Q4 2023 Earnings Summary
- Consistent Outperformance in Occupancy and NOI Growth: Welltower has consistently outperformed the market in both rate growth and occupancy growth, achieving a 330 basis point year-over-year occupancy gain—a record year. If they achieve their NOI growth guidance in the SHOP portfolio, it will result in a 75% compounded growth over three years, an unprecedented achievement in a large portfolio.
- Strong Pipeline and Robust External Growth Opportunities: Welltower is experiencing a record level of investment opportunities, with a robust and actionable pipeline, particularly in Q1, which is traditionally a slower period. They anticipate a massive amount of value creation through these investments, owing to a large number of maturing loans in the senior housing space that present acquisition opportunities.
- Confidence in Sustained Double-Digit NOI Growth: Management expresses strong confidence in sustaining double-digit NOI growth for years to come, driven by favorable demand-supply dynamics starting in 2025-2026 and their strategic platform buildout. They believe there's "no reason" they can't return to or exceed 2015 occupancy levels.
- Uncertainty about sustaining high growth rates in the future: When asked if the current strong growth trajectory can continue, CEO Shankh Mitra acknowledged uncertainty, stating, "We have no hubris of sort of knowing what we don't know... We'll see how this plays out." This suggests the company is unsure if growth will normalize or decelerate.
- Potential regulatory risks impacting profitability: In response to questions about regulatory concerns, Tim McHugh admitted awareness of discussions on regulatory changes that could affect senior housing, such as potential staffing requirements, though he downplayed the impact. This indicates that regulatory changes could pose a risk to profitability.
- Lack of specific data on key operational metrics: When asked about average age of move-in and comparisons to pre-COVID levels, Executive John Burkart did not have the specific information and could not provide details, stating he would "look to see if I can get it and get it back to you off-line." This suggests a possible lack of data or monitoring of important operational metrics.
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NOI Growth Outlook
Q: Can double-digit NOI growth continue?
A: Management believes they can continue achieving double-digit NOI growth for years to come. Despite market expectations of deceleration, they see no reason they can't return to 2015 occupancy levels due to improved demand/supply dynamics and their platform's buildout. -
Investment Opportunities
Q: How robust is the acquisition pipeline?
A: The acquisition pipeline is extremely robust, with management stating they've never been this busy in Q1. They anticipate a potential record year due to a massive amount of senior housing loans rolling over and limited credit available for refinancing. However, they emphasize they will only grow if it adds value per share. -
RevPOR and Rent Growth
Q: What is the expected RevPOR growth in guidance?
A: Rent growth is expected to be in the 5% to 5.5% range, driving the flexibility within their guidance. This contributes significantly to the anticipated performance of the SHOP portfolio. -
Operating Leverage and Margins
Q: Does increasing occupancy require more staffing or marketing spend?
A: As occupancy surpasses 80%, incremental staffing needs are minimal since key positions are already in place. Therefore, higher occupancy leads to significant flow-through to the bottom line, with conditions being described as fantastic due to favorable supply-demand factors. -
Wellness Housing Growth
Q: How has the wellness housing portfolio performed?
A: The wellness housing portfolio has historically grown at mid- to high single digits. In 2023, same-store NOI growth was 12.2%, and in the fourth quarter alone, it reached 13.1%. The 60% operating margin of the Affinity portfolio sits towards the upper end of the wellness housing spectrum. -
Regulatory Risks
Q: Are minimum staffing rules a concern?
A: Management is aware of regulatory discussions but notes that their senior housing business is almost entirely private pay, driven by reputation and quality. Staffing levels and care quality are critical for their success, and they focus on creating sustainable models at the property level. -
Development Expectations
Q: When will senior housing development pick up?
A: They anticipate that significant development is years away due to high construction and capital costs, lack of development financing, and dismantled development platforms. There is little confidence in achieving profitable development given recent market conditions. -
Occupancy Targets
Q: Can occupancy exceed pre-COVID levels?
A: Management believes there's no reason they can't surpass 91% occupancy, which was achieved in 2015. They would be disappointed if they only returned to pre-COVID levels, given upcoming favorable demand-supply dynamics. -
Competition for Assets
Q: Is more capital entering the space, increasing competition?
A: Currently, there is little to no competition for acquisitions as most transactions are privately negotiated. They are not seeing other capital entering the space significantly. -
Balance Sheet Positioning
Q: How will excess cash be utilized?
A: The company holds significant cash but plans to use it to pay off $1.35 billion of unsecured maturities in the first quarter. They are well-positioned to capitalize on opportunities to deploy cash into investments.