The operator welcomes participants to the Welltower Fourth Quarter 2023 Earnings Conference Call and reminds them that the call is being recorded. The General Counsel gives a disclaimer about forward-looking statements, and the CEO, Shankh Mitra, reviews the company's fourth quarter and full year results, as well as their business trends and capital allocation priorities. Other members of the team will provide updates on operational performance, investments, and balance sheet highlights. Overall, 2023 was a successful year for the company with strong execution, record-setting capital deployment, and improved financials.

The company has laid the groundwork for sustained growth in the future, including progress on their operating platform and transitions in their properties. The fourth quarter of 2023 showed strong occupancy growth and rate increases, with the portfolio achieving the highest occupancy growth in the fourth quarter in the company's history. The company is pleased with the rate growth achieved by their managers, despite one of their largest operators pulling forward rate increases in the previous quarter. Overall, the portfolio delivered strong revenue growth, showcasing the strength of the business.

Welltower's 2024 guidance predicts near double-digit topline growth and continued margin expansion due to the high operating leverage inherent in the business. 4Q 2023 saw the lowest levels of growth in RevPOR and ExpPOR in Welltower's recorded history, but the normalization of agency labor usage and positive trends in salary and wages are resulting in a favorable spread between the two. The company is optimistic about the demand-supply backdrop and rising occupancy rates, as well as the success of John's operating platform buildout. In 2023, Welltower completed almost $6 billion of investments, with nearly half of them closing in Q4 alone. These transactions share common characteristics, but specific details were not mentioned.

The company has grown through partnerships and acquiring assets at a discount from various sources. They have also added new partners and are expecting more growth. The first quarter of 2024 has been busy with investment activity and the company's strong reputation has made follow-on transactions easier. The market is currently experiencing volatility, but the company sees opportunities in the senior housing sector with a large amount of loans maturing in the next 24 months. The company's capital deployment pipeline is strong and within their expertise.

The acquisitions made in 2023, along with the efforts of the Welltower team to improve the customer and employee experience, have resulted in significant success and industry-leading performance. The Senior Housing same-store NOI growth for 2022 and 2023 was 20.1% and 24.4%, respectively, with a projected 18% growth for 2024. This indicates a three-year compounded growth of over 75%. The portfolio generated 12.5% same-store NOI growth in the previous quarter, with the Senior Housing Operating portfolio leading at 23.7% growth.

The Outpatient Medical portfolio saw a 2.8% same-store portfolio growth in the fourth quarter of 2023, with a 220 basis point increase in operating margin due to expense management. The Housing Operating portfolio also saw a 23.7% increase in NOI, driven by revenue growth and expense control. The company's integrated platform initiative is set to go live in the first half of the year, with a focus on improving the customer and employee experience. 2023 was the most active year for transactions in the company's history.

In 2023, Welltower invested nearly $6 billion in over 50 transactions with a median size of $54 million. They are well-positioned to take advantage of current investment trends and have a reputation as a reliable counterparty. They use their data analytics platform and investment team to quickly analyze and underwrite opportunities, and their operating partners help execute the business plan for each asset. Most of their investments were in seniors and wellness housing, with a focus on acquiring assets in markets where they already have high-performing properties. In the fourth quarter alone, they closed on $3 billion in investments while maintaining discipline.

In 2020, the company acquired 44 Senior Housing properties from 11 different sellers, with an average age of seven years and an average basis of $222,000 per unit at a 40% discount to replacement costs. These acquisitions have a low 6s year one yield and are expected to generate high returns. The company also saw a significant improvement in the performance of their Integra portfolio, with an annualized EBITDARM increase of $300 million. They have also successfully transitioned all of their buildings to regional operators and have achieved a coverage of over 1.5 times. The company has also been actively investing in the skilled nursing space, with a focus on downside protection through strategic partnerships and credit guarantees. Looking ahead, the company is optimistic about their future growth.

The company has announced a partnership with Affinity Living Communities and the acquisition of their portfolio for $969 million. The Affinity team has a strong track record and their operations align with the company's moderately priced active adult business. The company remains busy with investment opportunities and is focused on being a trusted counterparty. The financial results for the fourth quarter and full year 2023 are discussed, along with updates on triple-net investments, capital activity, and balance sheet liquidity. The outlook for 2024 is also introduced.

In the fourth quarter, Welltower reported strong financial results with net income and normalized funds from operations showing significant growth. The triple-net lease portfolio also saw positive performance, with an increase in same-store NOI and EBITDA coverage. The company invested $3 billion in acquisitions, loans, and developments, funded by equity issuance and debt extinguishment. This has resulted in a transformed balance sheet with a $2.1 billion cash balance at the end of the year.

In 2020, the company took quick action to protect their balance sheet during the COVID pandemic by reducing cash outlays and selling assets. This helped mitigate the impact of a 50% decline in Senior Housing Operating NOI. They stabilized their portfolio in 2021 and have since been able to lower their leverage through a strong recovery in Senior Housing performance and disciplined growth. However, their current leverage still does not reflect a full post-COVID recovery. In 2023, they plan to strategically reposition and expect further improvement in metrics. This gives them the ability to make opportunistic capital allocation decisions for long-term shareholder returns. Their 2024 guidance does not include any unannounced investment activity.

The company has introduced an initial full year 2024 outlook for net income and normalized FFO, which represents 11.5% year-over-year growth. This growth is attributed to various factors such as higher Senior Housing Operating NOI, higher NOI in Outpatient Medical and triple-net lease portfolios, and investment and financing activity. The company also expects total portfolio same-store NOI growth and revenue growth, driven by RevPOR and occupancy growth. Before opening up for questions, the speaker addresses the recent loss of Charlie Munger, who was a personal hero, mentor, and friend to the company's CEO. The company is deeply saddened by his death and appreciates the support from others during this difficult time.

In this paragraph, the writer reflects on the generous wisdom and influence of Charlie, a mentor and advisor to the company. They express gratitude for his guidance and highlight his impact on the company's culture. The writer also mentions new partnerships, specifically with Affinity, and their strategy of going deep with existing managers instead of expanding broadly.

The speaker expresses optimism about the growth prospects of their business and highlights five key factors contributing to this growth: favorable demand and supply, digital transformation, transitioning to better operators, targeted external growth opportunities, and an underleveraged balance sheet. They also mention the possibility of further organic deleveraging and open the call up for questions. The first question from a caller is about wellness housing.

The Affinity portfolio has been generating a 60% operating margin, which is above the range of a traditional assisted living facility. Welltower's strategy is to invest in both high acuity senior living and low acuity wellness housing. The 60% margin in wellness housing sits towards the upper end of the spectrum and the growth has been in the mid-to-high single digits.

The speaker, Shankh Mitra, responds to a question about the expected growth trajectory for the company's wellness housing portfolio. He acknowledges that they do not have all the answers and are surprised by the market's pricing in of a deceleration in growth. However, he believes that the company will continue to have strong years of double-digit NOI growth and is confident that the portfolio will be fully leased, despite uncertainties about the future.

The speaker believes that the company can reach 2015 levels and even surpass them due to improved demand-supply and platform build-out. They expect double-digit NOI growth for years to come and acknowledge that they do not have all the answers. The next question asks about the strong outlook for shop and the speaker responds by saying that they have factored in a 5-5.5% range for RevPOR growth. They also mention that as occupancy reaches 85%, there will be benefits to the bottom line and the operators may need to increase marketing spend.

The company has already hired all the necessary staff and is gradually increasing occupancy, which will result in a significant increase in profits. The company has the potential to deploy over $3 billion annually through its partnerships with developers and operators, but the exact amount will depend on the opportunities available and the potential for value creation for investors. The company sees a large number of loans in the Senior Housing space that will be rolling, presenting potential investment opportunities.

The speaker discusses potential opportunities for investment in the U.K. and Canada, as well as the current busy deal-making season. They mention the possibility of a record year, but also note that they will only invest if they see opportunities. The next question from an analyst is about potential regulatory changes in the Senior Housing industry, and the speaker responds by saying they are monitoring the situation and it could potentially impact profitability for operators.

John Burkart discusses the regulatory conversations taking place in the Senior Housing business. He emphasizes the importance of reputation and quality in driving the business, and mentions that this is different from other areas of healthcare. He also mentions the focus on creating sustainable models for property level. In response to a question about Affinity, he mentions the attractive margins and potential opportunities in the $16 billion debt maturities for Senior Housing loans. Shankh Mitra clarifies that they focus on the mid-market segment of active adult and wellness housing.

The speaker discusses the four major players in the senior housing market and emphasizes the importance of focusing on long-term shareholder value rather than growth for growth's sake. They mention their success in growing their business and their optimism for the future of wellness housing in their portfolio. In response to a question about the investment pipeline, they clarify that a significant portion of the opportunities are driven by current owners' credit situations.

The speaker discusses their approach to executing credit and equity opportunities, stating that they are primarily interested in equity but are also open to private credit. They clarify that they are not just lenders, but also owners of the properties they invest in. They mention that they are interested in taking back properties if necessary, but the majority of their executions are on the equity side. They also mention that they never loan against assets they do not want to own. In terms of competition, they note that they have not faced much competition in their recent transactions, as they have been privately negotiated with sellers. They also mention that there is currently limited liquidity in the market.

The speaker discusses the challenges of Senior Housing development, including rising costs and difficulty in obtaining loans. They also mention that many platforms for Senior Housing development have been dismantled in the past year, and that rebuilding the human capital side should be a priority before considering financial capital. The speaker also notes that developers typically build and develop products to sell at a profit.

The speaker expresses low confidence in the success of a product that is priced at $1.30 when the majority of products have been traded at $0.70 in the last three years. They also mention that development for Senior Housing is not a priority due to the lack of acquisition financing, but they may consider starting a few projects for Affinity Development Program, which focuses on rental housing products. The expected number of starts would be around three to four per year, depending on the current pipeline. Lastly, the speaker is asked about the average age and move-in for their traditional Senior Housing portfolio, and they mention that it is currently at eight years and around 25 starts per year can be expected.

The speaker is asked about any changes in demographics or behavior of tenants during the COVID-19 pandemic. They mention that they have seen longer stays and an increase in average age and acuity coming out of the pandemic. However, as things have normalized, the average age is coming down and length of stay is going up. The next question asks about the recent reacceleration of occupancy gains, and the speaker explains that both move-ins and move-outs have been better in the fourth quarter, creating an unusual seasonal pattern.

The speaker discusses the recent quarter and how it was both interesting and unexpected in terms of seasonality. They also mention an optimization process for Senior Housing that is currently not quantified but is expected to result in real numbers. The speaker avoids giving too many details due to concerns about others copying their strategies. They also mention the impact on frictional vacancy. A question is asked about when quantified numbers will be provided for the optimization efforts.

The speaker states that the company is not currently in a position to increase vacancy without concern, but there are opportunities for expense reduction through improved productivity. The focus is on improving the customer experience, not cutting costs. The speaker mentions a unified platform that will eliminate wasted time and increase staff availability for customers. The main opportunity for growth is on the revenue side, through increased occupancy or a change in the value proposition. The next question is about the company's balance sheet, and the speaker confirms that there is excess cash due to recent acquisitions and planned asset sales. There are also upcoming debt repayments in the first quarter.

The speaker discusses the company's recent payment of $450 million in debt and the remaining balance to be paid off in March. They also mention optimism for opportunities to invest cash. The speaker is then asked about share gains in Senior Housing compared to local competitors, to which they respond that their portfolio has outperformed in rate and occupancy growth. The speaker promises to continue striving to outperform the market. The speaker also mentions that if they achieve their NOI growth guidance, it will be a 75% growth over three years.

Shankh Mitra, the speaker, is talking about pricing trends for new customers and how it has evolved through the fourth quarter. He is pleased with the pricing trends and mentions that the RevPOR growth was up 6.8%, which is a strong number. He also talks about how a lot of operators have moved from Jan 1 to February 1 and that existing customer rent increases have been relatively in the same ballpark as last year, but about 100-150 basis points lower. He cautions that his numbers are not specific and may change.

Some operators have seen a decrease in occupancy by 100-150 basis points, but this is not solely due to rent increases. Market rent tends to be lower in Q1 and increase in the summer months. It is difficult to determine the optimal pricing and occupancy levels for maximum profitability, but the company expects double-digit revenue growth. The improvement in occupancy and guidance acceleration may be a combination of industry trends and the company's operating platform.

The speaker is asked if the company's target occupancy rate should be increased to 91% instead of 88% based on the projected occupancy recovery. The speaker responds by saying that reaching 91% would not add much value and that the demand-supply imbalance will be more favorable in the next few years. He also mentions that the company does not believe the friction vacancy rate is 9%. In response to the question about other operators, the speaker says he cannot speak for them.

The speaker promises to put in 100% effort to outperform the market and believes that the Q4 numbers will continue to show success. They have confidence in their ability to outperform the industry average and are hopeful for the future. The conference call concludes with no further questions.

This summary was generated with AI and may contain some inaccuracies.