple-net to RIDEA. Despite short-term drag, we believe this action will be significantly additive to our full cycle stabilized earnings as we have demonstrated in our recent transaction with Legend. These capital-light transactions and others, similarly made in 2023 will create significant growth for us in ’25 and beyond.

Speaking of transaction, the capital markets backdrop remained very conducive to deploying capital. Since the beginning of the year, we have closed or under contract to close $2.8 billion of investments across 23 separate transactions, including $1.1 billion, which we spoke to in February, mostly made up of the affinity transaction. These investments are predominantly with our repeat counterparties or existing operators. As excited as we are about this record level of activity in just first 4 months of the year, we remain incredibly busy parsing through granular opportunities in both the U.S as well as the U.K. Our near-term capital deployment pipeline remains robust, highly visible, actionable and squarely within our circle of confidence where we can bet with the house odds, rather than the gambler thoughts.

As rates and credit spreads continue to march higher, our telephones are ringing off the hook, as we are requested to provide solutions to institutions, families, operators and other sellers. 2024 will be a very active year for us. While I wrote extensively about our empathy towards entity level M&A transactions in our — in my annual letter, our enthusiasm remains unbridled for tuck-in acquisitions, one asset at a time, where we can invest at an attractive basis with operational upside, an irreplicable uplift from Welltower’s operating platform. As we have said in the past, our goal is to achieve significant regional density, seeking to go deep in our market, not broad. And with the help of our data science platform, Alpha, we are able to identify one asset at a time, which not only have the strongest growth prospects, but also the strongest fit to our portfolio.

Though we occasionally come across sellers who are disconnected from asset value as they appear to be living in a time capsule of yesterday’s interest environment, or simply hoping that we’ll be back there soon, many more pragmatic and smart institutions and families realize that perhaps hope is not a strategy, especially in face of a looming wall of debt maturity for the industry, and dearth of financing options. We continue to provide solutions to counterparties who want a sophisticated and reliable partner, who shows up at the closing table without a fail with cash and operating partners. We, at Welltower, are in a handshake business will remain so. Our stellar reputation is much more valuable to us than few basis points here and there that we may leave on the table.

After all, our NorthStar remains long-term compounding or part share value of our existing shareholders not to maximize the deal or a quarter. In the end, time is the friend of wonderful companies that compound and the enemy of the mediocre. With that, I’ll pass it over to John. John?

John Burkart: Thank you, Shankh. Momentum that continues to build in our business through 2023 has carried into the early part of this year, as reflected by our strong first quarter results. Our total portfolio generated 12.9% same-store NOI growth over the prior year’s quarter, once again, led by the senior housing operating [technical difficulty]. First, I’ll comment on our outpatient medical portfolio, which remains very stable, producing year-over-year same-store NOI growth of 2% for the first quarter of 2024. Leasing activity remains healthy, and our retention rate once again exceeded 90% leading to consistent and industry-leading same-store occupancy of nearly 95%. The full year same-store NOI guidance is unchanged between 2% and 3%.

As for the Senior Housing operating portfolio, our results remain impressive. The 25.5% first quarter year-over-year same-store NOI increase represents the 6th consecutive quarter, in which growth has exceeded 20%. Our top line growth came in at 10.3%, driven by strong occupancy growth of 340 basis points and strong rate growth of 480 basis points. All three of our regions continue to show favorable same-store revenue growth, starting with Canada at 9.1%, and the U.S. and the U.K. growing at 10.1% and 14.8%, respectively. Additionally, expense growth continues to moderate, up 5.7% year-over-year with the broader inflationary pressures continuing to abate. In terms of labor-related trends, we’ve not only seen broader macro pressures continue to ease, but also our various property and portfolio level initiatives have been paying off.

For example, by creating greater regional density within our Senior Housing portfolio, employees are able to fill open shifts at other regional properties, reducing the usage of agency labor and improving the overall customer experience. Regional densification also creates more opportunities for career progression and lower turnover as employees can take increasing levels of responsibility at different properties managed by the same operator in the same region. And equally important, to the build out of our operating platform, we’re beginning to create efficiencies, which will allow for more time to be set on resident care, improving the customer experience, reducing the administrative burden and related stress on-site employees. Shifting back to the quarter, we reported 320 basis points year-over-year improvement in margins as unit revenue growth continues to solidly outpace unit expense growth.

While NOI margins are below pre-COVID levels, the significant operating leverage inherent in our business and benefits of our operating platform should allow for multiple years of further margin expansion ahead. This year is still young, with peak leasing season ahead of us, but we remain encouraged by the start of this year. Ultimately, our Q1 numbers speak to the great work that the entire team is doing. We are relentlessly focused on improving the customer experience and employee experience and we’ll continue to pursue operational excellence. Thank you, Team Welltower, including our operators, Welltower employees and vendors. I’ll now turn the call over to Nikhil.

Nikhil Chaudhri: Thanks, John. Before speaking to our recent investment activity, I wanted to share some high-level market observations. As we’ve 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. In large part, this backdrop is a function of the challenged seniors housing debt, which sits on the balance sheet of the largest lenders in the space. While we have previously spoken about the $19 billion of seniors housing debt maturing this year and next, a deeper look into the performance of these loans is helpful. A great case study is Fannie Mae’s Senior Housing Network with a total outstanding principal balance of $16 billion.

It’s worth noting that borrowers typically seek out agency financing upon stabilization. And so a vast majority of these loans are for assets that were previously stabilized at some point. Of these $16 billion of loans, $5.9 billion are subject to floating rates. But despite that, 44% or $7 billion of Fannie senior housing book is considered criticized, suggesting loans with high risk of default. In addition, over $1.1 billion of loans are more than 60 days past due. While the agencies are the lender of choice for stabilized product, borrowers typically seek out banks for riskier development and lease up bridge loans. Unlike agency loans, these loans are almost always based on floating rates and have shorter durations. While granular information is hard to find on the status of these loans on bank balance sheet, it wouldn’t be unreasonable to assume that at least a similar percentage or almost 50% of the $20 billion plus senior housing loans on bank balance sheets are showing similar distress.

In fact, as I listened to first quarter earnings call, several regional banks that have historically been among the most active in the seniors housing space. I heard a consistent theme of concerns about their sector exposure and the desire to reduce it. This is not surprising given the poor performance of these loans over the last 5 years. Given the staggering level of maturing and underperforming loans, current borrowers are left with tough choices. On one side, borrowers can capitulate and accept the ultimate downside of losing a significant portion or perhaps even all of their equity. On the other side, for those with staying power and the right set of incentives to continue to come out of pocket for incremental capital to service and rightsize the debt load with the hope that some combination of continued improvement in asset level performance and a reversal in the trajectory of interest rates will allow them to achieve a meaningfully better exit value over time.

Perhaps unsurprisingly, with inflation showing signs of reacceleration over the last few prints and interest rates rising, the hope trade for a quick reversal in the trajectory of interest rates is dwindling and counterparties are coming back to us in droves with the hope of achieving an outcome somewhere in between the two extremes I just highlighted. Given our reputation of being solutions-oriented and creative dealmakers that honor our original price through the course of the transaction, we continue to be the counterparty of choice for motivated sellers, taking surety of execution and continue to engage with repeat sellers on follow-on transactions. During the first quarter, we completed gross investments of $449 million, comprising $241 million of development funding and acquisitions and loan funding of $208 million, comprised solely of seniors and wellness housing property types.

We acquired three seniors housing communities with an average age of 8 years for $158,000 per unit. We also received repayments of $36 million across three outstanding loans over the course of the quarter. In addition to the transactions closed in the first quarter, we are currently under contract or have closed on $2.6 billion of gross investments across 15 different transactions spanning 146 properties across the U.S., U.K. and Canada. These transactions have a median value of $37 million. As Shankh mentioned earlier, we are sticking to our mantra of building regional density through focused and granular transactions, and continue to grow with operators that are producing strong results for us in these markets. Our recent activity includes incremental new business with our partners at Oakmont, Cogir, Sagora, Discovery, Liberty, LCB and Healthcare Ireland to name a few.

I will end by extending a warm and heartfelt thank you to our best in business investment team located across our offices in Dallas, L.A., London, New York, Toledo and Toronto. We’ve been fortunate to be able to hire train and retain the brightest young minds from leading universities across the country year in and year out, while many other competitors eliminated or drastically reduced their teams during COVID. We had the foresight to plant the seeds of talent many years ago and are now able to enjoy the fruits from the tree that has since grown. While on one hand, the work at Welltower is incredibly challenging, fast pace and perhaps never ending. On the other hand, I believe that the training opportunity, autonomy and accelerated career growth are unparalleled.

The dedication, thoughtfulness and integrity exhibited by the professionals on our team is all inspiring. I couldn’t be more proud of our team or more excited about the opportunity ahead of us. I will now hand the call over to Tim to walk through our financial results.

Tim McHugh: 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. Welltower reported first quarter net income attributable to common stockholders of $0.22 per diluted share and normalized funds from operations of $1.01 per diluted share, representing 18.8% year-over-year growth. We also reported total portfolio same-store NOI growth of 12.9% year-over-year. Now turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats were reported a quarter in arrears.

So these statistics reflect the trailing 12 months ending 12/31, 2023. In our senior housing triple-net portfolio, same-store NOI increased 3.8% year-over-year and trailing 12-month EBITDA coverage was 1.02x, which marks the first time this coverage has moved above 1x since the pandemic began impacting the segment. Next, same-store NOI and our long-term post-acute portfolio grew 3.1% year-over-year and trailing 12-month EBITDA coverage is 1.23x. Staying with the long-term post-acute portfolio, the Integra Healthcare JV entered our same-store pool and coverage metrics this quarter. As a reminder, the 147 properties were put into a master lease in 4Q 2022 and the individual assets will then transition to local and regional operators over the following five quarters.

The entire master lease enters the same-store pool this quarter while the individual assets will enter the rent coverage metrics as they complete five quarters of operations under their respective operators. In Q1, 95 of the 147 assets entered our coverage metrics with trailing 12-month EBITDARM and EBITDAR coverage of 1.58x and 1.13x, respectively. As we’ve noted on previous calls, the Integra portfolio experienced continuous upward trend in cash flow over last year, as reflected in the trailing 3-month EBITDARM and EBITDAR coverages for these 95 assets at 2.23x and 1.74x, respectively. As we move through the year, the rolling forward of last year’s positive operating recovery as well as the addition of the remaining transition Integra assets in [indiscernible] coverage pool, should lead to a continual upward trend in our coverage metrics throughout 2024.

Turning to capital activity. As Nikhil just walked us through, we’ve $2.8 billion of closed or announced investments year-to-date, inclusive of the Affinity transaction announced last quarter. In the quarter, we continue to fund investment activity via equity issuance, raising $2.4 billion of gross proceeds at an average price of $91.22 per share. This allowed us to fund investment activity, along with the extinguishment of approximately $1.5 billion of debt in the quarter, including $1.35 billion of senior unsecured notes and ended the quarter with $2.5 billion of cash and restricted cash on the balance sheet. Staying with the balance sheet. On the third anniversary of our COVID era [ph] leverage maxing out in the mid-7s ex-COVID relief funds in the first quarter of 2021, rented this quarter at 4.03x net debt to adjusted EBITDA.

And we expect to end the year at a target leverage of approximately 4.5x net debt to EBITDA implied by last night’s full year guidance update. Consistent with past commentary on the balance sheet, I want to underscore that while our key credit metrics are at historical levels, over half of our NOI is represented by Senior Housing operating portfolio, which currently sits at just 82.5% occupancy, with NOI still well below pre-COVID levels. As NOI recovers back to pre-pandemic levels, the meaningful recovery in cash flow is expected to drive debt to EBITDA below 4x from projected year-end 2024 levels, further enhancing our financial position and access to capital. Lastly, as I move on to last night’s update to our full year 2024 guidance, I want to remind you that we have not included [ph] any investment activity in our outlook beyond the $2.8 billion to date that has been closed or publicly announced.

Last night, we updated our full year 2024 outlook for net income attributable to common stockholders to $1.48 to $1.61 per diluted share. And normalized FFO of $4.02 to $4.15 per diluted share or $4.85 at the midpoint. The incremental increase of $0.065 from prior normalized FFO guidance per share at the midpoint is composed of $0.03 from an improved NOI outlook in our Senior Housing operating portfolio and $0.055 of accretive investments in financing activities, offset partially by $0.01 from higher G&A expectations and $0.01 of near-term drag due to a triple-net to RIDEA converting. Underlying this increased FFO guidance is an increase in estimated total portfolio year-over-year same-store NOI growth to 9% to 12%, 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 17% to 22%.

The midpoint of which is driven by revenue growth of approximately 9.2%, made up of RevPOR growth of approximately 5.25% and year-over-year occupancy growth of 290 basis points and total expense growth of approximately 6%. And with that, I will hand the call back over to Shankh.

Shankh Mitra: Thank you, Tim. While we are very pleased with our execution thus far in the year, we are 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. Our results are a function of capital allocation and portfolio management decisions of yesterday. To paraphrase buffet, someone is sitting in the shade today because someone planted a tree a long time ago. Similarly, capital allocation decisions today will drive operating performance tomorrow. So even after nearly $15 billion of capital that we have deployed since the depth of COVID and hundreds of communities undergoing operator transition, we still have our hands full to optimize location, product, price point and operators on the asset side of the balance sheet.

On the liability side, under Tim’s leadership, we are absolutely hitting it out of the park. A sharp improvement in cash flow, coupled with our recent capital raising efforts, has driven a net debt to adjusted EBITDA down to 4x, which represents the lowest level in our recorded history. In the very short-term, we maintained significant dry powder with over $6 billion of total near-term liquidity to pursue attractive capital deployment opportunities and fund other near-term obligations. In the medium term, we’ve built significant debt capacity to take advantage of when we eventually get to the other side of the Fed cycle and still maintain an extremely strong balance sheet. Said another way, we don’t believe that one’s balance sheet should be viewed as an object of vanity, but instead a — as a countercyclical tool to prudently tap into to drive part share growth.

Our balance sheet was one of the five pillars of growth, which I articulated during our last call. And while I won’t repeat all the five of those pillars today, I’ll just reiterate that our confidence in delivering outsized levels of our share growth to our existing shareholders remain as strong as ever. And while we are fortunate to have a strong multi decade tailwind at our back, just note that we will not settle for the beta of the business, and instead, we are committed to creating significant alpha again for our existing shareholders with a years of compounding growth ahead of us. We appreciate your support. With that, I’ll open the call up for questions.

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Q&A Session

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

Ronald Kamdem: Great. Just — good morning. Just starting with the shop guidance range — guidance rate is 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?

Shankh Mitra: Ron, as we’ve 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 are pleased with what we’ve seen in the year, there’s a healthy level of paranoia in our team. We don’t know what the market will give us. We’ll report to you. Our promise to you remains that we’ll get more than our fair share of the market, but we need to see what the market gives us, and we’ll update you in 90 days, and we’ll see where we land. Thank you.

Operator: Your next question comes from the line of Vikram Malhotra of Mizuho. Your line is open.

Vikram Malhotra: Thanks for taking the question. 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.

Tim McHugh: Yes, Vikram. On the FAD side, we’ve had an ongoing conversation around this just FAD growth and we continue to focus on the long-term. On the CapEx side, growing an internal or internalizing our capital management team and growing that team has been a main initiative over the last 1.5 years. And so as we’ve done that, we’ve continued to identify value-add projects, it’s really attractive [indiscernible] adjusted returns. And so CapEx, probably a bit elevated here from a long-term run rate. But it 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. On the dividend part of the question, I’ll start, and I’ll let Shankh add anything.

But when we cut the dividend at start of COVID, we referenced cash flow as being the main driver of our dividend policy. And so that hasn’t changed. And so as we sit here today, not only is cash flow recovered pretty meaningfully from the COVID lows. So too is our confidence around the ongoing recovery in Senior Housing, and that was reflected with our updated guidance last night. So consistent with past commentary on the topic and our current financial position, you should expect that our current dividend policy is something we are actively discussing with our Board of Directors.

Shankh Mitra: I have nothing to add to that.

Operator: Thank you. Your next question comes from the line of Nick Yulico of Scotiabank. Your line is open.

Nick Yulico: Thanks. Good morning. Just a two-part 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. And then just in terms of the funding, so I just want to be clear. It seems like you’ve already sort of raised the equity to fund that pipeline. But going forward, how should we think about an equity versus debt mix for additional investments since you do seem under leveraged right now? Thanks.

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

Shankh Mitra: 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 $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. Our goal is to maximize our stabilized our full cycle earnings. And as I mentioned that you should fully expect us to use the balance sheet liability side of our balance sheet to drive significant additional part share growth on the other side of the FAD [ph] cycle.

Operator: Your next question comes from the line of Austin Wurschmidt of KeyBanc Capital Markets. Your line is open.

Austin Wurschmidt: Hey, good morning. Thanks. 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?

John Burkart: 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 two are related to 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.

Operator: Thank you. Your next question comes from the line of Jonathan Hughes of Raymond James. Your line is open.

Jonathan Hughes: Hi. Good morning. Thanks for the time. 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? Thanks.

John Burkart: Yes. As it relates to the ops team, we are finding tremendous opportunities to build out that team and do things more effectively or efficiently that are currently being done. There simply a surprise that we can bring operational excellence at our size, and so we continue to lean into that. We are finding that really throughout each of the areas that I’m involved in as it relates to investments on [technical difficulty].