Welltower - Q4 2023

Transcript

Operator (participant)

Good morning and welcome to the Welltower fourth quarter 2023 earnings conference call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. I will now turn the call over to Matthew McQueen, General Counsel. You may begin your conference.

Matthew McQueen (General Counsel)

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 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. With that, I'll hand the call over to Shankh for his remarks.

Shankh Mitra (CEO)

Thank you, Matt, and good morning, everyone. I will review our fourth quarter and full year 2023 results and describe high-level business trends and our capital allocation priorities. John will provide an update on the operational performance of Senior Housing and outpatient medical portfolios and progress on our operating platform buildout. Nikhil will give you an update on the investment landscape, and Tim will walk you through our triple-net businesses, balance sheet highlights, and 2024 full year guidance. First, as I reflect back on '23, it was a year of solid execution across the board with significant progress achieved in all aspects of the business. Operating performance far surpassed our initial expectations. We had a great year, a record-setting year in terms of capital deployment, and we meaningfully strengthened our balance sheet and liquidity profile.

Just as importantly, perhaps, is the groundwork we laid to sustain this level of performance and continue to deliver outsized growth not only in 2024 but also well into the future. This includes the considerable progress John and his team have made on the buildout of our operating platform, which we continue to believe will transform the industry. On top of that, as we have discussed in recent quarters, we have executed a number of operator transitions across all our geographies as well as converted a handful of properties from triple-net to RIDEA, all should bear fruit later this year and in 2025. We finished the year strong with significant momentum to set us up for another year of solid performance in Senior Housing Operating Portfolio, i was particularly encouraged by the occupancy growth in fourth quarter, which is seasonally not the strongest period.

The portfolio saw 110 basis points of sequential occupancy gains, which translate into 330 basis points year-over-year occupancy growth. The 330 basis points year-over-year occupancy growth is by far the highest level we have ever achieved in the fourth quarter of any year in our recorded history. Just as compelling is that looking at the intra-quarter trends, year-over-year occupancy growth strengthened each month, which is unusual given the aforementioned seasonality of the business. We're also pleased with the rate growth achieved by our managers. During our last call, I described to you that one of our largest operators, Sunrise, pulled forward January 1, 2023 rate increases into 4Q 2022. This year, they have returned to their historical cadence of January 1 rate increases.

While this distorts our SHOP portfolio's reported Q4 2023 RevPOR, the unit revenue, the rest of the portfolio delivered RevPOR growth of 6.8%, reflecting the underlying fundamental strength of the business. While our 2024 guidance assumes some diminution of RevPOR growth from full year of 2023 levels of 6.6%, we still expect another year of near double-digit top-line growth as occupancy continues to build at a solid pace. 4Q 2023 same-store ExpPOR, expense per occupied room, grew 1.7% year-over-year, the lowest level of growth in Welltower's recorded history, driven by 4Q 2023 same-store compensation per occupied room growth, which grew 1.9% year-over-year, also the lowest growth in Welltower's recorded history. While the normalization of agency labor usage is helping to dampen ExpPOR growth, we are also seeing some good trends in the salary and the wages line.

All of these trends are resulting in a favorable spread between RevPOR growth and expense growth. The powerful combination of this revenue backdrop with continued margin expansion that should be expected due to the high operating leverage inherent in the business leaves us feeling very strongly about our 2024 NOI growth setup. Tim will give you our detailed buildup of our NOI guidance based on our current assumptions. Plus, please understand that we have no false pretense about perfectly knowing what the business will look like as we move through the years, particularly the all-important summer months. But we are optimistic given the demand-supply backdrop, which improves by the day and the rising system-wide occupancy as well as the early success we have seen in John's operating platform buildout.

While 24.4% NOI growth last year for our SHOP portfolio alone was very encouraging, I'm extremely pleased with our capital allocation activities as well. In 2023 was the most active year in our history in terms of raising and deploying capital. We completed almost $6 billion of investments in the year, nearly half of which closed in Q4 alone. While I won't get into the specific transactions, I will mention that they share some common characteristics. First, we generally grew with our existing operating partners in their respective markets. Second, we acquired assets at a significant discounted replacement cost from core funds, PE funds, pension funds, and financial institutions who were seeking liquidity. We also added a couple of new operating partners along the way who I envision us growing with in the near term. More to come on this topic as we progress through the year.

The torrid pace of investment activity in Q4 has continued with 2024 starting off with a bang. In fact, I do not recall having ever been this busy in first quarter on the deal front. While we have pre-negotiated documents and structure to leverage, it is great trust that we have built with our 2023 counterparties that will make follow-on transactions easier to execute. These counterparties also experienced what our promise always is, that we honor our handshake irrespective of circumstances, as evidenced by our continued execution through this historic capital market volatility in the fall and winter of 2023. They know that we remain the clean shirt in an industry where retrading counterparties is the norm. It is interesting and perhaps coincidental that we're experiencing another bout of market volatility after a few weeks have come.

Over the past few weeks, another regional banking crisis driven by U.S. CRE debt appears to be rearing its ugly head from New York to Tokyo to Germany. We are currently staring at approximately $16 billion Senior Housing loans maturing in the next 24 months in the U.S., which dwarfs roughly about $2 billion of agency financing completed in 2023. This should generate significant equity as well as private credit opportunity for us. Suffice to say, our near-term capital deployment pipeline remains robust, highly visible, and actionable, and squarely within our circle of competence, where we can bet with house odds rather than gambler's odds.

Along with what we have already done in 2023, these acquisitions that carry an attractive basis, operational upside, and significant value add from Welltower's operating platform, we will have a meaningful impact on what remains our true North Star, long-term compounding of partial value of our existing shareholders. With that, I will hand the call over to John. John.

John Burkart (EVP and COO)

Thank you, Shankh. Although most of my time at Welltower has spent doing the Welltower hustle, getting up every day, identifying and aggressively pursuing the opportunities that exist focused on improving the customer and employee experience, I want to take a moment and reflect on how proud I am of the Welltower team for its success in doing just that, improving the customer and employee experience, which in part is reflected by our performance. Focusing Senior Housing for a moment, the Welltower team consists of our top operators and all of their employees, our key vendors, as well as the Welltower employees. We have all worked together to improve the customer and employee experience, which has resulted in fantastic results. On top of the Senior Housing same-store NOI growth for the full year of 2022 of 20.1%, our full year Senior Housing NOI growth was 24.4%.

Often on earnings calls, you hear the words "tough comps." That's certainly true here. Yet our guidance for 2024 Senior Housing NOI growth at the midpoint is 18%. Therefore, based on our two full years that are completed and in the record books, 2022 and 2023, and our guidance of 18% in 2024, that indicates that the three-year compounded growth of our Senior Housing NOI in 2024 will be over 75%. That's something to reflect upon. Thank you, Welltower team. Now back to our business. Our portfolio generated 12.5% same-store NOI growth over the prior Senior Housing Operating Portfolio with 23.7% year-over-year growth. the outpatient medical portfolio produced same-store NOI growth of 2.8% for the fourth quarter of 2023. This was driven by favorable operating expense management, increasing the operating margin by 220 basis points year-over-year to 71.4%.

Notably, our proactive appeal process achieved favorable real estate tax reductions. The 23.7% fourth quarter year-over-year NOI increase in our same-store housing operating portfolio was a function of 9.7% revenue growth driven by the combination of 5.5% RevPOR growth and 330 basis points of average occupancy gain and moderating expense growth. Expenses remained in control, coming in at 5.7% for the quarter over the prior year's quarter. The strong revenue growth and expense control led to continued margin expansion of 290 basis points. Again, our ExpPOR growth for the quarter set a record for the lowest growth in our recorded history at 1.7%. All three regions continue to show strong same-store revenue growth, starting with the U.S. at 9.4%, Canada and the U.K. growing at 9.7% and 14.1% respectively.

The strong revenue growth in each region, combined with the expense controls, have led to fantastic NOI growth in the U.S., Canada, and the U.K. of 21.8%, 21.7%, and 75.5% respectively. We're flying along with our integrated platform initiative, which will start to go live at our first operator in the first half of this year. I will not go into all the details, but I will say that our focus on improving the customer and employee experience is coming together very well. The integrations of the various modules will simplify the customer experience and reduce the labor around basic tasks, enabling our site teams to focus on what they love, our customers. More to come in 2024. I will now turn the call over to Tim.

Nikhil Chaudhri (EVP and CIO)

I'll go next. Yeah. Thanks, John. On the transaction side, as Shankh mentioned, 2023 marked the most active year in the history of the company. Our new investment activity of almost $6 billion spanned more than 50 different transactions with a median transaction size of $54 million, in which we acquired 153 properties over the course of the year. I am sure you all have read about the confluence of a few factors that are creating the current investment backdrop, namely the Great Wall of CRE debt maturities, expiring SOFR caps, pressure on the regional bank balance sheets, and the denominator effect. Welltower is uniquely positioned to capitalize on these trends and serve as a counterparty of choice for our private equity sponsors, large pension and asset managers, and entrepreneurs that are impacted by these challenges.

We are able to source these opportunities directly from sellers or through our operating partners, given our reputation of being a good partner and a reliable and credible counterparty. We are then able to analyze and underwrite quickly and in great detail, thanks to the combination of our data analytics platform, Alpha, and our best-in-business investment team. Finally, and perhaps most importantly, we then execute on the business plan for each asset through our deep network of aligned operating partners backed by the operating platform that John is methodically building out. These factors drive our sustainable competitive advantage for creating shareholder value. Our 2023 investment activities was focused on granular, off-market, high-conviction transactions. A majority of the transactions were focused on our seniors and wellness housing businesses, where we acquired additional assets in markets where we already have high-performing assets.

By acquiring these assets at an attractive basis and consolidating operations under the same operator, we are able to reap the operating benefits of regional density. In the fourth quarter alone, we closed on nearly $3 billion of investments while remaining targeted and disciplined. We acquired Senior Housing properties from 11 different sellers, growing our relationship with seven existing operating partners. We acquired roughly 8,800 units with an average age of around seven years, at an average basis of $222,000 per unit, at an approximately 40% discount to replacement cost. These transactions have a low-6% year-one yield and are expected to generate unlevered IRRs north of 10%. I am also excited to provide an update on the performance of our Integra portfolio, where we have continued to see a sequential improvement in performance.

For the 140 buildings that first transitioned to regional operators, we have seen annualized EBITDARM improve by more than $300 million, from losing more than $85 million in the three months prior to the transition to positive $228 million in the third quarter. While there continues to be meaningful remaining upside in performance beyond the current state, I am pleased to announce that EBITDARM coverage is now greater than 1.5x. We also transitioned the last seven remaining buildings earlier this month after getting the final set of regulatory approvals. On the back of our continued success turning around operations for our legacy Genesis and ProMedica skilled nursing portfolios, we were active in deploying capital in the skilled space as we partnered with regional operators to acquire under-managed assets.

Given the credit nature of our skilled nursing investments, we always strive to have meaningful downside protection through a combination of right-per-bed basis in states with favorable reimbursement landscape and significant credit protection through personal and entity-level guarantees. Looking ahead to 2024, we are off to an exciting start. We are delighted to announce our strategic partnership with Affinity Living Communities, in which we are entering into a long-term programmatic development relationship and acquiring the Affinity portfolio of 25 active adult properties with an average age of less than eight years for $969 million or $233,000 per unit after allocating the NPV of interest cost savings to the assumed below-market debt. Darin, Scott, Charlie, and John have built a fantastic business over the last decade as they have meticulously iterated and refined the Affinity prototype.

Their vertically integrated platform and unwavering focus on efficiency has enabled them to grow their footprint in typically expensive Pacific Northwest markets at an attractive basis to provide moderately priced active adult housing at average rents of approximately $2,100 per month. We have been incredibly pleased with the operating performance of our moderately priced active adult business over the last few years and are excited to partner with the Affinity team to further grow that business. Our investment team remains incredibly busy as we continue to be the steady hand and trusted counterparty in our business and remain well-positioned to capitalize on capital structure issues across the industry. We are inundated with opportunities up and down the capital stack and continue to balance price discipline, operator selection, and capital availability to be thoughtful stewards of our shareholders' capital.

I'll now hand over the call to Tim to walk through our financial results and 2024 guidance.

Tim McHugh (EVP and CFO)

Thank you, Nikhil. My comments today will focus on our fourth quarter and full year 2023 results, performance of our triple net investment segments, our capital activity, a balance sheet liquidity update, and finally the introduction of our full year 2024 outlook. Welltower reported fourth quarter net income attributable to common stockholders of $0.15 per diluted share and normalized funds from operations of $0.96 per diluted share, representing 15.7% year-over-year growth. We also reported total portfolio same-store NOI growth of 12.5% year-over-year. Now turning to performance of our triple net properties in the quarter. As a reminder, our triple net lease portfolio coverage and occupancy stats reported a quarter in arrears, so these statistics reflect the trailing 12 months ending 09/30/2023. In Senior Housing triple net portfolio, same-store NOI increased 2.2% year-over-year, and trailing 12-month EBITDAR coverage was 0.95x.

It is also worth noting that our trailing 3-month coverage in this segment moved above 1x for the first time since the pandemic. Next, same-store NOI in a long-term post-acute portfolio group grew 5.2% year-over-year, and trailing 12-month EBITDAR coverage was 1.36x. Turning to capital activity, we invested $3 billion in acquisitions, loans, and developments in the quarter, led by $2.1 billion Senior Housing operating investments. In the quarter, we continue to fund investment activity via equity issuance, completing a bought equity deal in November, which, along with regular way ATM activity, resulted in $2.8 billion of gross proceeds in the quarter, at an average price of $86.20 per share. This equity issuance allowed us to fund investment activity along with the extinguishment of approximately $250 million of debt in the quarter and end the year with a $2.1 billion cash balance.

Staying with the balance sheet, as we finish 2023, I want to highlight the balance sheet transformation that has occurred over the last 24 months. When COVID hit in 2020, we acted quickly to protect the balance sheet by securing substantial incremental liquidity, in large part by reducing cash outlays and taking advantage of strong asset values by selling long-leased duration assets into a zero-interest rate environment. These actions helped alleviate the impact of a nearly 50% drawdown Senior Housing operating NOI that bottomed out in the first quarter of 2021, driving peak leverage to nearly 7.5x ex-HHS funds. After stabilizing the portfolio in the sevens in 2021, the combination of a strong recovery Senior Housing performance and disciplined equitization of external growth over the last two years has allowed us to methodically lower leverage, finishing this year with 5.03x net debt EBITDA.

Consistent with past commentary around the balance sheet, I want to underscore that despite the improvements in metrics, current leverage still does not reflect a full post-COVID recovery Senior Housing operating NOI, as our portfolio still sits meaningfully below pre-COVID NOI levels. A recovery back to these levels will drive leverage well below 5x. In summary, in 2023, our post-COVID balance sheet recovery transitioned into a strategic repositioning, ending the year with substantially upgraded metrics from prior to the pandemic and expectation Senior Housing Operating Portfolio continues to carry significant organic cash flow growth momentum into 2024. This positions us with substantial capacity to continue to make systematically opportunistic capital allocation decisions to drive long-term shareholder returns in any market environment.

Lastly, as I move on to the introduction of our full year 2024 guidance, I want to remind you that we have not included any investment activity in our outlook beyond that which has already been announced publicly. Last night, we introduced an initial full year 2024 outlook for net income attributable to common stockholders of $1.21-$1.37 per diluted share and normalized FFO of $3.94-$4.10 per diluted share, or $4.02 at the midpoint. As mentioned in our release last night, our 2024 guidance contemplates no HHS or other government grants, so after adjusting for $0.03 received in 2023, the midpoint of our initial guidance represents 11.5% year-over-year growth.

This year-over-year increase in FFO per share is composed of a $0.33 increase from higher Senior Housing operating NOI, a $0.02 increase from higher NOI in our outpatient medical and triple net lease portfolios, a $0.04 headwind from higher year-over-year growth in G&A expenses tied mainly to the continued buildout of our operating platform, and finally, a $0.10 increase from investment activity through financing activity. Underlying this FFO guidance is an estimate of total portfolio year-over-year same-store NOI growth of 8.25%-11.5%, driven by subsegment growth of outpatient medical 2%-3%, long-term post-acute Senior Housing triple net 2.5%-4%, and Senior Housing operating growth of 15%-21%, the midpoint of which is driven by revenue growth from approximately 9.2%.

Underlying this revenue growth is an expectation for RevPOR growth from approximately 5.25% and an acceleration in year-over-year occupancy growth to 290 basis points. With that, I will hand the call back over to Shankh.

Shankh Mitra (CEO)

Thank you, Tim. I wanted to address a few important topics before I open the call up for questions. As you may know, on November 28th, we lost my personal hero, mentor, and friend, Charlie Munger. We are deeply saddened by his death and thank many of you for reaching out to my team and me during this difficult time. Charlie was truly generous with his wisdom, continually guiding us not only on the importance of compounding but also behaving like owners, not managers, and deserving great partners by being one and taking far less crowded high road and acting with conviction when the conditions were right. We witnessed his wit, uncommon sense, simplicity, passion for multidisciplinary running, and innate ability to cut through noise and arrive at the right decision. The influence he had on Welltower, its people, and its culture is truly immeasurable.

His serene guidance and sage principled advice has been invaluable to me in my life and my career. Charlie was also an instrumental influence on the members of our senior leadership team, to whom he gave his greatest gift of all time, his time. We're grateful for the time we spent in his presence. I owe him a lifetime debt that cannot be repaid. But we will carry forward his teachings in how we deal with our owners, partners, residents, employees, and others. His most profound impact on us is perhaps cemented in the ground rule document that he guided me to write that you can find on our website. Moving on to a less somber topic, I want to draw your attention to some of the partners which we forged new relationships with in 2023.

Beyond what we have announced so far, I want to highlight Affinity as our new growth partner. Nikhil walked you through the investment rationale of Affinity, but I would also like to express how excited I am to work with Darin Davidson and his team there. As we have gotten to know Darin over the last five years, he has proven to be a man of high integrity and thoughtfulness with a true compass on the future direction of how older Americans want to live. Despite adding a few handful of managers to our growth platform in 2023, our partner and geographic strategy remains to go deep instead of going broad, and our consolidating roster of existing managers reflect that. In summary, I hope that the optimism conveyed by my partners today on the growth prospect of our business has resonated with you.

While we remain focused on the execution of our 2024 strategic and operational goals, I cannot help but draw your attention to the outsized multi-year growth trajectory in front of us, which is supported by five different growth pillars. Number one, some of it is questionably a function of a favorable demand-supply setup that I think you all understand. This should only get better as we look into 2025 and 2026. Number two, a lot of my personal enthusiasm stems from the digital transformation and business process optimization that John is driving. We should start to see some fruits of his labor this year, but much more in 2025 and 2026. Number three, overlay that with the impact of hundreds of properties that we have recently transitioned or agreed to transition to better operators.

I am excited about the improving resident and employee experience that is currently underway with a financial impact following soon thereafter. Number four, add our extremely targeted and disciplined growth, external growth opportunities. And last but not least, number five, our underlevered balance sheet which Tim just described to you. We will continue to experience further organic deleveraging, which will either support an A rating or provide capacity for additional external growth. As we think about the next couple of years, we have never felt better about the growth prospects or accelerating growth prospects of our earnings and cash flow for our company on a partial basis. With that, I will open the call up for questions.

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star one. We kindly ask that callers limit themselves to one question. Your first question comes from Connor Siversky with Wells Fargo. Please go ahead.

Connor Siversky (Director and Senior Equity Research Analyst)

Good morning out there. Thank you for the time, and I appreciate the detail in your prepared remarks. An observation, a couple short questions on wellness housing. The Affinity portfolio generating a 60% operating margin, not exactly comparable, but seems to be above the range that a traditional assisted living facility could achieve. First question on this end: where does that 60% margin sit on the bell curve of wellness housing operating performance outcomes? Second, with what looks like a very solid return profile, how much should we expect Welltower to lean into this segment in the years ahead? And finally, how has RevPOR and NOI growth in that portfolio trended over the last two to three years?

Shankh Mitra (CEO)

You snuck in three questions. Let me see if I can remember all of them. First is, we laid out our strategy of how we see investing in the senior living space, which is high price point, very affluent micro market, high acuity product, if you will, where we provide a service that can be actually charged accordingly and hire people and pay them appropriately. So that's one strategy. On the other side of the barbell, we went from no acuity and built out a business over the last six years, five, six years on this wellness housing side where it's a much lower price point but almost no services. So it's sort of from an acuity standpoint, and that provides obviously a much higher NOI margin. That's the two business segments that we know how to do well and make money, and that's where we are.

I'm not suggesting that anything in between is not something that is right or wrong or anything like that, but just not something that we are focused on. Now, going back to your question, where that 60% or so margin sits in that wellness housing spectrum, I will say it sits towards the upper end, probably the upper half, but by no means an aberration, right? Sort of you think about I think about this business from mostly a mid-50s% to mid-60% margin business. Your last question, how has the growth been in the wellness housing? Historically, it has been growing, I would say, mid to high single digit. In 2023, the NOI growth for our wellness housing portfolio on a same-store basis has been 12.2%. In fourth quarter alone, that was 13.1%. Hope I remember all your questions.

Operator (participant)

Your next question comes from Jeff Spector with Bank of America. Please go ahead.

Jeff Spector (Managing Director)

Great. Good morning and congratulations on a great year. Our bunch of questions, but I'll just focus on one. After three years of very strong, better-than-expected internal growth, the market appears to be pricing in approximately 700-800 basis points of deceleration. As we look ahead, does growth normalize from here, or can the current growth trajectory continue?

Shankh Mitra (CEO)

Thank you, Jeff, for the question. I'll start probably with one of my favorite Mungerisms, which is knowing what you don't know is actually a lot more useful than being brilliant. So I want to make sure you understand that we have no hubris of what we don't know. So frankly speaking, I'm pretty surprised. For many months, I've been reading about this in research reports, talking to investors, that sort of this idea that if you had two good years of numbers, obviously, that has to go down pretty meaningfully. Frankly speaking, I don't personally understand that. I will tell you that we don't know how this year is going to completely play out. We give you our best guess that Tim described to you.

It is possible that we have another year of that growth rate that's sort of similar to last two years, possible if we have a strong summer sort of leasing season, right? But I think we're going to have many great years in front of us with double-digit NOI growth. Now, whether this year, next year, this quarter, next quarter, I don't know where chips will fall. But as we think about taking this portfolio to where it should be leased, with our opinion, as we have told you, there will be very disappointed if we go back to pre-COVID. There is no reason we can't even go back to where 2015 levels were, because if you look forward next few years, you will see demand supply has been significantly better, and our platform buildout should help us get well past that.

We should have double-digit NOI growth for years to come. I hope that sort of answers your question. We have no hubris of sort of knowing what we don't know, but we think it's also this idea that because our business has done so well for the last two years, it has to go down. It has to meaningfully decelerate. It sort of reminds me that perhaps we should have more humility of what we don't know. We'll see how this plays out. We'll see what market gives us. Thank you.

Operator (participant)

Your next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Vikram Malhotra (Managing Director)

Good morning. Thanks for the question. I guess I wanted to you have a very strong outlook on SHOP. I wanted to dig into that a bit more just in two parts. One, can you talk about sort of at the high end of your guidance range, or maybe the low end, what you've baked in for RevPOR growth? And then related to that, as you sort of trend towards 85%-ish, 86% occupancy, clearly, there are benefits to the bottom line. But I wanted to understand, do the operators need to staff up or spend more marketing dollars? Is there maybe some broad trends that you can share with us to achieve that 85% in the margin flow-through?

Tim McHugh (EVP and CFO)

Yeah. I'll start with the RevPOR, and then I'll hand over to John for any comment on kind of the operating spend side. But thinking about the rent growth, thinking about kind of 5-5.5 being kind of the range that drives it kind of flexes from the bottom to the top of that range.

John Burkart (EVP and COO)

Yeah. On how the numbers work, as Shankh and Tim have said for a long time, the flow-through gets pretty fantastic as you get north of 80%. So when you talk about staffing up, you really have and I mentioned this on the last call. The positions are in place. You have your head chef, you have your executive director, etc., etc. So it's very incremental. So this part of the curve is a lot of money that comes to the bottom line as you increase occupancy. And additionally, as we've said, because of supply-demand factors, that's just expected in the marketplace. We may or may not decide to spend more money on marketing to accelerate that, but the conditions are fantastic right now.

Operator (participant)

Your next question comes from Jonathan Hughes with Raymond James. Please go ahead.

Jonathan Hughes (Senior Research Associate)

Hi. Good morning. Thank you for the time. I wanted to ask about the trajectory of external growth. You lay out in the business update decks the opportunity to deploy an excess of $3 billion annually with your current stable of proprietary developers and operators. And on top of that are, of course, the opportunities outside of those relationships that could be additive like Affinity. I know you don't provide guidance on investment activity, but is it fair to assume $3 billion is kind of the low end we can expect year-on-year out given that these partners of yours, they want to grow their businesses, and they can only grow with you due to the proprietary nature of your partnerships? Thanks.

Shankh Mitra (CEO)

Jonathan, let me see if I can answer that question. We will not give guidance. Our shop is not designed to buy stuff. We only grow if we think we can grow to add value on a partial basis for existing investors. So if that means it's $3 billion, it's $3 billion. That means it's $300 million, it's $300 million. And that means if it's $8 billion, it's $8 billion. That's sort of where we are. Having said that, if you look at page seven of our slide deck, we see there's a massive amount of loans in Senior Housing space that's rolling. That's just a U.S. number. We're also seeing opportunities in both U.K. and Canada, similar ideas. And there is not enough credit in the system to refinance this. So we think the opportunity set, obviously, in front of us is going to be very robust.

Speaking of pipeline right now, I want to reiterate the comment that I have made in my prepared remarks. We have never been this busy in Q1. As you understand, there is a seasonality of the deal business as well, right? People work really, really hard into the year-end to close out the year. And Q1 is usually very sort of you don't see a lot of activity. Activity starts to pick up, obviously, in Q2. And then that's obviously translated into heavy second half. And that normal seasonality we haven't seen. And perhaps because of the debt cut that we're talking about, perhaps it's because of another thing that Nikhil mentioned, which is the interest caps that are coming off. And regional banks were nowhere to be found, right? So in that context, I think we're going to have a record year again. But who knows?

If we don't see the opportunities to invest, we won't. But the pipeline remains robust, it's visible, it's actionable, and we can see a massive amount of value creation coming through that.

Operator (participant)

Your next question comes from Tayo Okusanya with Deutsche Bank. Please go ahead.

Shankh Mitra (CEO)

Tayo?

Tayo Okusanya (Managing Director and Head of US REIT Research)

Hello.

Shankh Mitra (CEO)

Tayo, we can hear you. Hello, Tayo, we can hear you.

Tayo Okusanya (Managing Director and Head of US REIT Research)

Perfect. So good morning, and then congrats on a great quarter and a great outlook. On the regulatory front, again, in the past few weeks or so, there's been some discussion. The House just kind of doing some hearings Senior Housing and some concerns around maybe ultimately, you also see some minimum staffing rules Senior Housing. just kind of curious what you're hearing on your end, how you kind of see that evolving over time, and what that could mean for profitability Senior Housing operators.

Tim McHugh (EVP and CFO)

Yeah. Thanks, Tayo. Obviously, we're very aware of the conversations taking place on the regulatory side. I think something that's consistent with how we talk about this in the past is this business, Senior Housing side, we almost entirely play in a private-pay business where the delivery of a high-quality product and reputation in the market is the most important driver of your business on a go-forward basis. And so I think there's areas of the healthcare world where that's not the same, and you've got more of a captive demand audience, and there's more concern over how you may run a business. But on Senior Housing side, what we know very well, both the good and the bad, is that the business is entirely driven by reputation.

It continues to be the focus of ours is that whether it's the staffing levels, the level of care, or the quality of the employees, they are what drives the business day in, day out. It's why we spend so much time focusing on creating these sustainable models at the property level.

Operator (participant)

Your next question comes from Jim Kammert with Evercore. Please go ahead.

Jim Kammert (Managing Director)

Good morning. Thank you. Just tying some of the previous questions together, if I could. Thinking about Affinity, those are pretty attractive margins, and obviously, they're very savvy operators. And then you tie together the opportunity set in terms of maturity loans on page seven of your deck. Are there other wellness or active adult-type opportunities within the $16 billion or so debt maturities, thinking about overall margin implications for your portfolio as it changes?

Shankh Mitra (CEO)

That I believe that Senior Housing loan situation we're talking about is a Senior Housing product. You can, for some lender, sort of define this as multifamily. Some Senior Housing. so there's no way to specifically know. We play into the mid-market segment of that active adult, the wellness housing segment. You think about there are four large players in that space that we know of. There are others, but there are four major ones that we know of: Clover, Calamar, Sparrow, and Affinity. And all four of them are existing Welltower partners today. As I have mentioned before, I believe in going deep, not going broad. If we find more opportunities, we will obviously see how that stacks up against our growth potentials, etc. But we are definitely focused on growing our business.

I think you would say starting this business six years ago to about 25,000 units today, we have done a pretty good job of it. But growth for growth's sake is something that I just can't get my head around. Our job is to create long-term shareholder value, compounding on a partial basis what we're after. So we'll see if we can do it. But I would be optimistic that wellness housing, over a period of time, will become a very significant portion of Welltower portfolio.

Operator (participant)

Your next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Austin Wurschmidt (Senior REIT Analyst)

Yeah. Thank you. Shankh, just kind of touching again on the investment pipeline and all the factors you've laid out today and previously as to why that opportunity continues to expand. I guess I'm curious how big the investment pipeline you see today is sort of fee-simple real estate deals versus the credit opportunities, and how much of that expansion that you've seen in the investment pipeline more recently is a function of the credit opportunity side versus the more traditional fee-simple.

Shankh Mitra (CEO)

Austin, I just want to make sure I understand your question. A lot of opportunity that we are seeing are driven by current existing owners' credit situation, whether that's rate caps, whether that's LTV, whether that's DSCR, whether that's refi. So it's driven by credit situations on their end. How we execute that on our end could be credit or could be equity. And the vast majority of what we have done is equity opportunities. But we are interested in the private credit side as an equity owner. I've said this many, many times, that we're just not lenders. We are owner of those properties at the last dollar basis where our credit stands, right? So that's how we think about it. In other words, that we're very comfortable taking back the keys if the owner decides to do so.

However, the vast majority of our execution on our end is on the equity side, though we remain very interested for the right opportunities to play in the credit stack. However, I will tell you, we never loan against assets at a last dollar value at a given location for a product that we do not want to own. That is not what we do. So that's something that's very interesting for you to sort of think through.

Operator (participant)

Your next question comes from Michael Griffin with Citigroup. Please go ahead.

Nick Joseph (Head of US Real Estate and Lodging Research Team)

Thanks. It's Nick Joseph here with Michael, Shankh, you've obviously talked about the robust acquisition opportunities a lot on the call and then the multi-year growth that you expect Senior Housing. so curious how you are seeing competition for both assets and loans. Is this attracting additional capital into the space? And then also just a similar question on the development side. Obviously, we haven't seen development pick up yet, but given the multi-year growth outlook, when would you expect that to start to pick back up?

Nikhil Chaudhri (EVP and CIO)

Yeah. I think from a competition perspective, as I mentioned in my prepared remarks, most of the transactions or all of the transactions that we've executed on, they have been privately negotiated directly with the sellers. So it's not that we're participating in auctions or anything like that. And a big part of that is there is really no liquidity in the market. So we're not seeing any competition, really. And then I think remind me again, what was your second question?

Shankh Mitra (CEO)

Let me answer that question. That was the development question. Nick, we put out a page eight in our slide decks that could be informative from thinking about this question. If you think about, there are some interesting things to think through. One, let's just talk about things that we all know. Cost of construction is up significantly. Cost of capital, you just think about it, Senior Housing development loan today, if you can get one, good luck with that. Even we struggling to get one if we need one is a 350-400 over. So you're talking about your debt cost of capital in the nines and the 10s, right? No, we haven't seen a development pro forma that works. That's sort of a financial aspect you guys know, then obviously think through what it takes to an average Welltower.

I'm not talking in the middle of Manhattan, West L.A., west side of Boston, places like that. An average Welltower location in very wealthy micro markets in East Coast, West Coast, or locations like that probably takes two to three years of pre-development, and you know that it takes a couple of years of construction after that. But what is more interesting that we have noticed is last 12-18 months that a lot of the changes that happened because of what I just described to you in the platforms that have developed most of Senior Housing assets, they have been dismantled. So if you look at page eight, we have added something for you to sort of ponder over.

The first thing that needs to happen if people can find money, and if they think it's a good thing to do, is to build back the human capital side before you think about the financial capital side. The last thing I will leave you with to think about, my understanding is developers build or develop product to sell at a profit. When the majority of the product traded in the last three years at $0.70 on the dollar, what confidence do you have that when you build a product for $1, that you will get $1.30? I don't think the confidence will be very high on the equity side. Obviously, you'll take out financing when there is no acquisition financing because of the rollover we just described in the previous one. We think development in any meaningful way is years away.

Again, as I said, we don't know the future. That's what seems logical. We'll see what the future plays out.

Operator (participant)

Your next question comes from Mike Mueller with JPMorgan. Please go ahead.

Mike Mueller (Senior Equity Research Analyst)

Yeah. I guess following up on development, for the Affinity development program, how soon do you think we could see starts there? And is there a way to size up how big the annual investment outlay could be that you could ramp up to?

Shankh Mitra (CEO)

Yeah, Mike. So my answer to Nick's question was focused Senior Housing development, as in what do you understand as a Senior Housing product. Affinity or wellness housing, these are apartments, right? These are not where care gets delivered. So these are housing products. These are rental housing products. How can it be? I'll tell you probably to think about it. Nikhil said average age is eight years. The portfolio size is 25. So just call it three to four starts a year. Something like that would be something that I would expect. But we don't know. It sort of depends on where the product is year-over-year, what the current pipeline is. But something like that can be expected over time.

Operator (participant)

Your next question comes from John Pawlowski with Green Street. Please go ahead.

John Pawlowski (Managing Director)

Hey, thanks for the time. John, I was curious if you could share a current stat on average age of move-in for your Senior Housing portfolio, how that compares to pre-COVID, and just any big shifts you guys are seeing in terms of the demographics coming in the door or the behavior of the current tenants, again, versus pre-COVID. Would love to hear.

John Burkart (EVP and COO)

Yeah, that's a good question. What I am seeing is a little bit longer stays. As far as for the details of that, I don't have that specific information. I can look to see if I can get it and get it back to you offline.

Shankh Mitra (CEO)

John, I'll just add that if you look at the coming out of the pandemic, average age and acuity went up, right? Just coming out of the pandemic in sort of first three, six, something like that months where we've seen the acuity has gone up and the average age has gone up. As we sort of things have normalized, I will say we're hearing more and more comments from our operating partners that average age is coming down and length of stay because of that acuity is coming down, but length of stay is going up because of that.

Operator (participant)

Your next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll (Managing Director)

Yeah, thanks. I'm impressed with your guys' occupancy gains reaccelerating. Is that mostly driven by move-ins coming in, or is it kind of the dynamic that you're talking about in the last question related to move-outs as you're seeing longer length of stays? Maybe move-outs are trending a little bit lower too, helping that occupancy gain reaccelerate in 2024?

Shankh Mitra (CEO)

Yeah. So Mike, let me try to answer that question. I was just looking at this a couple of days ago. Interestingly, as we looked at the fourth quarter data, obviously, we're talking about the counter sort of seasonal trends that we have seen in fourth quarter, specifically looking at that. Both move-ins and move-outs were better. So we have seen better move-in rates, move-in trends, and we have seen better move-out trends. So that sort of both created this unusual seasonal pattern. As you have noted, not only the quarter was kind of interesting or, frankly, confounding in a positive way from a seasonality standpoint, but what happened intra-quarter was even more confounding because as you sort of get through deeper and deeper into winter, we see the business slows down just seasonally. And this year, exactly the opposite happened. So what's the reason?

Just from a pure math perspective, as I said, both move-ins and move-outs are better. But obviously, we're not projecting that in the future, but we'll see how it plays out as we get through the year.

Operator (participant)

Your next question comes from Rich Anderson with Wedbush. Please go ahead.

Rich Anderson (Managing Director)

Thanks. Good morning. So, I guess a question for John and the optimization process that you're going through Senior Housing. a lot of it is sort of, it's very interesting and believable, the work that you're putting into it, but yet to be sort of quantified. And I'm curious if very soon or in some reasonable period of time that we might see sort of this optimization, a new line item on your slide, page 19, where you're bringing some of the work into real dollars and cents in terms of the effort because right now, it's not really something you can model. And I wonder if that would be more in the way of expense savings, which I would expect, or maybe there'd be less frictional vacancies so it would impact the revenue side.

I'm just curious if you could sort of triangulate it all, putting some quantified numbers into your effort or when that might come for all of us to look at.

John Burkart (EVP and COO)

Great question. As you know, I tend to avoid a lot of details because everyone tends to copy things, and it's better to execute. I think what you're seeing in our numbers, there's real numbers coming through. So it's not just discussing it. You're seeing it in the output. But I do appreciate you want to get some more specifics. You mentioned frictional vacancy. We're nowhere close to that right now. The opportunity to just literally increase vacancy without worry or concern about frictional vacancy is there all day long. And so there is really both. There's some level of opportunities on the expenses, but that really relates to productivity because, again, as I said over and over, our focus is on improving the customer experience. It's not about trying to cut anything.

So to the extent there's some productivity opportunities there, which the platform is focused at in the sense of I mentioned last time, sometimes it takes hours to move someone in because of the paperwork, and having a unified platform will solve for that and eliminate that wasted time, enabling our staff to spend more time with the customers. A lot of the opportunity, though, really is focused on the revenue side, whether it be increasing occupancy because we're just simply out executing. Frankly, we're answering the phones and delivering that quality customer experience that's driving occupancy or because we're changing the value proposition and the market says this is worth more. Hopefully, that helps.

Operator (participant)

Your next question comes from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico (Managing Director)

Thanks. Yeah, maybe a question for Tim on the balance sheet. If we look at a substantial amount of cash at the end of the quarter and then the outline to have another $1 billion of asset sales and guidance, it just seems like relative to the acquisitions you've announced so far that you're sitting in a significant excess cash situation. So maybe you could just give us a feel for how you're thinking about that. I don't know if there's any planned debt repayments or anything else we should be thinking about there.

Tim McHugh (EVP and CFO)

Yeah, thanks, Nick. So you're correct on the excess debt side or excess cash side. I will highlight that as indicated in the past, we have $1.35 billion of unsecured maturities here in the first quarter, so $450 million of which matured in January, and we paid off, and the remainder will be paid off in March. So that's one component of the uses. And I think what you're hearing from the rest of our team today is a lot of optimism around opportunities to put cash to work. So I think the balance sheet is very well positioned for that.

Operator (participant)

Your next question comes from Wes Golladay with Baird. Please go ahead.

Wes Golladay (Senior Research Analyst)

Hey, good morning, everyone. Could you speak to the share gains you might be seeing Senior Housing versus the local competitor set when you look at that 230 basis points of expansion this year?

Shankh Mitra (CEO)

Wes, I missed the first part of your question. Can you please repeat the question and get closer to your phone?

Wes Golladay (Senior Research Analyst)

Yeah. Okay. Sorry. Can you hear me now, Shankh?

Shankh Mitra (CEO)

Yep.

Wes Golladay (Senior Research Analyst)

Yeah. Can you speak to the share gains you might be seeing in Senior Housing versus the local competitive set? You did mention the 330 basis points this year, which was a record year.

Shankh Mitra (CEO)

Yeah. So look, we have a very large portfolio. It's hard to speak in generalities and obviously across three countries. But if you look at all other industry data, you will see our portfolio has meaningfully outperformed both in rate growth as well as occupancy growth. But what's new about that? But you can probably look at the NIC data and other setups to decide that get to that point. But as I said, we don't know what the future will give us, what we endeavor, what I promised to you that we'll put 200% effort to outperform the market. And that's what we are trying to do. And so far, what I've seen I mean, John mentioned a stat that if we do achieve our NOI growth guidance in the SHOP portfolio this year, there's no guarantee we will.

But if we do, that'll be 75% compounded growth over three years, right? I don't believe there's any precedent of that in a large, broad sort of a portfolio. So we are meaningfully outperforming the market, and that gap is widening, and I think it will continue to widen.

Operator (participant)

Your next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.

Juan Sanabria (Managing Director)

Hi, good morning. Just a question on pricing trends for new customers. One, how has that evolved through the fourth quarter? Just to think about that relative to occupancy. And I guess the second part would be you mentioned the operating leverage changes as occupancy improves and you're fully staffed. So how should we think about how are you thinking about the trade-off between occupancy and price going into the rest of 2024 and into 2025?

Shankh Mitra (CEO)

Let me try to answer that question. So fourth quarter, if you look at, I'm actually very pleased with pricing trends. As you know, we have a lot of the portfolio sort of radically turned through the year, right? So we have a and so if you just look at the Sunrise situation that I talked about, RevPOR growth was up 6.8%. That's a very, very strong number. And with that kind of occupancy growth, you don't expect that kind of numbers. But put that aside, let's just think about what next year's look like. And we passed the January 1. A lot of operators in January a lot of operators sort of have moved from January 1 to the February 1. I think I talked about that two years ago. Not just be after holidays, sort of moved a little bit out of that.

So just generally speaking, talk about the half of the portfolio that's sort of rolling in the Q1 specifically rather than just talking January 1. I would say existing customer rent increases have been relatively in the same ballpark of last year, but probably 100-150 basis points lower. That generally feels right around that level. So if it was 10 last year, it's nine this year, something like that. I'm not saying don't hold me specific. Some operators have done more than 10 last year. I'm saying, generally speaking, in that range of probably 100-150 basis points lower. And we will see what the rest of the portfolio does as we go through the year. Just also remember, RevPOR is not just a function of ECRI or existing customer rent increases, but it's also a function of sort of market rent, right? Your mark-to-market.

We will see. We don't know. Usually speaking, market rents are lower in Q1 and sort of goes up from the summer months. We'll see how this all plays out. There's a math aside. We feel that the second part of your question, which is a brilliant question, sort of thinking about in this kind of occupancy just call it mid-80s occupancy, what is that sort of efficient frontier, pricing versus occupancy? That question is harder to answer on a conference call, but I will tell you what you are going after is a very important one because how operating leverage because of operating leverage, how your incremental margins work. While it is in the late 70s, early 80s, it is obvious that you should go after the rate.

Now, the occupancy, that may not be true in the mid-80s where your optimized level could be some occupancy, some rates. We'll see how this plays out. But we think it's our guess as we sit here today and nothing but a guess that will be largely in the same ballpark of close to double-digit revenue growth that we have seen last year.

Operator (participant)

Your final question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem (Managing Director and Head of US REITs and CRE Research)

Hey, I just want to sort of close the thought on the occupancy just because the sequential sort of improvement as well as the guidance acceleration coming at it a different way, how much of this should we think of as an industry-wide phenomenon where we should expect other operators to see occupancy accelerate versus sort of John's operating platform creating that alpha is sort of part one. Part two would be when you think about that occupancy recovery slide in your deck, are we at the point where we should start thinking about 91% as a new target versus sort of the 88% because based on the guidance, you're going to be at 85% at the end of the year? Just trying to get a sense of how much conviction and growing conviction you have in getting back to that peak occupancy level. Thanks.

Shankh Mitra (CEO)

Ron, let me try to answer that question. The second part is an easier one. If all we do is we end up at 91% occupancy, which is sort of 2015 achieved, then we, frankly speaking, wouldn't add a lot of value because if you think about, I don't know. Just pick a number, two years, three years, whatever your number of years is, demand supply, I think you understand, starts to get materially better starting 2025, 2026, right? And the delivery schedule, if you look at it, you know what the starts are, which is not much, right? You can see the demand supply imbalance gets really interesting next year and the year after, right? At least we can say that because we don't know if there are other people that without our knowledge is building. It's unlikely, but we don't know.

At least we can sort of see next two years with a reasonable clarity. We don't believe that frictional vacancy of this business is 9%, right, John? Is that?

John Burkart (EVP and COO)

It's absolutely not. It's a financial calculation, and it is not 9%. It is substantially less. So that's just not an option.

Shankh Mitra (CEO)

So do we believe that we'll end up at 91%? I'll be very disappointed if that's the case, but we shall see what the market gives us. What was the first part of your question, Ron, that I missed?

Ronald Kamdem (Managing Director and Head of US REITs and CRE Research)

Sure. It was just so we expect every operator to see occupancy reaccelerate in 2024, or what are you guys doing that's different?

Shankh Mitra (CEO)

Yeah. So look, I can't speak for others, right? Clearly, what do I know about others? My promise to you and our fellow shareholders have always been that we will put 1,000% effort to outperform the market. So far, we have done it, right? I don't think Q4 numbers will be much different. And I think our hope will be that we will continue to do so. My confidence in our ability to outperform the average of the industry is widening. I think that gap is widening, and my confidence is increasing. But we still have to this is February 14th. We have to see what the year gives us.

Operator (participant)

There are no further questions at this time. This will conclude the Welltower fourth quarter 2023 earnings conference call. Thank you all for joining us today. You may now disconnect.