Welltower Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 16, 2022

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q4 2021 Welltower Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today to Mr. Matt McQueen, General Counsel. Please go ahead.

Speaker 1

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 These statements are based on reasonable assumptions. The company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward looking And with that, I'll hand the call over to Sean.

Speaker 2

Thank you, Matt, and good morning, everyone. I'll review the quarter, reflect back on 2021 on this year end call, walk you through high level business trends and our capital allocation priorities. John will provide an update on the operational environment for show and MOB portfolios, and Tim will walk you through our triplet businesses, balance sheet highlights and Q1 guidance. 2021 was a year marked by high conviction capital deployment, Partner and talent acquisition and a powerful inflection in our senior housing business. Our belief in the long term demand thesis for the senior housing proved out as we witnessed significant occupancy growth starting in the spring of last year, which continued through Historically, seasonally weak winter seasons.

Speaker 2

Just as importantly, in the second half of twenty twenty one, we began to see a significant shift in the pricing power. Interestingly, we found this pricing power during a period of relatively low occupancy levels. After all, what industry or asset class do you know of that is able to achieve pricing power with occupancy levels in the low 70% range? Lo and behold, that pricing power continued to strengthen in Q4 and in the Q1 of this year despite the impact of Delta and Omicron. Same store RevPAR grew 3.4% in Q4, following Year over year same store revenue growth of 4.8% was the strongest quarter in the company's history.

Speaker 2

And even more encouraging is that revenue growth in U. S. Exceeded 6% with the momentum accelerating through 4th quarter. John will walk you through the details in a moment. Though I am not happy with our softpar bottom line results due to increased expenses mainly from the Omicron induced labor crisis, I continue to believe we will see significant improvement throughout the year Given the continued net hiring trends we're seeing from our operating partners, this assumes we don't experience as a highly infectious variant.

Speaker 2

We can offset the higher cost of full time employees just as we have done during the years prior to COVID. It is a significant presence of contract labor at surge pricing level that is a source of the issue. From a demand standpoint, We saw record interest in our product in Q4 that continued through January with inquiries up significantly from December. However, a meaningful number of tours got canceled or postponed as either the prospective resident or their family got COVID or a community that did not have enough employees to conduct the tour as there was a COVID crisis in the communities. However, the tours have picked up meaningfully in recent weeks and we are starting to see strong sales activity, which will translate into higher net move ins in next 3 to 4 weeks.

Speaker 2

If we are right about this, you may see occupancy growth Exceed seasonal trends, while occurring in an environment of strong rate growth. We project this will put us into the double digit NOI growth range in Q1, only to accelerate further throughout the year. As disappointed as I am about the diminished bottom line In Q4, due to $30,000,000 of agency costs compared to only $5,000,000 in Q1 of last year, I continue to believe that our 2022 exit run rate and 2023 earnings power of this platform is unchanged. Moving to capital allocation. In 2021, we deployed $5,700,000,000 across great real estate with fantastic operator and at even a better price.

Speaker 2

The most incredible aspect of this story was the granular nature of execution With a median transaction size of $26,000,000 we're not believers in elephant hunting as larger transactions usually results in value accruing to the seller. As you know, we manage this company for our long term shareholders to increase Our share value. Q4 was no exception to this consistent trend. We have deployed $1,400,000,000 of capital in Q4 across 20 separate transactions with a median size of $24,000,000 I won't bore you with the details of every transaction, but I would be remiss not to mention a couple of them, which I'm particularly proud of, including a handful of trophy buildings in Boston and Florida at a very attractive basis. But perhaps the most exciting investment of the quarter was the formation of our partnership with Andy and Glen at Quality Senior Living or QSL.

Speaker 2

It is hard to overstate how strong of a team Andy and Glenn have built from conceptualization of the product to development execution and ultimately their operational excellence. For example, despite all the labor challenges that I've highlighted, QSL have used virtually no agency labor and their buildings are well occupied. Andy, who is one of the biggest users of our data analytics platform, He's embarking on a multiyear effort to expand the Blake brand with the full support of our platform behind him. I hope you are seeing a pattern here With how our data and predictive analytics platform attracts some of the best people in the business as we offer so much more than capital. This network effect of platform execution across multiyear partnership that were formed over last few years will fuel our growth for years to come.

Speaker 2

As Delta and Omicron induced challenges reared their ugly head in Q4, Capital deployment opportunity set only expanded and that continued in Q1, which is seasonally the weakest quarter from a deal activity. With after a strong close-up 2021, we have already closed an approximately $600,000,000 investment over last 6 weeks, and I'm pleased to report that our pipeline remained robust, highly visible and actionable. While the capital market backdrop remained volatile of late, driven primarily by the Fed headlines, we're well positioned to fund our pipeline With well over $1,000,000,000 of equity and availability of liquidity in excess of $4,000,000,000 we're proud of our capital allocation track record, Both deployment and sourcing, but if capital markets volatility continues, we will access different tools from our toolbox as we have done before. Lastly, I'm very proud to announce our new partnership with Rubin Brothers, which is buying Avery Healthcare, one of our largest operating partner. Rubin Brothers, founded by David and Simon Rubin, is one of the largest family offices in the world and is the owner of prime real estate and infrastructure both in UK and globally.

Speaker 2

They are also a pioneer of investing in alternative real estate and Infrastructure as an early investor and owner of GlobalSwitch. Ruben Brothers share our optimism for the exceptional growth trajectory For healthcare and wellness infrastructure at society ages, we're particularly excited about the prospect of expanding The platform together as Rubin Brothers owns some of the most prime land and real estate in UK. Tim and I have said on this call many times that temporary degradation of cash flow doesn't necessarily mean the extraction of value. Avery, which constitutes 16% of our same store triple net NOI will be significantly delevered through this equity infusion from Rubin Brothers. Partnering with highly sophisticated global investors like Rubin Brothers validates our view Of the long term value of this business despite Wall Street's obsession with point in time coverage.

Speaker 2

In conclusion, I'm very Proud to offer execution in 2021 across operations, capital allocation and partnership. That stage is set For multi year earnings growth, as we find ourselves at the bottom of both secular and cyclical Cycles with unparalleled platform built with advanced data analytics, 20 or so growth vehicles with different partners and talent to execute on it. The pandemic has been devastating for our entire ecosystem, But we have doubled down during this massive disruption given our high conviction investment thesis. You as our shareholders can Rest assured that we'll not be resting on our laurels and that we'll continue to dig a deeper and wider moat. With that, I'll pass it over to John.

Speaker 2

John?

Speaker 3

Thank you, Shankh. My comments today will focus on the performance of our management operating segments in the quarter. Starting with our medical office portfolio. In the 4th quarter, our outpatient medical segment delivered 2.4% same store NOI growth over the prior year's quarter despite a 20 basis point decline in occupancy. We continue to see strong retention rates at 86% in the 4th quarter And with increasing construction costs and rising market rates, we will continue to push renewal rates in exchange And accept the reasonable level of increased turnover and related frictional vacancy as we maximize the value of the portfolio.

Speaker 3

Now turning to our senior housing operating portfolio. The strong demand base recovery in the senior housing business continues to strengthen. The show portfolio same store revenue increased 4.8% in the Q4 of 2021, representing the 1st full period of year over year same store revenue growth since the beginning of the pandemic. Occupancy grew 90 basis points over the prior year's quarter, Again, the 1st year over year increase in occupancy since the beginning of the pandemic and the largest year over year gain for any quarter since 2016. Sequentially, the show portfolio spot occupancy increased approximately 70 basis points during the Q4 to 77.7%.

Speaker 3

Compounding these strong occupancy trends is a notable shift in pricing power. Over the second half of the year, operators have successfully raised and are again able to charge community raised rates and are again able to charge community fees, both of which were reflected in a 3.4% year over year increase in RevPOR during the quarter. And following an outsized increases on January February renewals with little to no pushback, We expect further acceleration in RevPOR growth over the course of the year. Geographically, each of our markets, Canada, the UK and the U. S.

Speaker 3

Are showing improvement in same store top line metrics through the quarter. Our Canadian portfolio, which has lagged the recovery, posted a year over year revenue decline of 3% in Q4 2021. However, the revenue decline improved Intra quarter moving from a decline of 4.2% in October 2021 to a decline of 1.4% in December 2021 compared to the prior year's respective months. Sequentially, the Canadian same store portfolio grew at a revenue rate of 1.8% in the 4th quarter. In the UK, our same store revenue increased 7.8% during the Q4 on a year over year basis, Accelerating from 7.1% growth in October of 2021 to 9% in December of 2021 compared to the prior year's respective months.

Speaker 3

Finally, in the U. S. Where the majority of our portfolio is located, year over year revenue growth in the 4th quarter was 6.3%. The acceleration in revenue growth was particularly pronounced in the U. S, accelerating from 3.8% in October 2021 versus the prior year's month to 9.1% in December.

Speaker 3

Despite these encouraging top line trends, expenses increased 8.8% year over year, driven largely by excessive agency cost. The combination of holiday time off and Omicron disruption led to an increase in agency cost in the quarter, Almost 4.5 times agency expense versus the prior year's quarter. Excluding agency costs, expenses increased 5.3%. Stress in systems highlights opportunities and issues and the extreme stress in the healthcare system brought on by COVID has identified some opportunities to improve the value proposition for our hardworking healthcare workers. The agencies have been a temporary crutch, which will provide a short term option for both operators and the healthcare workers.

Speaker 3

That said, the excessive use of agencies is truly short term in nature The exceptional premiums that they charge as much as 6 times the base rate during the recent holiday period do not pass through to the agency employees who typically do not receive benefits either. The quality of life and their work experience is substantially less desirable than that of a permanent employee. Agency employees lack the connection to their co workers and customers that they desire as they travel from site to site, City to city and state to state on a daily basis often away from their families. Additionally, agency employees are less efficient as they do not know systems nor the processes of the operator or the site nor the specific customer requirement. Our operators have many workflows underway at this client and same store NOI of 9.3% in the Q4 of 2021, but still marked an improvement from Q3 2021.

Speaker 3

With over 50% of operators delivering positive NOI growth for the period. The recovery continues to strengthen despite recent Omicron disruption, and we remain confident in our ability to drive significant NOI growth in 2022. Through January, agency labor expense has declined as staff cases have fallen. Agency labor is expected to moderate further through the first half of twenty twenty two and decline substantially in the second half of twenty twenty two. The other disruption caused by Omicron was a record cancellation of tours, which Shankh described.

Speaker 3

However, at this point, Weekly staff cases are down 81% from their peak, including an 89% drop in the U. S. And we're seeing operations normalize. The disruption of tours and sales caused occupancy to fall about 20 basis points in January. However, with the high level of traffic, We expect that the continued occupancy gains will return and that we will regain lost occupancy by the end of the quarter.

Speaker 3

Here are some quotes from our operators about the strength of traffic and deposits. Digital inquiries We're up 36% over 2019 in the Q4 and continued strong in January. And our 4 week averages for inquiries, tours and deposits are the highest they've been since August 2021, we are seeing week over week growth in deposits, up 10% the last 4 weeks running. We are experiencing the strongest January for inquiries in several years. And finally, Our inquiries from the last week alone have been the highest numbers we've ever experienced.

Speaker 3

In closing, I have shifted from full immersion in the business to planning and action. I'm even more excited about the future opportunities across the Welltower platform. We are leveraging our proprietary data analytics platform and operationalizing the data to drive results. This process is occurring right now As we have several workflows underway, which we expect to bear fruit in the immediate future as well as many more workflows that we expect to drive our outperformance in the quarters and years to come. I continue to be appreciative of the warm welcome and excitement expressed by our operators as we leverage our combined real estate operating company and care experience to improve the customer and employee experience and drive financial results.

Speaker 3

Each operator has a unique expertise and opportunities. We've been working very well together and offering support where needed from implementing best practices to applying data analytics to improve their business. In one case, we identified a software tool over 25 years old. As they say, the 90s called and they want their beeper back. I'm confident there is a substantial opportunity to implement operational excellence across the board and bring the basic back office and sales operations up to match the high quality of care the operators are delivering, which will drive significant margin growth in the years to come.

Speaker 3

I'll now turn the call over to Tim.

Speaker 4

Thank you, John. My comments today will focus on our Q4 2021 results, performance of our triple net investment segments in the quarter, Our capital activity, our balance sheet and liquidity update and finally our outlook for the Q1. Welltower reported 4th quarter net income attributable common stockholders of $0.13 per diluted share and normalized funds from operations of $0.83 per diluted share relative to guidance of $0.78 to $0.83 per share. Our results included approximately 18,000,000 or $0.04 per diluted share of HHS funds and other out of period government grants that were not previously budgeted. Turning to our triple net lease portfolios.

Speaker 4

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 ninethirtytwenty 21. In our senior housing triple net portfolio, same store NOI increased 4.2% year over year, Driven by improvements in rent collections, our lease is currently on cash recognition and the early impact of rental increases tied to CPI. We expect the impact of both these trends to accelerate into 2022 as rent collections improve and given that 20% of our leases subject to CPI based escalators. Trailing 12 month EBITDAR coverage was 0.8 times.

Speaker 4

Looking forward, we expect coverages to inflect positively in the first half of twenty twenty two as year over year improvements in fundamentals followed the positive trends expected in our senior housing operating portfolio. Next, our long term post acute portfolio generated negative 0.8 percent year over year same store NOI growth. However, similar to our senior housing triple net portfolio, we expect NOI growth to improve in 2022 Through greater rent collections and leases currently on cash recognition as well as CPI based rent escalators. Trailing 12 month EBITDAR coverage was 1.29 times. Over the course of 2021, we completed $458,000,000 of long term post acute dispositions at a blended cap rate of 8.7% with an additional $108,000,000 under contract for sale at year end.

Speaker 4

As a result, our long term post acute portfolio represented just 5.2% of total in place NOI year end versus 10.1% at the end of 2020, a 490 basis point decline driven largely by the exit of our Genesis relationship. And lastly, Health Systems, which is comprised of our ProMedica Senior Care joint venture with ProMedica Health System, Had same store NOI growth of positive 2.75 percent year over year and trailing 12 month EBITDAR coverage was 0.39 times. Sequential improvement in coverage was driven by the previously announced agreement to sell 25 assets that have been contributing negative EBITDAR. As of year end, we completed the sale of 21 of those assets with the remaining 4 held for sale. Turning to capital market activity.

Speaker 4

We continue to enhance our balance sheet strength and position the company to capitalize our robust and highly visible pipeline of capital deployment opportunities by utilizing our ATM program to fund those near term transactions. Since the beginning of the Q4, we've sold 11,300,000 shares via forward sale agreements An initial weighted average price $85.06 per share for expected gross proceeds of $961,000,000 We currently have approximately 11,100,000 shares remaining unsettled, which are expected to generate future proceeds of $949,000,000 This is in addition to $220,000,000 of expected property disposition loan payoff proceeds. During the quarter, we also issued $500,000,000 of 10 year unsecured debt maturing in 2,032 with a coupon of 2.75%. Following similar discipline in our equity funding strategy, this is our 3rd unsecured issuance of 2021, bringing full year issuance to $1,750,000,000 with an average duration of 9.5 years and a coupon of 2.6%. At year end, when factoring cash and restricted cash balances, Our liquidity position exceeded the $4,000,000,000 of borrowing capacity in our line of credit.

Speaker 4

When combined with the previously mentioned $1,200,000,000 combined unsettled ATM proceeds, Expected disposition proceeds, we're in a very strong liquidity position heading into 2022. We ended the 4th quarter with 6.95 times net debt to annualized Adjusted EBITDA, down slightly from last quarter. Leverage was impacted by the timing of $1,500,000,000 of net investment activity completed later in the quarter. If we run rate the impact of net investment activity completed in the quarter, pro form a net debt to adjusted EBITDA decreased to 6.75 times. We continue to be pleased with the momentum of our top line recovery in our senior housing operating portfolio, with portfolio ending the quarter at 77.7 percent, 70 basis points higher than the end of the prior quarter, but still 9.50 basis points below pre COVID levels.

Speaker 4

The portfolio also sits 1300 basis points below peak occupancy levels. Setting the stage for a powerful EBITDA recovery As occupancy upside and strong rent growth is coupled with significant margin expansion of a very depressed base. Lastly, moving to our Q1 outlook. Last night, we provided an outlook for the Q1 of net income attributable to common stockholders per diluted share of $0.17 to $0.22 per share And normalized FFO per diluted share of $0.79 to $0.84 or $0.815 at the midpoint. This guidance takes into consideration approximately $6,000,000 or $0.015 per share of HHS funds expected to be received in the Q1.

Speaker 4

Excluding the HHS funds, the $0.80 per share midpoint of our Q1 guidance represents a $0.015 sequential increase from an as adjusted $0.785 per share number for 4Q, which excludes $18,000,000 of previously recognized HHS and out of period UK and Canadian subsidies recognized the quarter. This $0.015 increase is composed of $0.025 from a sequential increase in senior housing operating portfolio NOI and 4th quarter investment activity and an offset of $0.01 Increase of sequential G and A and income taxes. Underlying this FFO guidance is estimated 1st quarter total portfolio year over year same store growth of 7%, Driven by sub segment growth of outpatient medical, 1% to 2% growth long term post acute, 1% to 2% Health Systems, 2.75 percent senior housing triple net, 5% to 6% and finally, senior housing operating Growth of approximately 15%, driven by revenue growth of 10%. Underlying this revenue growth is an expectation of approximately 4.20 basis points of year over year average occupancy increase. And with that, I will hand the call back over to Shankh.

Speaker 2

Thanks, Tim. I wanted to conclude this call by addressing something that you we usually don't talk about and that is our comprehensive team. We have completed completely overhauled and upgraded our team, and this was a multiyear effort Building out new areas such as breakeven analytics to create a truly scalable platform. With extremely low Volunteer turnover, we continue to hire the best and the brightest to farther deep in our capital allocation expertise. Historically, the majority of the alpha we created have been through astute raising or deployment of capital.

Speaker 2

Over the last 15 months, Though, we have also built out an industry leading and frankly a very significant development team under the leadership of Mike Ferry and Aisha Menon. The last piece of this puzzle is building out our operational excellence and asset management capabilities. This started with the hiring of John in 2021. John is building out a world class team that will accelerate value creation for her shareholders for years to come. We have added a net 51 people last year and we're likely to add another 80 new colleagues in 2022.

Speaker 2

Many of you who follow our company closely understand that our asset platform is like a coil spring today. We spent heavily during the pandemic, but most of these assets are sitting with low occupancy and thus cash flow, which is about to be released and search forward to realize its full value. Similarly, the people side of our business Platform is also a coil spring today. You are only seeing them in G and A line, but their full contribution to the revenue line will be seen in 2023 beyond. With that, operator, please open up the call for questions.

Operator

Thank you, sir. Our first question comes from the line of Jonathan Hughes from Raymond James. Please go ahead.

Speaker 5

Hey, good morning. I wanted to ask about the quality of the operator relationships in the pipeline or maybe generally out there in the seniors housing industry. I'm just wondering what the landscape looks like after a couple of years of pandemic related headwinds. I know you have a few in progress and you've had Success with several over the past few years, but how many high quality operators remain as an opportunity that you don't already have a relationship with. And what's the size of those individual opportunities?

Speaker 5

Are they Yes, smaller or larger in terms of investment volume than the relationships established over the past few years? Thanks.

Speaker 2

Fantastic question, Jonathan. As I sit right now, I can think of 2 operators that in U. S. Particularly, This is a U. S.

Speaker 2

Specific comment and that will probably be the same for U. K. And Canada, that I can think of 2 specific operators that we don't have A relationship today that I want to have a relationship. One of them we already have shaken a hand, shaken our hands this quarter and likely probably we're going to talk about Next quarter's call. So what you are likely to see, what that means is we generally have the operator base, the platform that we want Bill, you would recall that before pandemic, we talked about with you that we have a map, right?

Speaker 2

And in that map, we have different ideas of where the different types of acuity or asset should be and what kind of operator should be running those, right? We kind of generally feel out that math. Now what you're going to see, we're going to go deep. Instead of going broad, which you have seen over last, call it, 18 To 24 months, you're going to see us go very deep. And that sort of talks about we have a slide on our presentation, you can see As we talked about, give or take, these 25 to 30 relationships across all asset classes, not just senior housing.

Speaker 2

Senior housing, Medical office and wellness housing, all three platforms that we are growing pretty significantly that we think creates a very significant opportunity of That we estimate could be an upwards of $2,500,000,000 to $3,000,000,000 a year for a decade to come. But that's sort of how we are thinking about it. Going deep instead of going broad, but we'll talk about hopefully another exceptional operator relationship next quarter.

Operator

Thank you. I show our next question comes from the line of Nick Joseph from Citi. Please go ahead.

Speaker 6

Thanks. John, you talked about the challenges with the staffing agency model. As you think about coming out of COVID, do Do you expect the business model or expense flow to change to rely less on agency staffing? Or is this more of a perfect Storm, where it's hard to actually change going forward to limit the use in times of crisis.

Speaker 3

Yes. No, thank you, Nick. No, my expectation is that the business will at least get back to historical standards, where agency was A small part of the whole picture just was an assistance piece. But frankly, with the workflows going on, Yes, I think it's a very strong chance that agency diminishes even further because what has changed is The world has gone from a situation where there's an abundance of employees to a scarcity of employees. And so the employers now, the good ones, have recognized that, Fundamentally changed how they look at things.

Speaker 3

Recruiting has become a sales machine with KPIs for the recruiters, etcetera. The value proposition has changed dramatically. People are looking at what the employee experience is, words that were never said, employee experience, you don't hear that. They're looking at that and they're trying to figure out how to optimize. So some changes that are going on are people are realizing like, hey, we should change our hours slightly For some employees because they have to drop their children off at school.

Speaker 3

They can't work here because of when we start. Not a big deal for us, move it an hour and it works perfectly for them. Lot of things like that are changing. So I think from my perspective, it's great for the hardworking healthcare employees. It will be great for the operators And it will further diminish the agencies.

Speaker 3

But it will take time for this to tail off, as I mentioned in my comments. So it won't happen overnight. But I think long run, Run rate will be great.

Operator

Thank you. I show our next question comes from the line of Vikram Malhotra from Mizuho. Please go ahead.

Speaker 7

Thanks so much for taking the question. So just a question on rent growth or RevPAR and margins and just two parts Just one, in the strong pricing part you're seeing, can you talk about the mix between the in place pumps and just the re leasing Or the spreads you're seeing today and what your expectations are? And then on margin, in your bridge, it's and maybe this is not the right way to look at it, but in your bridge, It seems like you're embedding maybe a 60% to 70% incremental margin, which seems like it's reasonable. But how are you thinking about that incremental in the context of pricing power?

Speaker 3

Yes. So on the you managed to get 2 questions and that was good. On the re leasing versus the market, clearly net effective markets are up significantly. There were Concessions and community fees that well, concessions that were given, communities that were waived, that's all reversed itself. And so certainly at one point, if you go back in the industry, Market rents were below in place.

Speaker 3

That's now changing. And from an in place perspective And overall, the rents are moving up pretty significantly, very consistent with the comments that Shankh made previously with the expectations of Mid-5s to 10% in that zone. What we're seeing is a lot of strength in the marketplace and a recognition that costs have come up and it takes a certain amount of money to provide great care and that's what people want.

Speaker 2

Vikram, to answer your second question, we are Getting you back to the pre COVID margin on that slide, I think you're referring to Slide 17. There is no question that if you have pricing power that will improve, but remember you also have higher labor costs. So to the extent that you have Higher pricing power in excess of higher labor costs, you will see upside to that margin. But it is getting you back to Q4 margin Q4 of 2019 margin for the portfolio that was there in Q4 of 2019.

Operator

Thank you. I show our next question comes from the line of Derek Johnston from Deutsche Bank. Please go ahead.

Speaker 1

Hi, everyone. Good morning. So in 2021, you had $5,700,000,000 in gross investments, see off to a solid start here in 'twenty two. So do you believe 2021 number is the high watermark? Is that level of acquisitions repeatable or even beatable this year?

Speaker 1

And has anything changed in your terms of your ability to source opportunities or even competition for deals since our last call?

Speaker 2

Has anything changed? The answer is yes. So if you think about what we have been saying that we are mostly focused on what we have been buying As you can see, the average age of those assets would indicate they are the children of supply over cycle of 15 to 19, Right. What you had is disruption from the revenue side because of all these variance. Then you had a disruption from the Cost side because of our employee situation that we talk about, something changed there.

Speaker 2

Yes, something has in last, call it, 4 to 5 days. And that is what you didn't have is the pressure from financing costs. All construction loans are made on LIBOR, right? Pretty much all construction loans, a variable rate LIBOR based loan. And obviously, if you look at how the outlook for Fed has changed over last, call it, 45 to 60 days, You can imagine that hard pressure is just about to come, which is higher financing costs.

Speaker 2

So something has changed. And now going back, is this the level of acquisition possible or beatable? The answer to that question is very simple. We're not a volume driven investor. We're a value driven investor.

Speaker 2

If the volume is there to create partial value, We will do it. If not, we will not do it. That's just as simple how we allocate capital. The success of a team Is not measured, at least our team in our opinion, is not the growth of the enterprise, but part share value creation For existing shareholders. So as long as that opportunity is there, we'll absolutely do it.

Operator

Thank you. Our next question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.

Speaker 8

Yes, thanks. I guess I just wanted to circle back a little bit on the guidance just to make sure, Tim, I understood. In the 10% Revenue growth that you talked about for show, again, what was occupancy and what was rent? And then what is included in the expense side from the elevated levels that you saw in Q4? Are you sort of assuming the same level In Q1, is Q4 or did you assume some moderation?

Speaker 8

Thank you.

Speaker 4

Yes. Thanks, Steve. So on the revenue side, we're assuming 4.20 basis points Occupancy increase on a year over year basis driving that 10% revenue growth. So the remainder of that revenue growth is being driven by Great. And on the expense side, I think the best way to look at it is sequentially, we're talking a lot about Agency labor.

Speaker 4

We are assuming a sequential reduction in agency labor, about 10% from the 4th quarter to the 1st quarter In that pool, and that's supported by early trends we've seen in the quarter.

Operator

Thank you. I show our next question comes from the line of Rich Hill from Morgan Stanley. Please go ahead.

Speaker 5

Hey, good morning guys. I recognize you're not giving a full year guide, but I think back to 3Q 'twenty one, there were some bread crumbs given on where renewals and maybe street rates are trending. Based upon my notes, one of your competitors have talked about 8% renewals and I think you had talked about 1.5x to 2x faster than renewals for Street Rate. Wondering if you could Provide any updates on that as we think through what full year 2022 might look like?

Speaker 2

John just talked about that. The Street trade comment I made is a net attractive rent. And you are seeing because Obviously, the concessions that were given, the lack of community fees that you had, so effective net Street rate is moving up because of that. Not necessarily the face is moving, but the net effective rent is moving. We continue to see, in fact, we have seen some a couple of our operators have now moved street rate above in place rent.

Speaker 2

Couple of our very large operators have gotten much closer. So it's a pretty encouraging sort of as we look in the future. Tim just walked you through what our 10% guidance means from a rate and occupancy perspective, And that sort of gives you the second answer to that question, right? So we are a shop. We're focused on ultimately Optimization of revenue, not necessarily one component of the revenue.

Speaker 2

And on top of that, you have to think about one component of the revenue comes with higher cost, Which is labor, right? If you adjust occupancy, which obviously rate doesn't. So we're trying to optimize all of those things Together and that sort of blends to what we talked about, which is a 10 ish percent revenue growth in Q1, 15% NOI growth in Q1 And that NOI growth should continue to accelerate as we get to the year for two reasons, right. One is as you build occupancy, You will get obviously your marginal margin will expand obviously, right? So that's one point.

Speaker 2

2nd, you will get a continuation of sort of Barn off of the agency labor that you got. So that's sort of 2 things together, you will get an acceleration of NOI growth as we get to the second half of the year.

Operator

Thank you. I show our next question comes from the line of Juan Sanabria from BMO Capital Markets. Please go ahead.

Speaker 6

Hi, good morning. Thanks for the time. Recognizing again you're not giving full year guidance, but one of the larger operators Space talked about 500 to 600 basis points of occupancy growth for the year as their target. So curious how you feel excluding And a new COVID wave, how that feels to you, particularly given seasonality is still apparent in the business and typically you don't Necessarily gain occupancy outside of the Q3. So just curious about your general commentary and targets for occupancy growth for the year.

Speaker 2

Yes. So first, you said the magic word excluding any more new variant, right? So that's a very important one you mentioned there. And despite that, I'm not going to venture a guess of what it will look like. I will tell you there are a couple of things to think about.

Speaker 2

Last year, you got a massive Disruption in Q1, you had a significant occupancy loss. So you started at a big hole and you had to climb up that hole to get to a point where on an average basis You can build out the occupancy. You don't have that problem this year, right? John talked about January, our occupancy From point to point, it's down 20 basis points, which is probably will make this January the best January we ever had, Seasonality perspective. So you don't have a hole to climb up.

Speaker 2

2nd, you have better demographics this year. You can see the demographics is building. So you have more demand there and that's sort of playing out for all the leads and other data that John disclosed on his script. 3rd, you have significantly lower number of deliveries this year, right? So and then if Under your assumption, if we don't get hit by 4 waves like we did last year, and hopefully that will translate into better occupancy growth.

Speaker 2

I'm not going to comment on any specific operator or try to sort of venture against what entire year is going to look like. However, the table is set. If all of these things we just discussed play out, we'll see a better year. But we're long term investors. We're not focused How occupancy plays out this quarter versus that quarter, but we're pretty optimistic because of what the underlying trends we see in the marketplace.

Operator

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

Speaker 4

Yes, hi. Just curious on the Watermark transaction, what was the pricing difference between, I Just the entry fee assets versus the rental, just in terms of like a rough cap rate difference?

Speaker 2

Mike, we're not going to Get into a specific deal, let alone things within the specific deal, right? Obviously, as you know, how these things play out is that you We're not going to get into it. We have talked about, I believe in the last call, That what we like about that transaction is, A, the price per unit was very attractive to us, B, some of the underlying lanes that ultimately as you are thinking about real estate investment, you have to think about the DART, Exceptional, Darragh. And 3, we think there is value to be created because of what these assets are And the lands that come with it and what you can do with the zoning. With all of those three combined, we're very excited about The portfolio we bought, but we're not going to get into economics of a specific deal, let alone Different parts of that deal.

Speaker 2

That just will put us in a significant violation of a confidential agreement that we have signed.

Operator

Thank you. Our next question comes from the line of Connor Zavisky from Berenberg. Please go ahead.

Speaker 5

Good morning out there. Thanks for having me on the call. Just want to keep this simple, focusing on senior housing in particular in consideration of the value based investment approach. So in this positive environment for pricing, I mean, do you expect to see some cap rate compression this year on increased competition? And then How does this change the opportunity set for you?

Speaker 5

Does that mean more granular transactions or perhaps a restriction in activity on your end or

Speaker 2

Yes. Conor, I answered this question earlier. I'm just going to repeat what I said. What's changed is there's a third Stress that's coming and that's because majority of construction loans are done on a floating rate basis, If not all of them are done on a floating rate basis. And you have a very significant sort of a potential increase of LIBOR that's coming to the pipe.

Speaker 2

That will put even more stress in the system. And the second point is we're not cap rate buyers. It is hard to cap rate is a stabilized concept. Senior housing is anywhere but stabilized at this point. I do not expect Cap rates, even if you are talking about in the context of stabilized cap rates, I do not believe there is going to be It's significant compression.

Speaker 2

In fact, I think a lot of institutional investors are looking at all asset classes, including many we own We talked about historically that underlying growth rate versus inflation adds up in CapEx makes no sense, right? I've talked about, For example, for quarters after quarters that given sort of the outlook of what the forward curve was telling you, Inflation breakeven and others, it made no sense to me for what people who are paying for MOBs with 2% growth rate. Finally, it seems like there is an obviously an understanding on the institutional investor side. People are waking up to say, what did I buy for this and how do I make return? So I think there has to be a reconciliation of when you look at your IRR, you have to think about What is the real growth versus a nominal growth?

Speaker 2

And that's going to show up. That's going to show up at your exit. And we're a long term IRR virus. We think through And that's why we refuse to chase the market. You have seen that for years years we have done and there was not going to be any difference in that discipline going forward.

Operator

Thank you. Our next question comes from the line of Rich Anderson from SMBC. Please go ahead.

Speaker 9

Thanks. Good morning. So Shankh, you have said in the past that you are not likely to be an elephant hunter, You get noise in the system when you go too big and I can appreciate that, but that is a different Mentality versus your predecessor. So if you're not willing to be a buyer as an elephant hunter, Is there anything that you could see from the sales perspective that could be I mean, if you're at $26,000,000 average deal price on the buy side, what do you think your average deal price would be on the sell side, That mentality toward

Speaker 2

Yes. Very good question. It's extremely astute observation. Look at 2020 Look at how many billions we sold and if you looked at the disposition, you will see sales were done on a multiple of the buys, right? I don't know exactly what the number is, but it is likely to be multiple of that $24,000,000 $26,000,000 that we mentioned.

Speaker 2

We want to buy retail and sell buy wholesale and sell retail. That's what we do, right? Fundamentally, no matter what investment class you are, it's something very simple how you make money is buy low, sell high, Right. That's ultimately is how you allocate capital to make money. So portfolio, when there is a lot of hunger in the market to buy certain asset Class, portfolio premiums are real.

Speaker 2

So you go sell portfolios, but you buy smaller assets. I think we have mentioned That $5,700,000,000 we bought, median size of the transaction, not median size of the building, median size of the transaction was 26 That's how we create real value.

Operator

Thank you. I saw our next question comes from the line of John Pawlowski from Green Street. Please go ahead.

Speaker 4

Hey, thanks for the time. John, as you pick through the SHOP portfolio either by property type, AL, IL, memory care or geography, are there any signs within the portfolio of structurally higher vacancy rates Well, where maybe move in percentage or just not improving in recent months or occupancy is actually sliding here?

Speaker 3

No. Each area is improving across the board. Yes. With the starting point that we're at right now is, of course, pretty low. So, the bar is low to build from.

Speaker 3

As we get to an optimal level, which would be Substantially higher. Your question is a good question and there may be some things that become more apparent. But At this point in time, everything is working across the board.

Operator

Thank you. I show our next question comes from the line of Michael Carroll from RBC Capital Markets. Please go ahead.

Speaker 10

Yes, thanks. I wanted to transition to the triple net portfolio for Tim, can you quantify how many triple net tenants are on a cash basis today? And what's the difference between the current cash that's being paid and recognized compared to the contractual rents on those leases?

Speaker 4

In the Q1 sorry, Q4, it's about 15% to 20%. It's kind of stayed within that range For most of the last few quarters. So that's the quantum of kind Of how much of that in place rent is being recognized in a cash basis? And I don't have the gap to contractual right now.

Speaker 2

But Mike, remember, all of our triple net senior housing portfolio is in U. S. And UK, right? And you can see how much that cash flow is sort of inflected at or expected to be inflected this year because they're obviously on cash. The underlying NOI is what we eat and that underlying NOI is going up significantly, which is translating into that same store triple head Growth expectation that Tim just gave you.

Speaker 2

In other words, we took the hit by putting it obviously on cash recognition. Tim talked about that on many calls. Now we're on the other side of

Speaker 3

that.

Operator

Thank you. Our next question comes from the line of Steven Valiquette from Barclays. Please go ahead.

Speaker 11

Great. Thanks. Good morning. So all your commentary on the labor That was definitely helpful. I guess I'm curious for the $30,000,000 of the agency labor expense absorbed in the 4th quarter.

Speaker 11

Is Is there any further color on whether that was fairly evenly spread geographically across the SHOP portfolio? Or did you find it was geographically concentrated maybe in a few markets? And also since Welltower Inc. Earnings Conference Call. And also since

Speaker 3

Welltower Inc. Earnings Conference Call. And also since Welltower Inc.

Speaker 11

Earnings Conference Call. And also since Welltower Inc. Earnings Conference Call. In rural versus urban markets just in general? Thanks.

Speaker 3

Sure. That's a great question. And we've done an awful lot of Studies on that particular issue, leveraging our data analytics team. The interesting thing that we found is, it gets back to my comment on stress Identifies opportunities and issues. And when looking at it closely, clearly some markets can have a level of stress Specific to that market.

Speaker 3

But then when you dig deeper in, you find out that tremendous amount of assets have 0 labor And selected assets have a lot of agency selected assets have a lot of agency. The cause of that is a combination of, In some cases, Omicron came in and had a material impact on a great amount of staff, which is no surprise. In other cases, my belief, Frankly, it is leadership. And that's partly what gives me great optimism in moving forward in solving this because The leadership issues are solvable and the leadership issues, this is one indication, but they also tie to other issues, occupancy, etcetera. So this Frankly, helps us identify some situations that will as we make adjustments, we'll improve things going forward dramatically.

Speaker 3

So hopefully that's helpful. Thank you.

Operator

Thank you. I show our next question comes from the line of Jordan Sadler from KeyBanc Capital Markets.

Speaker 10

Thank you, guys. Good morning.

Speaker 2

Good morning,

Speaker 10

Ron. Good morning. I wanted to this is sort of a little bit of a 2 parter one. I want Clarify the contract labor assumption embedded in 1Q. I think you said down 10%.

Speaker 10

So $30,000,000 of expense becomes $27,000,000 Is that the way to think about it? And then separately, Just kind of thinking about the cadence of your guidance for the SHOP portfolio in particular, right? Last time you gave sequential guidance For 4Q, right? We ended up with a surprise variant late in the quarter that ended up Providing pretty significant headwinds, especially on the labor front and pressured Numbers lower relative to what original expectations were. I'm curious how much that experience in the 4th quarter impacted sort of your decision surrounding guidance for the Q1.

Speaker 10

In other words, this appears kind of conservative relative to the increase of moderation in expenses and what seems to be a flat occupancy assumption for the Q1

Speaker 11

overall, despite the fact

Speaker 10

that you only lost 20 basis points in January. So I know that's I've asked a lot there, but I'm basically asking about the cadence on giving guidance.

Speaker 2

Yes. So John, why don't I start and Tim will finish. First is on the sand, Q1 is seasonally a weak period from an occupancy standpoint. So as John talked about, we're down in January about 20 basis points. And we're kind of thinking obviously the sales activity picked up pretty significantly, torso picked up.

Speaker 2

And we're thinking as Sales picked up, you get some lag, right, call it 20 to 30 days lag from sales to occupancy. So that kind of puts you at a Sort of towards the end of the quarter. So you don't have a lot of time to pick up that occupancy, right? So that sort of I wouldn't call that a conservative, Right. I would call that what we think was going to happen.

Speaker 2

The up 10, down 10, who cares? But just sort of generally speaking, I want you to understand what we're thinking about, You are right. I mean that will on average quarter average Q1 occupancy goes down about 70, 80 basis points. So you get sequentially flat, which would probably put an average of flat and significant year over year growth. That's a pretty good outcome because you have to think about what that means for the rest of the year, right?

Speaker 2

It's not about just Q1. The second point is, Look, I mean, I am pretty disappointed about the bottom line results in Q4. There is no two ways about it. We did not expect that Omicron will hit us like the way it did. And frankly speaking, There's 45 more days to go in that quarter.

Speaker 2

And as we have seen, if highly infectious variant comes and how that can impact you Quarter to quarter, Jordan, who knows, right? I mean, we're focused on what's the real run rate earnings power of the platform And what we see is pretty exciting, at least what we see today. But it's hard to get into Specifics are when things happen. You have an operating business, right, which is driving the marginal differences. Try to get very, very Sort of prescriptive about how exactly things are going to play out is hard to comment.

Speaker 4

I would just add to the labor So your map is correct on the expectation kind of step down. And I don't think what happened in the Q4 necessarily changes certainly very carefully anywhere like conservative in the way that we're Forecasting, but the variance in what we've seen happen over the wave is that the labor disruption has Much greater than the demand disruption, particularly over the last two ways and Omicron was a significant labor disruption. So certainly changes the way you forecast From the inputs and confidence levels around it. So not saying it's conservative, it's more of a there's a lot of uncertainty in the short term. The labor piece and how it's impacting the labor market, it being the different variances is probably the biggest reason why it's not making a longer term forecast right now.

Speaker 4

So I think as I said earlier, I think the early trends we're seeing in January are very supportive of our view on the step down in agency. And we thought that was going to be a little bit more back half of the quarter weighted. But I think in general, it still stands as a pretty good assumption.

Operator

Thank you. Our next question comes from the line of Nick Yajanko from Scotiabank. Please go ahead.

Speaker 12

Thanks. I just want to follow-up here on this agency question. So,

Speaker 3

it sounds like it

Speaker 12

could be about 27,000,000 For those costs in the Q1, if you go back to the Q3, I think it was $20,000,000 So still up versus then. And Just trying to hear a little bit more about your assumption for why at some point that expense, which is about 3% of your expenses, goes away and why you're confident that it's a COVID issue and not a tight labor market issue that's driving the use of that agency cost?

Speaker 3

Well, it's both. No doubt about it, it's both. And When you look at the Q4, some more color on that is you've got some healthcare workers, all of the healthcare workers who have worked Unbelievably, the tires were and did not take PTO for long, long periods of time. So you had Increased PTO that occurred around the holiday season and then you add in Omicron and you get the result of agency at 6x. So agency is usually 2 to 3 times the rate and it got as high as 6x.

Speaker 3

It's a surge pricing kind of like Uber. So As that backs away, that'll lower the expense regardless of the hours. But again, going back to my comments, the reality is Each of the operators have workflows in play to increase hiring and they're all working. So it was just a unique situation, The combination of the PTO and Omicron that came. So I am confident that it won't be a long term Item in the industry, but exactly how it abates is, yes, it will be over time.

Operator

Thank you. Our next question comes from the line of Tayo Okunsoyar from Credit Suisse. Please go ahead.

Speaker 4

Yes. Hi, everyone. I wanted to talk a little bit more about the Rubin Brothers transaction. I'm intrigued by it, just kind of Given, again, the high quality assets that they tend to own over here in the UK, Curious how big that JV could become over time? And if really the idea is you're going to be building Stuff like the Sunrise asset at 56th and Second, right in Central London.

Speaker 4

Is that the idea there?

Speaker 2

The idea is to expand the JV to reflect the fact that UK society is aging Just like U. S. Society is aging and there is a lack of high quality product. If you think about Ruben's own a lot of Extraordinary prime land and buildings obviously around the United Kingdom. And We're looking at a lot of opportunities to grow the platform and that could include trophy assets Just like you mentioned that Sunrise at East 56th Street, which by the way opened this quarter And it's doing pretty well.

Speaker 2

If you are in New York, you want to visit the asset, let us know. Finally, through all the noise of the COVID, And we're seeing some very early demand story there, which is playing out pretty well. But it can be, but doesn't have to be Just trophy assets.

Operator

Got you. Thank you. Thank you. I show our last question comes from the line of Daniel Bernstein from Capital One. Please go ahead.

Operator

Good morning. So I've asked

Speaker 13

a question here last second. So you talked about ramping up your development team and when I was looking at your slide and your supplemental, It's pretty noticeable that you only have 3 MOB properties under development and most everything else is senior housing. So I was hoping you might be able to talk about on the MOB side, whether the lack of development there is more lack of opportunity versus the lack of value. Just the lack of value, certainly on the acquisition side, you talked about an inflationary environment, you don't want to buy 4, 5 cap assets with 2% growth. But on the development side, is there a different story there?

Speaker 2

Yes. So a couple of things.

Speaker 3

First is our MOB

Speaker 2

pipeline is actually pretty meaningful. I don't know then Line is actually pretty meaningful. I don't know then what's in the south versus what's been reported and not reported. I can tell you That the MOB pipeline is very, very significant. It's 1,000,000 plus square feet that's fully leased.

Speaker 2

So it's probably not been reported yet. What you see is reported as a senior housing It's because we don't separate out what senior housing from our Welltower Inc. Business. It's all reported as one bucket. But a very substantial portion of our development activity is on the wellness side of the house rather than on the senior side of the house.

Speaker 2

On the senior side of the house, they're very targeted, but they're very large buildings, right? So think about, I'll give you an example. I mean, it's 56th Street, which is delivered, that's a $300,000,000 asset. If you think about 1,001 Van Ness, that's roughly a $300,000,000 asset. Hudson Yards is a $400 plus 1,000,000 asset.

Speaker 2

Brookline is $150,000,000 assets, right? We talked about Kisco, that's $170,000,000 So you have very few assets there that are substantial that does Make a difference to the number, but from a number of properties perspective, they're actually not that high. And the reason being, Frankly speaking, other than very special situations, right, think about what 1,001 Van Ness is, it's going to be the most trophy building in San Francisco period full stop or Think about Brookline, the fact that we got something entitled in Brookline in middle of Fisher Hill, I mean, right next to the Brookline Country Club, that should have taken probably 15 years Right. So just so it's a special opportunity and that's where we're executing. But other than that, senior housing development Today, in my opinion, doesn't make a lot of sense.

Speaker 2

And the reason it doesn't make a lot of sense is you don't know Where the ultimate labor cost adjusted rent will land. You just don't know that. And there is no reason To go and guess that and just obviously if you're doing for your own capital, if you're a 4 fee developer or a fee only operator, which is Mostly the people who are I'm seeing starting the development these days, because they have no money on the line, right? If it works out, it's great. I have a promote.

Speaker 2

If it doesn't, somebody else lost money. So I just don't see how that works, particularly in the context of Very high cost and high financing costs, right? So this goes back to my point that I made earlier On LIBOR based and floating rate based construction loan industry. So we are thinking about giving you additional disclosure Sometime this year about what's the wellness side of the house versus the senior side of the house, and we'll get to that. But majority of our new activity It's on the wellness side of the house, where we're a lot more confident on where the margin lands.

Speaker 2

And frankly speaking, their CapEx are much, much, much tighter to create value on the acquisition side, so focus on the development. And you're going to see, as I said, the pipeline is very strong on the revenue development side and that's just coming through. I Seth, I'll finish it by saying what you have said on that question, very important one. I still no one has explained me how someone makes money in a significant inflationary environment on a real basis, not on a nominal basis With an asset class that grows 2% with a 400 cap rate when your inflection is much higher. So someone is here to explain me that And unless I believe that would not be active on the acquisition side.

Speaker 2

You saw we bought a small MOB portfolio, Which was a high quality portfolio on Ann Arbor we bought, we bought it at a 5.5 cap, which I have said for multiple years, it sort of gives you

Operator

That concludes today's Q and A session and today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Welltower Q4 2021
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