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    Welltower Inc (WELL)

    Q2 2024 Earnings Summary

    Reported on Jan 6, 2025 (After Market Close)
    Pre-Earnings Price$112.24Last close (Jul 30, 2024)
    Post-Earnings Price$112.23Open (Jul 31, 2024)
    Price Change
    $-0.01(-0.01%)

    What went well

    • Welltower is actively acquiring high-quality seniors housing assets at attractive valuations, capitalizing on distressed opportunities in the market, leading to potential substantial occupancy and cash flow upside. The company has $4.9 billion of transactions closed or under contract in 2024 , with assets offering significant occupancy growth potential from the low-80% range . Executives emphasize that they are in the very early inning of the growth cycle .
    • Strategic initiatives, including leveraging technology and operational improvements, are expected to drive significant growth and margin expansion starting in 2025 and beyond . The company is dramatically driving down costs by 20% to 50% , and their initiatives have the potential to meaningfully contribute to growth in 2025 and beyond . They are focused on building regional density and growing with operating partners, emphasizing a total return approach .
    • Financial performance is strong, with normalized FFO of $1.05 per share, representing 16.7% year-over-year growth (19% adjusted) , and same-store NOI growth of 11.3% year-over-year . Credit rating agencies S&P and Moody's both moved their outlooks on Welltower's ratings to positive during the quarter , reflecting the company's strong balance sheet and growth trajectory.

    What went wrong

    • Despite falling lumber prices, Welltower's overall construction costs remain meaningfully higher than they were a couple of years ago, impacting development margins.
    • Operating margins in Welltower's senior housing operating portfolio remain in the high 20% range, below pre-pandemic levels, and improving margins requires higher occupancy, which may be challenging.
    • Welltower is being cautious about acquisitions of distressed senior housing properties, with no set targets, potentially limiting growth opportunities.

    Q&A Summary

    1. Growth Drivers and Occupancy
      Q: What will drive the next phase of growth?
      A: Management sees substantial occupancy upside, as industry occupancy is in the low 80% range. They expect tremendous cash flow growth as occupancy increases beyond 80%, where margin flow-through improves significantly. They focus on assets with occupancy upside and believe they are in the very early innings of the growth cycle.

    2. Margins and Operating Leverage
      Q: How high can operating margins go?
      A: While not speculating on exact margins, management aims to exceed pre-COVID levels. Achieving higher occupancy and implementing platform initiatives are key to margin expansion. They stress that merely returning to pre-pandemic margins would mean they have failed.

    3. Acquisition Strategy
      Q: What's the current investment environment?
      A: The company focuses on total return investments with occupancy upside, not stabilized assets attracting competition. They target assets where they can add value and grow with operating partners. Availability of debt for stabilized properties doesn't affect their strategy.

    4. Balance Sheet and Leverage
      Q: Will you use leverage to drive growth?
      A: There's no plan to lean into leverage, but low leverage offers optionality. Organic deleveraging and increased free cash flow provide capacity to tap debt for per-share growth when appropriate. Management acknowledges they won't remain at very low leverage levels indefinitely.

    5. Cash Flow Generation
      Q: Are there upside drivers to free cash flow?
      A: They are in the early stages of enhancing free cash flow generation. Operational initiatives are reducing CapEx costs by 25% to 50% and accelerating turnaround times, improving occupancy and NOI. Management is excited about the significant potential in free cash flow as these initiatives take effect.

    6. Wellness Housing Growth
      Q: What's the growth profile of wellness housing?
      A: The wellness housing business has expanded to 25,000 units since 2018. Despite high occupancy, it has compounded at 8% to 10% through the pandemic. Management is enthusiastic about its strong organic growth potential.

    7. Foreign Owners Exiting
      Q: Why are foreign owners selling senior housing?
      A: Foreign counterparties face debt pressure similar to domestic sellers. A strong U.S. dollar offsets some impact, but they seek to exit entirely. The company is working on transactions to buy them out completely.

    8. SHOP Portfolio Margins
      Q: How to improve SHOP operating margins?
      A: Increasing occupancy is crucial for achieving higher margins beyond pre-pandemic levels. Management insists that merely returning to pre-COVID margins is insufficient. Higher occupancy will drive significant margin expansion.

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