Welltower Q1 2025 Earnings Report

Thank you for standing by. My name is Kaylyn. I will be your conference operator today. At this time, I would like to welcome everyone to the Welltower First Quarter twenty twenty five Earnings Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Matt McQueen, Chief Legal Officer and General Counsel. You may begin.

Thank you, Matt, and good morning, everyone. I'll review business trends and our capital allocation priorities, and the team will follow the usual cadence. I'm pleased to report that we began the year on a positive note, delivering approximately 19% growth in FFO per share, driven by better than expected results from our seniors housing operating portfolio and significant acquisition activity. These results and our refreshed outlook for the remainder of the year have enabled us to raise the midpoint of our full year FFO guidance by $0.10 per share to $4.97 Before getting into some of the details, I first want to mention that our achievements this quarter extend well beyond operational execution and attractive capital deployment. Our years of unrelenting effort culminated into an announcement of several major achievements, which I believe will allow us to both augment our growth and extend its duration even further into the future.

These achievements include: one, the launch of our private fund management business two, significant advancement in the Welltower business system, our proprietary end to end operating platform three, solidifying our leadership through several key promotions four, our successful rollout of a corporate rebranding that reflects WorldTower's transformation from a healthcare real estate deal shop to a data science and technology driven operating company in a real estate wrapper. And finally, and most recently, an upgrade to a credit rating by both S and P and Moody's to A minus and A three respectively. I'm humbled by this unwavering dedication of our team in achieving these major milestones. Turning to fundamentals. Seniors Housing operating business remains strong.

There is no diminution of the momentum, which we carried into the year as reflected by our tenth consecutive quarter in which same store net operating income growth has exceeded 20%. From an occupancy perspective, following a period of exceptional results in 2024, we reported 400 basis points of year over year growth in Q1, the highest level of growth we have witnessed in any quarter outside post COVID recovery. Perhaps even more impressive is that despite seasonal headwinds that we typically encounter early in the year, the portfolio's sequential average occupancy growth of 60 basis points was the strongest we have reported in the first quarter of any year in our recorded history. Please look at our Slide six of our business update to reflect on what kind of seasonal outlier Q1 was. The business also maintained strong pricing power with growth in RevPAR or unit revenue of nearly 6%, with 90% occupancy cohort experiencing seven plus percent growth.

Excluding the impact of leap year, RevPAR growth was still strong at 5.1% and export or unit expense would have been 1.3% and same store revenue growth of 9.9. With the spread between RevPAR and export remaining at the historically wide level, we achieved another period of outsized margin expansion of nearly 300 basis points year over year with a significant runway of further growth, which John will touch on shortly. As we look ahead, the demand supply backdrop for senior living sector continues to strengthen, setting us up for a multiyear period of attractive growth. And we continue to augment that growth by taking market share with our best in class operating partners and bolt on business system execution. Nonetheless, we're acutely aware of the rise in macroeconomic uncertainty, particularly as we approach the summer leasing season.

We're encouraged by the strong trends we have observed thus far in the year, but also need to see what market gives us during the all important summer leasing season. The need based private pay nature of our product provides optimism around our ability to outperform not only other forms of real estate, but also major asset classes. However, as you know, we have no dilution of certainty. Shifting to transaction environment. As we have discussed in recent quarters, the opportunity set for compelling investments has grown meaningfully, and our recent activity clearly reflects that momentum.

In mid February, we announced $2,000,000,000 of pro rata acquisitions. In March, we announced the CAD 4,600,000,000.0 acquisition of Amica Senior Living. Today, we're pleased to announce another $1,000,000,000 of additional acquisition, bringing our total pro rata acquisition activity to roughly CAD 6,200,000,000.0 for the year. To put this into perspective, we have closed $6,000,000,000 of investments in all of 2024. As we reached the April, we have already invested more of our precious capital this year than in any previous years in the company's history.

However, as you know, our focus is not volume of investment, but the value they deliver. Transactions that we completed this quarter were secured at significant discount to replacement cost and are expected to meaningfully enhance our growth in coming years. This includes 38 community AMECA portfolio, the highest quality senior housing portfolio in North America. This trophy portfolio of 38 communities is located in highly affluent neighborhoods of Toronto, Vancouver and Victoria with an exceptional outlook for long term growth. Nikhil will provide more details, but we are thrilled to form a long term partnership with Robert, Jens and their team who share our vision of delivering a killer value proposition for residents and a dynamic environment for site level employees to grow and thrive.

If you want to look at another example of what great management does to thriving communities, please look at another Canadian example. In fourth quarter of twenty twenty three, we bought the Jazz portfolio for CAD885 million. While the portfolio was highly occupied at the time of acquisition, in last eighteen months, Matthew, Frederic and the team has taken the portfolio to 97% occupancy and 47% margin, well exceeding our high expectations. Another great example of similar win win success story is taking place in The U. S, our partnership with Timber Cannon and Legend.

Through our idea conversions, acquisitions and transition, we have collaboratively created a much bigger pie to share in together by expanding the portfolio to 53 communities. Legend has since grown the legacy portfolio cash flow to nearly 2.5x and also received non linear benefit as greater regional density drives higher management and incentive fees, higher real estate values and improved employee retention across all Legend communities. Before turning it over to John, I wanted to quickly touch base on our balance sheet. As I mentioned earlier, our efforts in recent years to reduce leverage and bolster our liquidity profile was recognized by S and P and Moody's through an upgrade of our credit rating. And during the quarter, our net debt to adjusted EBITDA further declined to just 3.3 times, another record low for the company as a result of prudent funding of our acquisition activity and strong cash flow growth.

Additionally, with nearly $9,000,000,000 of balance sheet liquidity, we are not only in position to endure any further capital market volatility, but also to deploy capital as opportunities arise. All in all, we're pleased with our execution so far in the year, but we have a long and busy year in front of us. With that, I'll pass it over to John. John?

Thanks, John. As we've discussed over the past few quarters, we have observed a noticeable expansion in capital deployment opportunities resulting not only from debt driven challenges, but also from pension funds seeking liquidity and other institutions reducing exposure to commercial real estate.

This backdrop has resulted in year to date investment activity, which has already surpassed our acquisition volume for all of last year, which in itself was a record year for the company. In addition, our investment pipeline remains robust with recent capital markets volatility presenting additional opportunities for us. Turning to the quarter, we completed $2,660,000,000 of new investments in the first quarter. On our last call in February, we had previously announced $2,000,000,000 of year to date activity. And since then, in the last two and a half months, we have expanded our investment activity by 4,200,000,000.0 bringing our total year to date balance sheet investment activity to $6,200,000,000 This additional activity is comprised of the USD 3,200,000,000.0 acquisition of Amica Senior Lifestyles announced last month and an additional $1,000,000,000 plus of new granular activity.

Of this additional $1,000,000,000 6 60 million dollars has already closed in Q1 with the remaining transactions expected to close in the coming months. Zooming in on our Amica transaction, which is expected to close around year end, we are already, and incredibly excited to announce our partnership with one of the strongest seniors housing operators in Canada. Alongside Cozier, one of Welltower's most valued growth partners, Amica's inclusion in our portfolio further enhances our partnership with best in class operators in the country. As Shankh mentioned earlier, the quality of the Amica portfolio is simply unparalleled as demonstrated by its locations within highly affluent neighborhoods and its performance track record. This ultra luxury portfolio that is comprised of 38 locations in Vancouver, Victoria, and the Greater Toronto area, boasts home values of 2 to $4,000,000 within the immediate vicinity of the communities, or three to four times the average home values in those respective provinces.

Living in an Amica building is a matter of great pride and prestige for the residents, and the service offering and the food quality are truly five star. The total consideration of 4,600,000,000.0 Canadian dollars is comprised of the following components. 31 in place operational assets with an average age of 11 years. These properties include 24 in service assets with in place occupancy in the mid nineties. These assets have sustained occupancy at these levels for a long period of time and both margins in the low to mid forties.

Given their strong reputation, these assets have demonstrated CAGR rep for growth of nearly 7% during the last five years. Beyond the stable 24, there are seven in place assets that are newly built and currently in lease up with average in place occupancy of approximately 70%. Amica has demonstrated an incredible lease up track record with their last 10 development projects leasing up in just eighteen months on average. The next bucket includes seven projects that are currently under construction and will be acquired at a preset price upon construction completion without well tower bearing any construction and cost related risk. These projects are expected to be completed between 2025 and 2027.

The final real estate component includes nine development parcels, which have gone through elongated multiyear entitlement processes. These parcels comprise of expansion opportunities for existing AMCA buildings or de novo developments in the most desirable and supply constrained locations in Vancouver, Victoria and the Greater Toronto Area. In addition to these components, the transaction includes the assumption of CAD $560,000,000 of CMHC debt priced attractively at 3.6% and an approximately one third ownership of the Amica management company along with an Align Dry DF five point o contract. The non development components of the transaction are underwritten to generate expected from the expansion and development projects as their respective business plans are executed over the coming years. Zooming back out to our first quarter activity, 93% of our activity was off market and 75% of this was with repeat counterparties.

Our activity was comprised of 26 different transactions with a median size of 55,000,000. I want to let this sink in. 26 different transactions in thirteen weeks or on average two transactions a week. We acquired 88 properties comprising nearly 10,000 units across all three countries and asset classes that we invested. Just within The US, we invested capital across 23 states in the first quarter.

With team members sitting across just three offices in The US and one office each in The UK and Canada, we're able to invest in a granular manner due to the strength of our data science and machine learning platform. Our data science solutions, which have been created over the past decade by Swagat and his team, provide us with a unique view of the terrain, giving us a neighborhood level view of 10 plus million micro markets in The US, allowing us to attain a level of scale which is truly unprecedented in real estate. When combined with our investment team's intellectual curiosity and relentless drive to get it right, not just to be right, with the disciplined execution of our high performing operating partners backed by the proven strength of the Welltower business system, we are able to get the air just right. This setup enables us to create significant value and consistently deliver strong returns and durable growth for our investors. I will now pass the call over to Tim to cover our financial results and updated guidance for 2025.

Thank you, Tim. Before I open the call up for questions, I wanted to quickly reflect on the current macroeconomic environment. Please note that during our second quarter call last year, we described our base case macro view for next few years. Without fully repeating my comments, I'll summarize them by saying that we appear to be entering a potentially long period of higher inflation and higher interest rate, a stark contrast to the market conditions over the past forty years. As a result of that shift, the tailwind which have lifted asset prices, including that of real estate, for the past few decades are not just subsiding, but also may well very well turn into a headwind.

Additionally, the current macro uncertainty may introduce another layer of complexity in the near term. Cyclical pressure on economic growth unfolding against the backdrop of elevated rates and persistent inflation that you can observe in the consumer confidence and other high frequency economic data. While we are not in the business of forecasting economic trends, we are keen observers of market based signals. Higher interest rates, coupled with significant widening of credit spreads across investment grade, high yield and all asset based financing markets warrant cautions as it relates to asset prices going forward. Said in another way, in our world of real estate, we expect higher rates along with wider debt spreads will put downward pressure on asset prices.

On our recent calls, while we have repeatedly discussed the wall of debt maturities and lack of credit availability, the other trend we are paying close attention to is on the equity side. Following the slow return of capital to LPs this cycle and the impact of denominator effects, after many years of pension funds and endowments steadily marching towards the Yale Swanson model, many large pools of capitals are reducing their exposure to private assets, including private real estate. This phenomenon has potential to exacerbate the negative credit driven impact of asset prices, which I just described. We at Welltower are focused on risk, reward, and duration when deploying capital, and we perceive a high level of risk than we did ninety days ago. While we hope that these clouds will pass, we do not believe hope is a strategy.

We believe capital allocation is all about positioning, not predicting. And to that point, I want to thank Tim and our Capital Markets team for putting us in an enviable position in terms of our balance sheet strength and liquidity to protect our owners' capital on one hand and take advantage of the market opportunities that may arise on the other. Ultimately, we believe that the days of generating returns through financial wizardry and levered beta are over. Instead, as an operating company in a real estate wrapper, we're convinced that the only path to delivering satisfactory returns will be through compounding of cash flow generated by superior operations and supplemented with capital allocation to sub optimize assets, further growing our network effect. And with that, I will open the call for questions.

And your next question comes from the line of John Kieliczewski with Wells Fargo. Your line is open.

Yes. So I'm not gonna walk you through. I wrote in a very detailed format of how jail market sort of structure works in a a marketed transaction. But if you go back and read it, you will see the path is sort of a real estate is a very glacially moving slow business. Right?

So if you just think about what the whole process looks like, John, when you say you are a seller, you are looking to sell something, you hire a broker, you go through all this to ultimately, you close the deal. That whole process takes about five to ten months depending on whether the, you know, the counterparty needs financing or not financing and all of those kind of things. Right? So if you just think about, you know, in our business, let's just say that focus on just our business, market participants in our business, not most, all of them are focused on sort of Nick 99 or that kind of information, which is sort of, you know, that's not great level of information, but that's kind of what you have. Level of information that sort of MSA level information, and then sort of that whole process rolls out.

For us, as Nikhil mentioned, you know, our proprietary platform analyzes 10 plus million micro markets nationwide, leveraging a unique and nonreplicable dataset accumulated over a hundred plus senior housing operators over twenty years. Right? So this granular machine learning approach, powered by long time series of data across diverse properties and operators, enables us to take a neighborhood level view of any asset and provide initial interest, within our team within a few minutes. And it determines a narrow range of predicted performance within a day. It used to be two to three days.

We have brought it down, with significant more compute power within a day, allowing us to provide initial, you know, sort of preliminary pricing feedback within a week that we can live with. Subsequently, to the assets and have a handshake on definitive terms within two weeks that we can again, we can stand by. Remember, at Worlds Out, we have nowhere walked away from a handshake. Right? So it's not just a question, oh, we'll look at our broker proforma and give people or throw people a number.

That's how real estate industries work. Right? So ultimately, close that deal in forty five to sixty days. So just think about that velocity to market makes us the first call to more sellers. Because frankly speaking, and obviously our reputation that we never walk away from a handshake, has fundamentally upended the status quo in this business, the real estate industry, which hasn't changed in decades.

Right? Because if you're a seller, what do you have to lose? If you don't like your answer within a week, you go go do that process anyway. Right? That we described that will take you five to ten months.

So think about so what are we trying to do? We're trying to bring down latency that is inherent in a glacially moving industry in a significant way. And latency is a very important concept when you study network effect. In most industries that move in that glacial phase, no different in our industry, as I said, in real estate. And that is a very, very thing that we're trying to disrupt by reducing latency in our system by completely turning the velocity to market in its head.

And as latency shrinks, materially as we talked about just talked about, the network effect kicks into high gear, creating a new paradigm of maximum growth, maximum gain that simply doesn't occur in businesses and industries that moves at a glacial pace. Right? So that's how it works. If you think about the journey of our journey of, you know, what we have been able to achieve, and you wanna point out to one thing, as Tim mentioned, you can't point out to one thing. This is a long decade long journey of transforming this industry and the transforming the business.

But if you want to point out one thing that will be reducing that latency. Right? That's how you sort of go into a paradigm of maximum growth, maximum gain, and that sort of create another level of, you know, network effect that kicks into the high gear.

And your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Your line is open. We'll go ahead and go to our next question with Jonathan Hughes with Raymond James Financial Inc. Your line is open.

Jonathan, before Tim gives you an answer, I'll I'll just say that we fundamentally disagree with your, assumption that our cost of equity is, lower than our cost of debt. Our cost of equity is much higher than you think. And that's probably because we think our potential growth rate in our long term business is much higher. Right? You gotta think about your cost of equity on a long term mark, not just your spot cost of equity. Anyway. Tim?

And your next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is open.

Ron, I would just say our expectation of what we think occupancy growth this year is Tim just described to you, so I have nothing to add to that. Long term, we believe that as we sort of optimize this business with fewer and fewer operating partners who increasingly have a much greater regional density, we believe that frictional vacancy is a lot lower than we thought. And John talked about this in the call, I believe, two, three calls ago. And so we believe we have a long journey in front of us, to a much higher level of occupancy. And obviously, I'm not I'm not talking about optics. I'm talking about current portfolio because remember, Nikhil continues to add a lot of under occupied buildings. So so we think we have a long journey in front of us. And but we're just think about this year. Right? We're giving you our best guess.

Remember, it's a guess. And our business is a June to October type of a business. Right? It's of a summer leasing season business. We'll go through summer and we'll tell you what we see.

But if we didn't feel good about the current pace of activity, current pace of, you know, sort of future resident engagement, we would not have raised guidance in Q1 for both occupancy and rates, right? But that's what we see today. We'll see what tomorrow brings us.

And your next question comes from the line of Seth Berge with Citi. Your line is open.

Seth, we are not going to sit here and try to speculate on what our pipeline may or may not do. We do believe that when this kind of capital markets disruption happen, people who absolutely looking for liquidity, whether that's the equity driven or debt driven that Nikhil talked about, will need to access liquidity. And and if it is that their expectation is commensurate with the today's reality of rates and spreads, we'll provide them that liquidity. And if not, we'll not. We know we're not in the business of doing deals.

We're an operating company. We only add assets in our, you know, in our markets and in our micro markets where we feel we can build retail density. So if we can, we will do it. If not, we'll just sit here and wait. Thank you.

And your next question comes from the line of Rich Anderson with Wedbush. Your line is open.

Yes. That's a very good question. It's a question that we reflect on in our shop all the time. So let's just take a step back and think about so the the if you are looking for a numeric answer, I'll just say it's fewer. And that sort of noise, no question that we are, focusing on regional density, focusing more and more concentrating concentrating on our existing partners who have performed performed really well.

There is no question that every year we look at, you know, we look at obviously a lot of new operating teams, and we added one or two. And then, obviously, a lot of people also fall to the wayside. But generally speaking, I will say, is there a pushback? Look. We're fair people. We're entirely focused on performance, and we're entirely focused on outlook of how some of our operating part part you know, sort of partners that think about the future.

Right? This is all about the future. And that is nothing to do with frankly speaking. There are two types of operators. Right?

Think about what we call gen one operators in our business. People who have been around with in with our company, with George Chapman and others, and they absolutely killed it. Tim Buchanan would be a great example. Right? Then there are operators that I grew up in this business with who are sort of, say, gen two operators, who have built the business as we with us, such as, you know, Matthew at Cozier or, say, Dan

Right? So so these are the operators that I grew up in the business with. A tremendous amount of respect for what they do and how they do it. And may frankly speaking, their outlook for the future. They want to get better every day, do new things, try things, fail fast, and move the business forward.

Do we find new operating partners, you know, sort of, who share that view? Amica would be a very good example of that. Right? Amica is an exceptionally good operator who have founded. Care UK and UK would be great example of that.

Right? They're exceptional team. But generally speaking, view is as the business has grown, we want to reduce complexity by focusing on think about what we're trying to do. We're trying to deploy well, to our business system across, grow with our operators, and, you know, so it's just today, it's a moving target. We have not seen any pushback, obviously, from all these, you know, sort of in UK and Canada.

In fact, we can Canadian businesses are growing, fabulously, and we expect that both of those business will continue to grow significantly. But that's kind of what I have to say at this point in time. I always sort of think about in current context of assets we have. But remember our, assets, Nikhil is making our job harder every day by growing the asset base, significantly, and we'll see where these things land. But philosophically, we want to be with people who right or wrong.

This is not a we're not pointing out that we're right, somebody else is wrong. It's just like we're philosophically aligned with us on where we're trying to take the business. And so that's kind of very important point is we want to be with people who are, you know, shoulder to shoulder with us no matter what.

And your next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Yeah. Once there was a couple of different transactions, but, you know, in in this particular quarter, you know, look, we've used the skilled nursing business as a credit business for us. Sometimes that comes in the form of a debt investment. Sometimes it comes in the form of a triple net lease investment, but they're they're both underwritten from a credit investment perspective. The the large transaction this quarter, you know, has a lot of things that we're really excited about.

So the first thing is, you know, it was a broken transaction with and there was some softness in the market. Deal fell apart. Welltower was able to come in and come in with dual path solution. One was we brought an operator to the table that the deal was lacking, and then the other was obviously a certainty to close. So first thing is, you know, we leverage that, the fact that it was a broken deal, to get a favorable price adjustment, you know, to the tune of a couple hundred million bucks in our favor.

Then the operator that we brought in is an operator we've, you know, we have an existing book of business with Aspire that has done an incredibly good job for us. You know, with Aspire, we we bought a turnaround portfolio towards the end of twenty three, and their performance, you know, in just a matter of five, six quarters has been quite incredible. They took a portfolio that was, you know, on the EBITDAR basis losing, call it, $15,000,000, and improved cash flow such so significantly that today that EBITDAR is, you know, north of $90,000,000. So given and there was a scaled portfolio just given the dollars we're talking about here. So given, you know, their strength and the quality of execution, this portfolio, given its size, made a lot of sense for them.

And from a performance perspective, in place, this portfolio is generating enough cash flow to cover rent, you know, one o year one or in place. And that's that occupancy in the mid sixties. So we have an operator that has a proven track record of, you know, improving performance pretty substantially. But in this case, unlike the Florida case, you have significant in place cash flow that covers rent day one. And on top of that, there is additional credit enhancements in terms of guarantees.

There's north of a half a billion dollars worth of net worth, you know, that is in assets outside of skilled nursing that is sitting behind with this transaction to support. Right? So you've got, you know, quality assets check, quality operator check, in place cash flow with room to the upside check, and additional credit protection check. Right? So that's that's the setup here.

And, you know, we just found a a great transaction that was broken.

And your next question comes from the line of Wes Golladay with Baird. Your line is open.

Yeah. So, look, as I mentioned in the prepared remarks, there is nine development parcels that we're acquiring as part of the transaction. And, you know, they've had extended multi year, five, six, seven year entitlement processes. Now some of those are expansions. The other are de novo projects.

As you can imagine, expansions are easier to pencil just given that the operating cost load that you're gonna add to the incremental units is is, you know, in most cases de minimis or in a fraction of what you would have for a de novo project. So those projects continue to make a lot of sense and and will develop. And and the the the handful that are de novo, you know, they are in the highest quality, highest rent market. And those will evaluate. Right?

We'll we'll evaluate to see if, you know, once the dust on settle you know, settles a bit on tariffs and cost certainty, we'll see if it makes sense to start them today or or or in the future. But, you know, just given that there's a bunch of expansion projects, we'll certainly expect to see some starts next year.

And there are no further questions at this time. This does conclude today's conference call and you may now disconnect.