Welltower Q4 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Matt McQueen
    General Counsel
  • Shankh Mitra
    Chief Executive Officer and Chief Investment Officer
  • John Burkart
    Executive Vice President, Chief Operating Officer
  • Tim McHugh
    Chief Financial Officer & Senior Vice President
  • Nikhil Chaudhri
    Co-Head of U.S. Investments

Analysts

Presentation

Operator

Good morning, my name is Audra and I'll be your conference operator today. At this time. I would like to remind everyone -- I would like to welcome everyone to the Welltower Fourth Quarter Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time. I would like to turn the conference over to Matt McQueen, General Counsel. Please go ahead.

Matt McQueen
General Counsel at Welltower

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 the reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC.

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

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Thank you, Matt and good morning everyone. I will review fourth quarter and the year and describe high-level business trends and our capital allocation priorities. John will provide an update on operational performance of our SHO and MOB portfolios, and Tim will walk you through our triple net business, balance sheet highlights and 2023 full year guidance. Nikhil, our newly appointed CIO is also on the call to answer questions.

While we are happy to bring back full year guidance after three years. I'll point out that many macro and business uncertainties remain. I would recommend investors and analysts to focus on 2023 exit run rate to understand the earnings power of this platform and not overly emphasize the calendar year guidance. I have mixed emotions as I reflect back on 2022. As I've described, during my prior calls, our results frankly underwhelmed our expectation during the first half of the year. While we don't like to fix that on short-term stock performance, as we believe, an appropriate window to gauge our performance is at least three to five years, you should throw tomatoes at us for generating an unsatisfactory return -- total return in 2022.

But remember, stock is a fractional ownership of the business and not a ticker. We view our fellow investors as partners for the long haul and continuously strive to improve the prospect for long-term compounding of this business. In spite of some of the headwinds that we experienced in 2022, my team and I are pleased with the underlying improvements we have seen in this platform and our talent base resulting in a strong rebound of performance in fourth quarter and further improving momentum being carried into 2023. Our recent progress is only the tip of the iceberg of many of our initiatives, will truly manifest themselves in the year -- next year or two, which I'll go in a minute.

While overall macro headwinds persist, we have seen a considerable improvement in the key indicators of the unit economics of the business as reflected by expense per occupied room or ExPOR or revenue per occupied room or RevPOR. On the expense front, we have seen significant progress on addressing certain challenges we have faced over first year plus, most notably on the agency and temp labor situation. In fact. ExPOR has moderated in Q4 to 3.4%, driven largely by a deceleration in compensation per occupied room or CompPOR to 2.6%, the lowest level we have seen in our recorded history.

At the same time, RevPOR, again the revenue per occupied room remain a consistent bright spot for us, increasing 7.5% in Q4, a clear reflection of strong pricing power resulting from our premier locations, product and operator base. As I mentioned on our last call, one of our largest operators pull forward January rent increases in Q4. Even without that, our Q4 RevPOR would have exceeded 6% plus and reflecting a broad-based strength across our portfolio. And while we achieved record RevPOR growth in 2022 of 5.5%, we expect to surpass this level of growth in 2023.

While we achieved an impressive 19% SHOP NOI growth in 2022 and expect circa 20% NOI growth in 2023, I believe we're only at the beginning of a multi year double-digit NOI growth resulting from a long runway of occupancy rate growth and operating margin expansion. And despite significant macro uncertainty, already weighing on the fundamentals of many other sectors, our confidence in future growth of our business is supported by the need-based nature of our asset class, along with a favorable demand-supply backdrop, which is getting better every single day.

I am pleased to report that 2023 is already off to a great start with January move-ins up 16% over 2019 levels, representing a meaningful acceleration from the fourth quarter. Forward-looking indicators are also showing promise in January with our total volume across our senior housing operating portfolio is up 25% year-over-year. I would be completely remiss to ignore perhaps one of the most important milestones in the 53-year history of our company and that is the private letter ruling we received, which permits us to both own and self manage independent living assets. The PLR provides us significant flexibility in operating our assets and its timing coincides almost perfectly with the build out of our industry-leading operating and asset management platform, which John and his team have been tirelessly working on.

We remain optimistic that further investment in our platform will not only result in a better margin profile of our assets, but also will meaningfully benefit the third-party operating partners across the senior living spectrum who we choose to do business with in the future. We continue to see a tremendous opportunity to professionalize and modernize the operating side of senior living business following our instinct, where there is mystery there's margin. And our PLR gives us significant ammunition to accelerate the pace for what Welltower 2.0 might look like. I want to thank Mike Garst, our tax team and many others, whose efforts have led to this game-changing treatment.

Before turning to investing environment, I want to highlight the addition of Retirement Unlimited or RUI to Welltower's roster of exceptional operating partners. RUI is one of the best performing senior housing operator in the East Coast with the highest quality programing and care centers. RUI has consistently maintained occupancy levels at north of 90% and with hardly any use of agency labor over past few years.

We announced today that RUI has assumed the management of our first community together in Alexandria, Virginia with plans to meaningfully grow our relationship in near term through acquisitions, transition and development. We're extremely excited and humbled to partner with the Fralin Waldron and and RUI otherwise All-Star President, Doris-Ellie Sullivan and welcome them to Welltower family.

In terms of growth partners, it was exactly a year ago when we announced our partnership with David and Simon Reuben, along with their acquisition of Avery Healthcare in the UK. As you know, Reuben Brothers is one of the most sophisticated forward-thinking and well-capitalized global investors with a reputation of attracting best-in class talent and technology platforms. Our thesis was validated when Reuben Brothers attracted Lorna Rose, one of the most well-respected senior housing operating executive in UK to join Avery as the company's CEO in December. Lorna has spent 25 years in the industry and was most recently with Barchester, one of the UK's largest senior housing platform.

Next on the capital allocation side, we have rarely seen a favorable environment across all our product types in all three countries we do business within. There are $20 billion plus of exit queue for core real-estate funds and perhaps even a longer one for non-traded REITs. This along with a challenging debt market give us an enormous advantage to buy the right product at the right location at the right basis. Please note that while we are under earning by more than $0.5 million of EBITDA from pre-pandemic levels, we just reported debt metrics that are better than Q4 of 2019, along with more than $5 billion of near-term available liquidity.

We have many avenues to access and deploy capital that I've described before and we remain busy on all fronts, but our north star remains consistent and simple. We strive to create par share value for our existing owners by compounding over a long period of time within our circle of competence, which we define as the area where we can assess and allocate capital with house odds rather than gamblers odds.

With that, I'll pass it over to John.

John Burkart
Executive Vice President, Chief Operating Officer at Welltower

Thank you Shankh. I am excited about our operating performance this quarter and the acceleration in growth, which we've witnessed. My first conference call at Welltower was in Q2 of July 2021. Total portfolio same-store NOI was a negative 7.1%. Since that call, the portfolio's performance has continued to improve. In 2022, despite challenges, growth was in the range of 7% to 9% for the Q1 through Q3. However, in Q4, we accelerated to 12.9% portfolio NOI growth driven by senior housing operating business with NOI growth of 28.1% despite all the challenges of the current economy.

This amazing performance is a result of both the fantastic supply-demand dynamics of the senior housing sector and aggressive asset management. I continue to see many opportunities to professionalize the business, which are being proven out through various initiatives as noted in the case studies we presented in the slide deck and clearly come through the financials when looking at the massive improvement in agency labor, which I'll outline in a moment.

It is this abundance of opportunity, the opportunity of applying proven industry solutions to the senior housing industry, which led me to reach out to my friend, Jerry Davis and engaged Jerry as a strategic advisor. As many of you know, during my multifamily days, Jerry was my counterpart at UDR, one of the largest multifamily REITs with the national platform of 60,000 apartment homes. Jerry spent 30 years in various roles at UDR and nearly 15 overseeing all the Company's operations before retiring in 2021. He and I have always shared similar views that the operational excellence requires a focus on people, processes, data and technology, which if well done, results in a superior experience for both residents and employees and ultimately drive stronger financial performance.

We've made substantial headway over the past year and a half in enhancing our management capabilities and Jerry's expertise will accelerate that progress. He'll focus his efforts on specific opportunities, while I'll continue to build the broader operating platform from asset management and operations to capital resource management renovation etc., as Welltower transforms the business. Jerry will help us to continue to accelerate change in the senior housing industry. Our work together will not simply be additive, it will be exponential, J square.

Now, I'll provide some insight into our operating business, starting with the medical office portfolio. In the fourth quarter, same-store NOI growth for our outpatient medical business was 2.1% over the prior year's quarter. Same-store occupancy was steady throughout the year at nearly 95%, while retention remains extremely strong across the portfolio at 93% for the second straight quarter and nearly 92% for the entire year. This robust retention rate helps us drive improved lease rates and continued strong releasing rates.

Turning to our senior housing operating portfolio, the 28.1% the fourth quarter NOI increase over the prior year's quarter was driven by revenue growth of 10.3% for the period. Year-over-year margin growth of 320 basis points was also the strongest of the year. All three regions showed strong revenue growth, starting with Canada at 6.6%, the U.S. and the UK, an impressive 10.6% and 19.2% respectively. Revenue growth in the quarter was driven by a 200 basis points increase in average occupancy and another quarter of healthy pricing power with RevPOR growth of 7.5%, which as Shankh mentioned is the highest we've ever witnessed. Sequentially, portfolio average occupancy continued to improve with a gain of 20 basis points during the period.

Turning to expenses, agency use has obviously been a key factor in 2022 expenses. However, in Q4 2022, just as Tim had mentioned many times, agency expense is acting as an expense deflator. Agency in our same-store portfolio is down 44% year-over-year in Q4 2002. We often quote agency as a percentage of compensation. So, looking at it that way in Q4 of 2021 agency expense was 6.9% of compensation and in Q4 of 2022, it was 3.7%. Regardless of how you look at agency, the expenses declining in the U.S. and Canada where over 90% of our senior housing portfolio is located.

The UK is still impacted by overall labor shortage as well as some rigid staffing models, which have led to lower occupancy properties being over staffed. Management in the UK is slowly adjusting to the dynamic staffing model, ensuring appropriate staffing at various levels of occupancy. Overall, CompPOR or compensation per occupied room, which represents about 60% of the expense per occupied room increased only 2.6% in the fourth quarter compared to the prior year's quarter, which is the lowest growth rate in over five years.

This moderating CompPOR growth helped drive the deceleration in overall expense growth despite continued inflationary pressures in several line items including food and utilities, which rose 10.5% and 10% respectively in the fourth quarter of 2022 on a per occupied room basis compared to the prior year's quarter. Food and utilities represent roughly 12% of expense per occupied room. The combination of 7.5% RevPOR growth, the highest in over five years with a 3.4% expense POR growth led to remarkable growth rate in net operating income per occupied unit of 25%.

Regarding our operating platform, we continue to be on pace to pilot our first module in Q1 2023 with several other modules in the works. I must say that I'm purposefully not giving out the details as they are proprietary. However. I will say that I'm proud of the creative accomplishments of the Welltower team and I'm grateful for the wonderful operators that we're partnering with on these first modules. The successes that we have had through aggressive asset management as noted in the slide deck are the results of brute force and prove the opportunity.

Operational excellence is achieved by focus on people, processes, data and technology and that is exactly what the team has done in the various initiatives that are outlined in three case studies on agency labor reduction, revenue management and care revenue. We will continue to leverage our team to drive results that the greatest opportunity will be realized as we rollout the operating platform in the coming years. Finally. I would like to thank our operators and all their employees and the Welltower employees for making these results possible. Our teamwork has clearly paid off, leading to improved resident and employee experiences and stronger overall results.

I'll now turn the call over to Tim.

Tim McHugh
Chief Financial Officer & Senior Vice President at Welltower

Thank you, John. My comments today will focus on the fourth quarter 2022 results; the performance of our triple net investment segments in the quarter, our capital activity, our balance sheet liquidity update and finally our outlook for the year ahead. Welltower reported fourth quarter normalized funds from operations of $0.83 per diluted share, representing 7% year-over-year growth after adjusting for prior period government grants and FX headwinds. We also reported total portfolio same-store NOI growth in the quarter of 12.9% year-over-year. Before getting into our segment results, I want to provide an update on our recently closed ProMedica restructure and the go forward reporting treatment.

In late December, we announced the closing of our restructured joint venture with ProMedica Health Systems and our newly formed joint venture with Integra Health. The ProMedica Health System JV consisting of 58 private pay assisted living assets, will continue to be operated under lease with ProMedica Health System and is now part of our senior housing triple-net reporting segment. The Integra Health joint venture, consisting of 147 skilled nursing properties, comprised of property joint venture and a master lease with Integra Health. The lease commenced upon closing in December as of the first tranche of the property JV with Integra requiring 15% and Welltower's taking 54% of the assets for $73 million.

As previously expected, subsequent to the year end, the second tranche of assets closed in January, as Integra acquired 15% interest in another 31 assets for $74 million. The remaining 62 assets are expected to close in the second half of the year. As for the underlying operations, the subleasing of the portfolio is progressing in line with expectations. 75% of the badge have already transitioned to condition management, but the remainder of the portfolio waiting on state-specific approvals. We will continue to update the market as the progress of management transitions in addition to underlying property level fundamentals.

Now turning to performance of the rest of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats are reported a quarter in arrears. These statistics reflect the trailing 12 months ending 09/30/2022. In our senior housing triple-net portfolio, same-store NOI increased 4.3% year-over-year and trailing 12 month EBITDAR coverage was 0.86 times in the quarter. Next, same-store NOI on long-term post-acute portfolio grew 4% year-over-year and trailing 12 month EBITDAR coverage was 1.34 times in the quarter.

Turning to capital market activity. In the quarter, we settled $1.5 billion of previously raised equity through our forward ATM program, helping to bring debt-to-EBITDA down to 6.31 times at year end, a substantial decrease of nearly 7 times at year end 2021 and below pre-COVID levels of Q4 2019. For the year, we settled a total of $3.7 billion of equity to fund $3.7 billion of net investment activity, allowing us to continue to play capital into a desiccated private market while materially delevering the balance sheet. Looking-forward, we ended the year with $722 million of cash, full capacity on $4 billion revolving line of credit and $383 million expected proceeds from near-term dispositions and loan pay downs, representing $5.1 billion in near-term available liquidity.

Before moving on to our 2023 guidance, I wanted to add more context to Shankh's earlier commentary around the opportunity provided to our company by last year's private letter ruling. Nearly 14 years ago, Welltower's stuck its first day of management agreement, giving a direct economic exposure to senior housing operations. Over the last five plus years, we've built a better and stronger alignment within this contractual structure, ultimately reaching to a point in 2021, where we can generate meaningful ROI through centralized human capital and technology investment at Welltower.

We hired John Burkart and started to build a team around him. The PLR we received last year allow us to meaningfully accelerate that effort as the ROI friction is entirely removed under self management. This Welltower platform investment is evident through G&A with greater than 80% of our expected year-over-year increase in overhead costs being driven by technology investment and new position additions in 2022 and 2023, focused primarily on asset management, data analytics and technology. We continue to believe that the opportunity to both modernize operations and drive efficiencies through scale in our business is vast and creates a sustainably strong cash flow tailwind when combined with the demographic driven demand of the next decade plus.

Lastly, moving to our full year guidance, which we are reintroducing for the first time since COVID uncertainty began impacting our business in March 20020. Last night, we provided an outlook for 2023 of net income attributable to common stockholders of $0.57 to $0.75 per diluted share and normalized FFO of $3.35 to $3.53 per diluted share or $3.54 at the midpoint.

As mentioned in the release, our 2020 guidance contemplates no HHS funds or other government grants we received in the year. So, after adjusting for $0.07 of non-recurring government grants received in 2022, we are guiding for 5% year-over-year growth. This year-over-year increase in FFO is composed of $0.36 in growth in our senior housing operating portfolio and $0.03 in growth across the rest of our segments. These were offset by $0.04 of prior mentioned higher G&A and Welltower platform costs and $0.19 interest in foreign exchange headwinds.

Underlying this FFO guidance is estimated total portfolio year-over-year same-store NOI growth of 8% to 13%, driven by sub-segment growth of outpatient medical 2% to 3%, long-term post-acute 2% to 3%, and senior housing triple-net of 1% to 3%, and finally, senior housing operating growth of 15% to 24%. The midpoint of which is driven by revenue growth of approximately 9.5%. Underlying this revenue growth is an expectation of approximately 230 basis points of year-over-year average occupancy increase and rent growth of approximately 6% in the quarter.

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

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Thank you, Tim. While we ended 2022 on a positive note, it was also a year of sheer grit and perseverance from our team. As we face different challenges in our business with the expense pressure, development cost pressure of ProMedica, we remain steadfast in our belief that our job as towards of our shareholders' capital is to solve problems when we encounter on this journey. And not to rip the Band-Aid off and give away potential future upside to private equity to profit from either because one, it is the easiest thing to do instead of working things out or two, the feeling of instant gratification as Wall Street tends to cheer such decisions.

We see too many market participants mix-up short-term volatility with long-term risk or permanent capital loss. As our partners in the business, our investors can count on us to take tough road to deliver strongest returns we believe are achievable when we face challenges. This is evident in the build out of our operating platform and our transaction with ProMedica and Integra.

To paraphrase, [Indecipherable] you can rest assured that we have a deferred gratification gene imprinted all over our culture and we remind ourselves every day that big money is made not in buying and selling, but in winning. Lastly, I'm extremely delighted to see many of my partners recently appointed to the executive and senior management roles within the organization, who grew up in the business fighting it together in the tranches and I'm convinced that we have the deepest bench strength, along with the longest runway as I look across the real estate space.

Supplementing this talent is our unmatched data and machine learning capabilities, which allows us to efficiently and cost-effectively evaluate new investments, as well as reinvestments in our portfolio. In addition to our strength of our existing team, we continue to attract best-in class talent from outside the industry who share our belief that the future of our business may look very different from the past. Simply said, we want to attract talent that comes from the industries with higher standards.

And to that point. I could not be happier that John has convinced Jerry Davis to join our team. As you all know from his many years in multifamily sector, Jerry has one of the sharpest operating mines in real estate. I have known and admired Jerry for 15 years and cannot be more excited to work with him and learn from him. I am more convinced than ever that John along with Jerry will have an exponential impact and transform this industry. If you are or know someone of that operating caliber and more importantly have an outsiders mindset from a related or frankly unrelated industry who wants to join the formidable team of J square, please let us know. Welltower is wide-open for business, not only for asset acquisition, but also for talent acquisition.

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

Questions and Answers

Operator

Thank you. [Operator Instructions] We'll take our first question from Jonathan Hughes at Raymond James.

Jonathan Hughes
Analyst at Raymond James

Hey, good morning. I wanted to...

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Good morning, Jon.

Jonathan Hughes
Analyst at Raymond James

I just wanted to ask about the increasing operator relationships. Obviously, we just saw another one yesterday with RUI, you talked about more opportunities -- expected opportunities in the future, but I'm wondering what the landscape looks like after three years of these pandemic headwinds? How many high-quality operators remain as an opportunity that you don't already have a relationship within? What's the size of those individual opportunities? Are they smaller or larger in terms of investment volume than the relationship established over the past few years? Thanks.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Jonathan that's a very, very good question. So, as I think about, if your question is specific to senior housing industry, I see that, obviously, we have most of the operating partners that want to do business with we already do business with. So, expansion of new operating partners is less of a focus and going deep rather than going broad is our focus. We are looking for striving for regional density with our existing partners across the different country, right.

Now, we have -- I mentioned before that we have -- there are operating partners in the business are operators in the business that we admired for a very long period of time and this is a long dating process, it takes a long time for both parties to understand how we can add value to each other, right. Capital is the commodity, just capital -- us bringing capital to an operating partner, frankly speaking, in any relationship is not enough. And for our perspective, so we bring in data analytics and other operating platform initiatives that John is doing to the equation.

At the same time, we want to understand whether these operating partners are thinking about the business of where the business is going 10, 20 years from now, not where the business what tend to do us from 10, 20 years ago, right. There is a significant mind shift that is needed in the business and frankly speaking, as I mentioned a few minutes ago, we need higher standards: higher standards of employee engagement, higher standards of customer service and higher standard of how we treat capital and what we -- how we deliver results for the capital. And those are the type of operating partners and business partners that we're looking for and we're grateful that we have a fundamentally fantastic rooster of people to drive business with.

Now, going to the second part of your question, from an investment volume standpoint, I want to reemphasize, you're going to see majority of the investment volume with existing partners, as well as sort of the partners that we have already announced in last couple of -- two, three years.

Operator

We'll take our next question from Michael Griffin at Citi.

Michael Griffin
Analyst at Smith Barney Citigroup

Great, thanks. Maybe just on transaction activity. Maybe Shankh, I know you've always talked about how you're an unlevered IRR focused investor. I'm curious, if you've seen any change in maybe hurdle or return rate that might get you more excited about one property type relative to another. I know you seem pretty positive in your opening comments, but any additional clarity there would be helpful.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Michael, if you think about different times give us opportunities for different types of product. You have seen us buy and sell every product that we own in last, call it, seven years, eight years under this -- under the leadership of this team, right? So because different times you get opportunities to buy different product at a very favorable basis. This might be the first time we're seeing across all our product types, across the three countries that we do business with in, we're seeing opportunities, right? This is a very, very disruptive time from not only from debt side but also from equity side, the people we normally compete against, right, the core funds, non-traded REITs and other, everybody is facing very significant flow -- outflow, either because of the denominator effect that you see in pension fund world as well as institutional world, or so other reasons such as availability of -- not availability of debt and other situations.

So we're seeing across all product types. We're seeing very significant opportunities been -- and frankly speaking, an ability to achieve IRRs that we haven't seen in some of the product types frankly forever.

Operator

We'll move next to Josh Dennerlein at Bank of America.

Josh Dennerlein
Analyst at Bank of America

Hey, guys. I guess, [Indecipherable]. It's Josh Dennerlein here. Yes, no. I appreciate all the color on the asset management platform. I'm just kind of curious how we should be thinking about is this like the full investment year and then payout start happening in 2024. Is there anything kind of built into guidance as far as like payoff? And how we're thinking about that J-squared run-rate returns?

John Burkart
Executive Vice President, Chief Operating Officer at Welltower

Yeah, I'll start and Tim may want to comment. I'm not definitely for clarity not commenting on Tim's guidance. But I think what we're seeing and what we're trying to show is the returns are already coming through. I mean, if you look at what's going on from that aggressive asset management perspective, you see that in the agency move and what the team has done, which is a tremendous amount of blocking and tackling. The additional work that we're doing really relates to scaling those things and partly why we included that in the deck is, I came in and I had a view of things from my gut, you might say, so to speak, and I probed around and got confirmation. And then we started workflows and now that, that's proving out and that's what we wanted to show, because that is critical.

We were right. There is tremendous opportunity here and the more I got into it, the more opportunity I see. When you look at J square to this exponential opportunity, it's huge. I -- my view is we're on working right now is across the whole platform, as I mentioned, and Jerry will be able to focus in on individual items and execute at highest of all levels, which will speed up our process. So bottom line is we're already delivering numbers, it will continue for many, many years. And it'll ultimately lead to significant margin improvement across the board.

Tim McHugh -- Chief Financial Officer & Senior Vice President

Now just to add-on costs. We look at this as an investment, right, I mean, human capital side and on the technology side. So you know that we run our platform very efficiently and we don't take the cost lightly as far as any further investment. But we think there's a lot of return here on investment. And so there is a bit of a lag between dollars in and hires in that return. But on a go-forward basis, I expect us to be very prudent about it and continue to be show high return before dollars are spent.

Operator

We'll move to our next question from Mike Mueller at JPMorgan.

Mike Mueller
Analyst at JPMorgan Chase & Co.

Yeah, hi. I'm curious, what's the range of margins that you think the show business could operate at at full occupancy, and to use your term, when it's fully professionalized.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Mike, I'm just not going to sit here and try to speculate what might or might not happen, but I will repeat what I've said before. If you went back to pre-COVID occupancy and pre-COVID margin, I will be really disappointed. That's why we all will be disappointed.

Operator

We'll go next to Derek Johnston at Deutsche Bank.

Derek Johnston
Analyst at Deutsche Bank Aktiengesellschaft

Hi, everybody. Good morning. In addition to the REIT community, a lot of generalist investors are closely following WELL. So I know we touched on it in the opening. But can you expand on this favorable private letter ruling with the IRS? I think around 45,000 independent living units were not really being designated as health care facilities and you are subject to RIDEA. And so what does that mean, right? And importantly, how the decision may drive further earnings growth, especially given the beefed-up asset parent important 44:30 platform? Thanks.

John Burkart
Executive Vice President, Chief Operating Officer at Welltower

Yeah, I'll touch on that. So what it means, I think the easiest way to look at it is if you just go back in REIT history a little bit and look at the multi-family world, when everyone kind of came together in the mid-90s when I started, where I was at, and what you saw is this move from fee managers to owner-operators was the fundamental shift. And what I think a lot of people missed was, there was the basic economics behind that. In essence, as a fee manager, you get paid a percentage, let's say, 5% to collect the $1, and that means you would spend more than $0.05 to the $1. As an owner-operator, you were paid $1 t collect the $1. So that you would spend $0.99 to collect $1 and so that fundamental shift enabled us as owner-operators to move much, much faster and changed how we looked at the world, whether it'd be investing in websites with technology, et cetera, or bringing things in-house, marketing in-house, et cetera. All these things enabled a tremendous improvement in margins and that's what it ultimately means is. It will allow us to step into that business and have tremendous impact on the margins.

More than that, I would say I break the business down into three components overall. There is a real estate or multi-family component; there is what I call the hospitality component, which relates to meals, housekeeping, activities; and then there's a care component. And so our various residential businesses have one to three of those parts. So as we step in and we address the real estate as well as this hospitality component at our independent living, we'll be able to take those best practices and move those into the assisted living, which we're obviously not managing. But if we find better ways, more effective way to deliver higher-quality meal service, et cetera, that will all be pushed out through our platform. No different than what we're doing right now in our case study on revenue management, how we push that out to one of the assisted living properties.

So the same concept would apply. So this is pretty huge. And it will impact our overall residential platform.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

I'll just add, Derek, one thing to that, just as I mentioned before, we're working towards regional density and going deep and not going broad with our existing partners, right? So think about it. I don't know, just you will see the future is with our select operating partner or strategic partners, we're going to have bigger density or higher density and a bigger scale in a market. And with our investment in the technology platform and the operating platform, with our operating partners' ability to execute on-the ground, I think -- again, this is going to be not only a great win for our owners, our assets, but also a great win for the select operating partners that we will choose to do business with going-forward.

So this is a very much of a focus on win-win. And that's the way business got to be.

Operator

We'll take our next question from Michael Carroll at RBC Capital Markets.

Michael Carroll
Analyst at RBC Capital Markets

Yeah, thanks. How have Welltower's relationship changed with this(48) being independent living operators since the PLR announcement? I mean, are they more willing to work with Welltower given certain goals or targets or has there been any noticeable change since that was announced?

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

The forward-thinking ones who are thinking about where the business needs to go 10 years from now, five years from now, 15 years from now, has come forward and want to participate in building out the platform together. The ones that are holding onto the notion of what the business was in the 90s, are clearly realizing that future is not with us.

Operator

Next we'll go to Ronald Kamdem at Morgan Stanley.

Unidentified Participant
at Welltower

Hey. [Indecipherable] on for Ron. Good morning, guys. Just wanted to ask about the ProMedica and Integra assets. Wondering with the new operators in place there for some of them, if you could kind of comment on the rent coverage. I'm not sure if it was in the supplement. I don't know if there were some changes there in terms of the reporting structure. So I'd love to just hear about the rent coverage. I think it would be helpful for investors given the kind of the prior history there.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Well, I think with the new operators, now we've transitioned to at least 16 operators so far and by the time dust settled, it will be north of 20 operators. But all the transitions have happened over the last month, month and a half. So it's too soon to have numbers and performance, and conversations about their performance. But overall, transitions have been smooth and in the upcoming months, we'll have better data to share on performance trends. But for now, the focus has been on getting the building in the right hand. And as you'll see, we now have 16 to 20 operators that the focus has been very deep and very sharpshooter ask where you want to find for every single asset, the right operator. So that's been the top priority so-far.

Operator

We'll go next to Steve Sakwa with Evercore ISI.

Steve Sakwa
Analyst at Evercore ISI

Yeah, thanks. Good morning. Shankh, I was just wondering if you could talk a little bit more about the investment opportunities that you're sort of seeing out there and sort of the distress in the system. You guys were obviously very active last year. I'm just curious, what it takes to sort of shake the tree and how the returns might have changed kind of looking forward on the new deals.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Steve, I don't think I have much to add. Maybe Nikhil has something to add. I'm done. I would just tell you that this is sort of the only time I've seen where there is opportunity in all three product types across all three countries, right? You usually don't see that, and that's driven by last couple of years have been primarily debt driven, right? So we have seen a lot of opportunities in the IRRs. We have done senior housing 9%, call it, circa 9%, some higher, some lower, but call it around 9%.

Historically, I've said medical office is an interesting business to buy or interesting space to invest around, call it, 7-plus unlevered IRR. Finally, we are seeing opportunities in the 8-plus level. And one the wellness side, where the cap rates have been very, very tight, IRRs have been in the 6s, we're finally seeing they're in the high 7s, right? So that's sort of, I would say, where the different investment landscape, where we're seeing [Technical Issues] depends on, some are obviously higher. We're still seeing some double-digit opportunities, but I will tell you the other thing is because it's not just debt driven but also equity driven, most of the stuff that we have bought in last couple of years, we're fundamentally focused on right location, right product, right basis. And we have bought lots of assets with no cash flow, negative cash flow. And finally, we're seeing because people have to transact, right, what's happening, we are seeing opportunities that with very good basis with very good locations assets are also starting to come with cash flow. So that's sort of I will say the slight change and nuance of the investment landscape. But I don't know, Nikhil, you want to add anything.

Nikhil Chaudhri
Co-Head of U.S. Investments at Welltower

I think the only thing I'd add is, we just go through a lot of pain and effort to try and be the highest-quality counterparty for someone to deal with, whether it is the speed of execution, whether it is across the timeframe of a transaction, sticking with what we started off saying initially the deal was. And in times like these, it just makes us the preferred counterparty. And so there's a lot of recognition for that across the street and it's times like these that we really are able to shine. So we're excited about our pipeline for the year.

Operator

We'll take our next question from Rich Anderson at SMBC.

Richard Anderson
Analyst at SMBC

Hey, thanks. Good morning, everyone. If I could just...

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Good morning, Rich.

Richard Anderson
Analyst at SMBC

Good morning. On the PLR, very, very interesting indeed. I just -- just some thoughts around it. Does this mean that we should see sort of a pace of investment from you guys to bring managers in-house for what you have currently? And how much of the IO portfolio that you have today didn't qualify? Will there be kind of changes there to have them pass the test so that they also can qualify for the PLR ruling? Thanks.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Yeah. So I'll take the second part. Think about we have independent living that is standalone, for example, holiday Atria portfolio as well as Canada portfolio, that's roughly I would say two-third to three-fourth of the independent living that we own, that obviously qualifies. How this relates to -- when independent living, as a part of the continuum, we will figure that out. Most importantly, I want to focus on what I've said before that you will see with our forward-thinking select operators who have density, you will see that we will building out the platform, right? John has mentioned very clearly that he is building out of blocks with our best operators, right? This is not a question of what part we'll do in-house versus what part we'll do with our operator.

We have also another 15,000, 20,000 units in the wellness housing sector here which obviously we always could have done in-house, right? So this is finding the right balance of retail density with all the product that's around that region and bringing in-house where we have the density versus or keeping it outside, when our partners have density.

So the game is not to who does what. This is not a fight of just because we do something we'll do it better. The main goal is with our operating partners build this operating platform to the highest-quality technology and systems and processes and data to deliver the best outcome for our residents as well as frankly employee experience.

John, you want to add anything to that?

John Burkart
Executive Vice President, Chief Operating Officer at Welltower

Yeah. I mean, that's said perfectly and I would just add sense of the speed, you can only imagine we're moving and we have been moving extremely fast to address the opportunities that we see. We will definitely build on success. It's not exactly what John said, it's not about going out and trying to control everything. It's about creating success that drives value to all the various stakeholders. So that's where our heads are at and in the end, there'll be a little bit of a lag in the sense of where we spend money on G&A versus where we start to offset that, because of reduced fees because we're just moving it like the multifamily move-in to property management services onto the book. So little bit of a lag there, but ultimately it will offset and then improvement will be in margins.

Operator

We'll go next to Juan Sanabria at BMO.

Juan Sanabria
Analyst at BMO Capital Markets

Hi. Good morning. Just wanted to hit on the SHOP same-store NOI growth guidance. Shankh, I think you mentioned in your opening remarks about the exit run rate and focusing on that. So maybe hoping you can provide a little color there. And should we assume that there is any incremental transitions in 2023? You mentioned RUI have been going, going forward to transitions as well. So just curious, if you could maybe just comment on those two moving pieces.

John Burkart
Executive Vice President, Chief Operating Officer at Welltower

Yeah. Thanks, Juan. So on the transition piece, we will start with that. There is not a conflation of further transitions in our guidance. So our first quarter has about 85% of our open and operating buildings since October 31; our first-quarter has 85% of that same-store and that grows to mid 90s, so on average kind of 90% of the open and operating assets in that pool.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

What was the first question?

Juan Sanabria
Analyst at BMO Capital Markets

The cadence for the exit run rate.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Yeah. So if you think about it, we're building occupancy, right? You know that Q1 is sort of the weaker point in the occupancy spectrum. And you build occupancy -- occupancy growth happens through spring and summer. So your occupancy build on an average basis, you get closer to sort of that Q3, Q4 level where you will get a better revenue, if you will, right, sort of in that annual journey.

Now think about expenses, which are also coming down, right? So you have -- you probably have a better -- significantly better exit run rate in Q4 than Q1, right, so following both revenue as well as expenses. Now think about how other situation that I've described before, I think the last call, maybe the one before, is how RevPOR builds, right? You move your rents on a bunch of people at the beginning of the year and -- as well as for our portfolio, just call it, half-and-half. We also have a very large operator who moved in Q4, but just think through how that plays out. And then you chase that in-place rent through your market rent, which is also going out for the year.

So if you think about from an occupancy, from rates, from expense movements, which is, we are glad that agency cost is down from, call it, 7 to sub-4. We were very unhappy it's still sub-4. It should be significantly lower than that. So if you think through all of the main drivers, you're going to get a much higher exit run rate in Q4 than Q1.

Operator

We'll move next to John Pawlowski at Green Street.

John Pawlowski
Analyst at Green Street

Hey, thanks for the time. John Burkart, can you just give me a sense for how much more pushback your operators are seeing on rent increases today than in recent quarters where they've had no issue pushing rents? And if there's any segments of the portfolio that are starting to hit a wall on just in terms of absolute rents? Any color there would be appreciated.

John Burkart
Executive Vice President, Chief Operating Officer at Welltower

Yeah, no, glad to. I am not aware of any pushback. It's not to say, of course, when the rent increase goes out, there is not a discussion, but in the sense of defining pushback back as the market responds to that, no, I am not aware of that. I think the partners have done a phenomenal job of mitigating the increases and the reasons behind those increases and I think our residents understand that they don't want to see important services and care cut. They want to have what they paid for, the best of that. And we're just not aware of any issues there.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

And John, as I mentioned, I expect rent -- RevPOR increase to be better in 2023 than 2022, so that sort of gives you a, let's see what the market gives us. But as we sit here today, we think the pricing environment is getting better.

Operator

We'll move next to Vikram Malhotra with Mizuho.

Vikram Malhotra
Analyst at Mizuho Securities

Thanks for taking the question. Just maybe building upon the pricing power. Maybe Shankh or John, if you can just elaborate, you talked about the exit run rate -- earnings run rate sort of as a guide to the earnings power. Can you talk about both on pricing and say capex, as you see inflation come in, your costs come in, your maybe ability to push higher rates, you said near term is not hampered. But as you see inflation come in but occupancy is still low, can you just give us some context on how you see pricing power evolving until occupancy recovers?

And then similarly, capex wise. After two, three years of COVID, what do you need to invest from a run rate standpoint, maybe percent of NOI, is there a uptick needed over the next few years on capex? Thanks.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Let me try that. So first on the capex, I do not believe other than inflationary changes, anything changed from a capex standpoint, right? So just to understand that we bought predominantly in last two, three years assets, we bought one or two portfolio as a value-add portfolio and when we bought it, for example, the holiday Atria portfolio, we told you exactly what we underwrote to spend on capex, right? We bought in an extremely cheap basis. And we told you exactly what that capex needs are and how we plan to invest them.

So from that perspective, as you think about going forward, I do not believe outside those couple of value-add investments that we have done and we report -- told you otherwise, when we have done it, we do not believe that businesses' capex needs outside the sort of inflationary increases that are happening, anything has changed. Now I think John has a very large plan, a very big plan to re-amenitize of the portfolio and fundamentally changing what the value proposition might look like. Also we will do that, if we think that we are getting fantastic return on that incremental investment. But from a regular capex perspective, I don't think anything has changed.

From a pricing power standpoint, I don't think what else I can add other than to what I said to John's question, an earlier question which is, we are feeling very good about the pricing power across all our countries and across all our product type. As you know that Canada has been a laggard, feels like Canada is starting to catch up. U.K. and U.S. have been strong and continue to be strong. So we're feeling pretty good.

John, you want to add anything to that?

John Burkart
Executive Vice President, Chief Operating Officer at Welltower

Yeah. I mean, again, I would just say on the value-add side, this is purely opportunistic. And I just look at the world and see our portfolio is positioned so well to come with another layer of value-add opportunities because of the age of the portfolio, which are really the highest returns, because the infrastructure is all in great shape and so you're talking about what some people would call fluff and buff but re-amenitize and enhancing the units a little bit, and really improving that value proposition and getting paid very well for it. Very much similar to what many of the multi have done. So -- but that's all enhanced returns.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Vikram, I missed one part of your question. I'll just tell you, that from a pricing power standpoint, this is something I mentioned in the last call. That we are despite our average occupancy of the portfolio, call it, circa 80%, a significant part of the portfolio, call it, give or take half of the portfolio, 45% of the portfolio is in that high 80s -- mid to high 80% occupancy. There the pricing power changes, too. I'm raising price because I've no rooms to sell, right? So there is a dynamic that's going on and increasingly we'll get to the point, as we move average occupancy for the portfolio more and more properties get in the bucket, but you will get to that pricing power because frankly, you have no room to sell. So that transition is happening and will continue to happen in 2023.

Operator

We'll take a follow-up from Michael Griffin at Citi.

Michael Griffin
Analyst at Smith Barney Citigroup

Hey, thanks. I just wanted a clarifying question. I don't recall if I heard this early, but just on the assets that continue to be operated by ProMedica, the assisted living and the memory care, what is the coverage on those? Do you happen to have that, Tim, still handy?

Tim McHugh
Chief Financial Officer & Senior Vice President at Welltower

Yeah, those are covered 1 times on the EBITDA basis.

Operator

And we'll go next to Derek Johnston at Deutsche Bank.

Derek Johnston
Analyst at Deutsche Bank Aktiengesellschaft

(1:06)I'll make a habit of it, but on staffing levels. At 80% occupancy in senior housing, I believe that's near fully staffed and please correct me if I'm wrong. But the question is what are you modeling or including in guidance for 2023 relative to agency labor as a percentage of labor expenses? And do you view this as possible low-hanging fruit to get back to pre pandemic levels of agency, especially as John and the team increased property-level accountability?

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

Let me try to take part of that. And Tim will take part of that question. So we do not view this as a low-hanging fruit, but we do view this as a fruit that can be plucked, right? So there's a lot of effort that's going on. Tim will tell you what's modeled, and frankly, I don't know. But I will tell you that this is -- agency labor is a function of frankly weak management. That's just what it is, weak leadership. And we're working with our best-in class operators to get the right people in the right place so that we should, over a period of time, see that improvement. As I've said, coming below 4% is an achievement when you start from 9%, but by no means I want you to think that I'm actually happy with that number. That number needs to be substantially lower.

And we need to really get full-time employees in the communities. This is not just a question of cost, but also as John alluded to, it's also a question of culture and the customer experience.

Tim McHugh
Chief Financial Officer & Senior Vice President at Welltower

And from modeling perspective, we're essentially in the high 3s, as a percentage of compensation. So pretty far from when we came out of 2022.

Operator

We'll move next to John Pawlowski at Green Street.

John Pawlowski
Analyst at Green Street

Thanks. I just had one follow-up on the private letter ruling. I guess what else needs to happen internally in terms of people, systems, technology before you're actually able to both operate a substantial amount of IL units? I'm just curious how quickly we can actually see Welltower operate these assets.

John Burkart
Executive Vice President, Chief Operating Officer at Welltower

Yes. So I'll comment on what would need to happen, but not necessarily the speed at which - -but if you look at it, I mean one way to look at it is really just to simplify the world a lot and to say what would happen. When the company -- from my past experience when two companies merge, you look and say, okay, if I step into their systems and start to fly the plane with what they have, that could happen pretty fast, right? That's not that complex. And so the timing of it could be -- can be faster if we wanted it to be faster by stepping in that way. Obviously, what -- going back to what we are building, as I've mentioned previously, we're using exist-- largely existing modules. There's some creative stuff going on right now with the team, but generally, it's existing modules that are out there and so it -- that doesn't take that long either. So the speed can go fairly fast. The bigger issue is we're focused on success and we're focused on working with people to deliver the success. It's not about us necessarily doing it, it's about us delivering success for all the stakeholders. So that's where my mind is at, but the speed could go pretty fast.

Shankh Mitra
Chief Executive Officer and Chief Investment Officer at Welltower

[Speech Overlap] surprise me to see that we start to self-manage some assets -- some IL assets in calendar year 2023.

Operator

[Operator Closing Remarks]

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