Welltower Inc. Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Welltower Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Operator instructions: To ask a question, press star then the number one on your touchtone phone. Please be advised that today's conference is being recorded. Operator instructions: I’d now like to hand the conference over to your first speaker today, Mr. Matt Carrus.

Thank you, Dillaman, and good morning, everyone. As a reminder, certain statements made during this call may be deemed forward-looking statements within 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?

Thank you, Matt, and good morning, everyone. First and foremost, I hope that all of you and your families are safe and healthy during these extraordinary times. In the suite of this year-end call, I would like to review year 2020, the most challenging in our history and discuss different paths of growth, and long-term value creation for our continuing shareholders on a per-share basis. We came into 2020 prepared for perhaps a plain-vanilla business cycle downturn. We pushed out our maturities in Q4 of 2019, sold a lot of short-duration assets, bought a lot of longer-duration assets, and continued to upgrade our portfolio, operators, management contracts, and talent. We are hopeful that with the continued decline in senior housing deliveries and starts on one hand and the aging of the population finally picking up on the other hand, that 2020 would serve as an inflection point for the fundamentals after decades of weak demographics resulting from the aging of the baby-boomer generation. Then, the once-a-century pandemic happened that would turn out to be particularly devastating for our business. The back half of first quarter, the second and third quarters were all about long-term value preservation. We enhanced our liquidity profile dramatically by selling assets in record time at or near pre-COVID pricing, and, more importantly, avoided mistakes of raising long-term dilutive capital, a consistent theme for managing the company for continuing shareholders on a per-share basis. We started during the dark days of March and April by selling $1 billion of assets at great prices in a record 43 days from signing a confidentiality agreement to receiving cash. We continued this journey during Q2 and Q3 and eventually executed on $3.7 billion of dispositions at extraordinary prices to build an unprecedented war chest. Two things particularly surprised me during these times: the resilience of our team including our extended team of operating partners, and the liquidity of our assets. Not that we didn't have doubts or failures, but we continued to move forward in spite of them with a steady hand on the wheel and an unwavering belief that we would get to the other side. Our team's stoic resilience reminded me every day of Winston Churchill's famous quote, that "Success is not final, failure is not fatal; it is the courage to continue that counts." In those moments of reckoning, I realized how privileged I was to be part of this team that didn't miss a beat and blazed new trail. For years, I have heard that healthcare-oriented real estate deserves a discount compared to, say, a shiny tower in the middle of a large gateway city due to the lack of liquidity and smaller ticket size, especially during down cycles. I hope that during the worst down cycle of our asset class, this debate has been finally settled as demonstrated by our execution and that of our colleagues that helped us. In the fall, we pivoted again from defense to offense as we started underwriting and shaking hands on new acquisitions. It is important for you to understand that we don't shake hands and then find excuses to walk or chip away; if we shake hands, we close. Our handshake in this business is worth gold, and we only enhanced our long-term reputation during this pandemic. During last quarter’s call, I discussed $1 billion of deep-value opportunity. I am delighted to report that we have closed roughly $700 million of acquisitions since the start of fourth quarter at a significant discount to replacement cost. Our acquisition pipeline has grown meaningfully, and as I sit here today, I am optimistic this year is shaping up to be a year of net acquisition, perhaps significantly so. At the same time, I will remind you that we are not driven and incentivized by volume of acquisition, but the value of it. Asset price is the ultimate determinant of how we'll behave. In this moment of confusion and ambiguity, I indulge you to focus on four distinct pillars of long-term value creation for Welltower. One, operating fundamentals. Tim will get into the details of what happened last quarter and what might happen next quarter. While operating fundamentals are awful right now with little near-term visibility, we are optimistic about the vaccine rollout as 90% of our assisted living and memory care facilities have conducted their first vaccination clinic with virtually all residents taking the shot. While I would not expect this to be a source of value creation in the very near term, I'm hopeful about the second half of the year. Normalization of operating performance remains the largest source of value creation for our shareholders. It is too early to comment on exact timing of the trough and the shape of the recovery, but we'll keep you posted frequently intra-quarter so that you can see what we see. Our focus remains on upholding the reputation of our communities and maintaining the safety of our operator staff and residents. We spared no expense and have already spent in excess of $80 million on COVID-related expenses to date doing everything we can within our control to support their well-being. Due to the great reputation of our operators and the extraordinary value they provide, rates are holding up. In 2020, REVPOR was up 2% in assisted living and memory care, 1% in independent living, and 4.4% in our seniors apartment business. This growth occurred despite the headwinds resulting from lower community fees driven by a decline in move-in activity. Number two: operator platform enhancement, management contracts, leadership and system enhancements, and building local scale are some of the examples of this. Let me highlight two specifics here. A) Sunrise: we are delighted by the appointment of Jack Callison as the CEO of Sunrise Senior Living, our largest operating partner. Jack will bring much-needed attention to operating excellence with an operations-first culture. We are also negotiating a new management contract that will align the interests of Sunrise and Welltower as the owner of the assets. We are diligently working with the management of Revera, Sunrise's majority owner, to enhance Sunrise's position so that it can emerge from this pandemic as the leading operator poised for excellence and growth. B) Building local scale. If I can quote Charlie Munger, the advantages of local scale are of ungodly importance to this business. We have and we will continue to scale our most important strategic partners as we expand our senior housing footprint. To name a few in alphabetical order, Balfour, Brandywine, Clover, Cohj? (assumed "Cojir" in the transcript may be "Cojir" or another operator), Frontier, Kelsey-Seybold, Kisco, Oakmont, StoryPoint are just some of the examples of the partners we have grown significantly during this pandemic. What is common amongst them? They are excellent operators in their market. They have great leadership. They are disciplined, yes, courageous, and they have an aligned relationship with Welltower. We rise and fall together. This list is expanding with our significant opportunity set that I mentioned a few moments ago. Number three: capital deployment opportunity. I have already commented on the acquisition opportunity on the deep-value side. As a risk of sounding like a broken record, I would remind you that we are an IRR buyer with an incredible focus on basis, operators and structure. Our opportunity set is rising rapidly and I hope to provide you with more specific color in the next 60 to 90 days. This comment is obviously focused on the current opportunities. Let me provide you with some color on a related topic, but on future opportunities. We at Welltower have never been in a more advantageous position as a partner of choice. For years, we have focused on a growth strategy driven by our relationship-based and alignment-focused structures and data analytics platform rather than prioritizing costs and access to capital advantage. After all, not all capital is equal. We never imagined that we'd encounter today's extreme stress, but as you can see, we stood by our operators during this difficult time not only to preserve their businesses, but also to grow them significantly. Talk is cheap, but action is not. For this reason, we are inundated with requests as a partner of choice from all asset classes we play in. As much as they like to call, we have been on roads throughout this pandemic meeting with prospective partners. This is a very meaningful truth. We have executed more partnership and pipeline deals in the next nine months than over the five preceding years combined. We expect to deploy $10-plus billion of capital in these opportunities in the next few years. In other words, we are not only executing on deep-value early-cycle opportunities, but also laying a strong foundation of growth through the entire cycle when inevitably the significant price discrepancies of today will be gone. To give you an example, we recently reupped our master development agreement for five years with Kelsey-Seybold, our largest MOB tenant. We are looking to start approximately 600,000 square feet, 100% pre-leased development in 2021 and 2022. Number four: talent opportunity. I touched on this last call, but let me elaborate for those of you who are focused on long-term. We are seeing an incredible interest in our platform from seasoned professionals to early career applicants. We have taken advantage of recent disruption and brought in 41 new professionals in 2020. We expect at least as many, if not more, to join our team in 2021. In addition to new talent, our existing talent pool is taking on more responsibilities in reaching new heights. As a result, we had 50 new promotions at Welltower. Though this puts early pressure on G&A, which is partially offset by lower executive comp, we think this incredible talent pool is equivalent to a cold spring, which will manifest itself in meaningful growth for the firm. Speaking of talent pool, how is the mood inside Welltower today? What I described to you as a stoic resilience last year has transformed into an environment of optimism and unbridled passion this year. I want to make it abundantly clear: we have no crystal ball about the near-term operating fundamentals, but we are doing meaningful work that matters, we have meaningful relationships, and we are seeing a new level of positive energy of people who want to be part of this team internally and externally to create meaningful value and make a disproportionate impact. With that, I'll pass it over the microphone to Tim. Tim?

Thank you, Shankh. My comments today will focus on our fourth quarter 2020 results, the performance of all of our investment segments in the quarter, our capital activity, and finally, a balance sheet and liquidity update and our first quarter outlook. The fourth quarter was a tough end to a very challenging year as the ongoing impact of coronavirus accelerated meaningfully in the back half of the fourth quarter and into the beginning of 2021. The visibility for large parts of our business beyond the next 90 days remains very limited and very dependent on virus-related variables, such as its unpredictable path of growth, the rollout and efficacy of the vaccine, and the continuation of population lockdown mandates. As a result of this uncertainty, we decided to provide our first quarter outlook this morning in place of the full-year outlook we would normally provide in our fourth quarter call. As we have done over the last year, we will continue to disclose and update information on a frequent basis, with the intention of providing a more complete outlook as soon as the virus-related variables moderate to a level that allows for reliable forecasting. Now turning to the quarter. Welltower reported net income attributable to common shareholders of $0.39 per diluted share and normalized funds from operations of $0.84 per diluted share. Normalized FFO was sequentially flat versus third quarter and the decline in senior housing operating earnings and dilution from dispositions closed over the last two quarters was offset by recognition of HHS funds, lower G&A, lower interest expense, and initial returns on reinvested capital. Now turning to our individual portfolio components. First, our triple-net lease portfolios. As a reminder, our triple-net lease portfolio coverage and occupancy stats are reported a quarter in arrears. So these statistics reflected the trailing 12 months ending 9/30/2020, and therefore only reflect a partial impact from COVID-19. Importantly, our collection rate remained high in the fourth quarter, having collected 97% of triple-net contractual rent due in the period. Starting with our senior housing triple-net portfolio: same-store NOI declined 2.7% year-over-year as leases that were moved to cash recognition in prior quarters continue to comp against prior full-year contractual rent received. Occupancy was down 260 basis points sequentially consistent with the average occupancy drop from Q2 to Q3 in our RIDEA portfolio and EBITDAR coverage decreased 0.01x on a sequential basis in this portfolio to 1.01x. During the quarter, we transitioned a UK development portfolio from triple-net to RIDEA, transitioned 14 former triple-net capital senior assets to new operators in RIDEA structures and disposed of one asset with net impact of increasing coverage by 0.03x. Consistent with my comments in the past, our senior housing triple-net lease operators experienced similar headwinds as our RIDEA operators over the past nine months and we expect reported lease coverage stats to continue to reflect these challenges as more of the pandemic periods are reflected in EBITDAR going forward. That being said, resilience of this portfolio is reflected by the continued high cash collection rate, which is encouraging. As I described last quarter, we entered into an agreement with Capital Senior at the beginning of 2020, which allowed for an early termination of Capital Senior's leases on 24 Welltower-owned assets in exchange for full rent being paid in 2020 in cooperation with transitioning the operations of these assets. We transitioned 14 properties operated by Capital Senior to new operators in the fourth quarter in addition to the five that were transitioned during the third quarter and anticipate the remaining assets to be transitioned to new operators in the first half of 2021. As a result of the continued COVID backdrop, the initial expected dilution from these conversions is expected to be approximately $0.04 per share in 2021. Additionally, the conversion of a development portfolio in the UK from triple-net to RIDEA is also expected to negatively impact normalized FFO by $0.04 per share in 2021. The combination of these two transitions is expected to result in a sequential roll down with a little over $0.02 per share of normalized FFO from Q4 to Q1. Next, our long-term post-acute portfolio generated 2% year-over-year same-store growth. However, EBITDAR coverage declined by 0.012x sequentially to 1.0x, which was almost entirely due to deterioration in our largest long-term post-acute tenant, Genesis HealthCare. As we noted last quarter, Genesis HealthCare, which makes up approximately half of our long-term post-acute exposure, raised concerns around its ability to continue as a going concern in the second quarter financials filed on August 10. As a result of this concern, Welltower began recording revenue on a cash basis in the third quarter. Furthermore, we wrote down our unsecured loan exposure driven by $80 million in the fourth quarter. Similar to our Genesis lease income, we've been recognizing all interest on our unsecured loans on a cash basis. So this impairment does not change income recognition on these loans. Genesis remains current on all financial obligations to Welltower through January. And lastly, health systems, which are comprised of our ProMedica Senior Care joint venture with the ProMedica Health System, had same-store NOI growth of positive 2.7% year-over-year and trailing 12-month EBITDAR coverage was 2.27x. Turning to medical office. Our outpatient medical office portfolio delivered positive 2.1% year-over-year same-store growth, modestly below long-term trends. Growth continues to be negatively impacted by reserves for uncollected rent, the large majority of which resulted from lease enforcement moratoriums in several California jurisdictions in which we have a sizable footprint as I described last quarter. As these moratoriums expire, we expect rent collection to improve from the 98.5% received in the fourth quarter. Looking back at 2020, our outpatient medical platform displayed incredible resilience in a truly challenging year, which includes periods of time when basic medical appointments and procedures were not permitted. We still managed to grow same-store NOI on average by positive 1.7%. During the fourth quarter, we continued to observe improvements in several key operating trends as business continues to normalize, notably a pickup in our leasing pipeline, which has started to reflect positive occupancy pickup towards the back half of 2021. Now turning to our senior housing operating portfolio. Before getting into this quarter’s result, I want to point out that we received approximately $9 million from the Department of Health and Human Services CARES Act Provider Relief Fund and post-quarter we received another $34 million, delivering $8 million and $31 million of net expected proceeds at our share. We are recognizing these funds on a cash basis and so there were flow-through financials in the quarter in which they are received. We are normalizing these HHS funds on a same-store metric, however, along with any other government funds received that are not matched to expenses incurred in the period they were received. In the fourth quarter, there are approximately $11.8 million of reimbursement normalized out of our same-store senior housing operating results, mainly tied with HHS program in the U.S. Now turning to results in the quarter. Same-store NOI decreased 33.8% as compared to fourth quarter of 2019 and decreased 11.3% sequentially from the third quarter. Starting with revenue, sequential same-store revenue was down 2.4% in Q4 driven primarily by a 160 basis point drop in average occupancy. As a reminder, we started the fourth quarter with relative optimism on the occupancy front with improving year-over-year move-in volumes and relatively low prevalence of COVID within our communities. However, these positive trends rapidly reversed as the exponential rise in global COVID cases in November and December, and the city and statewide lockdowns, admissions bans across many of our key MSAs—particularly in the UK and California, which together comprised 34% of our SHO portfolio NOI—resulted in 180 basis points of occupancy loss from November through year-end. As I stated on our third quarter call, the path of COVID will dictate our business trend from the fourth quarter, not seasonality and not the seasonal flu, and that has proved true over the past 3.5 months. Turning to REVPOR in the quarter, total SHO portfolio REVPOR was down 1.2% year-over-year and flat sequentially. But as I described last quarter, mix shift is a key part of the true picture of rent growth metrics. The standalone year-over-year REVPOR growth for active adult, independent living and assisted living segments were positive 3.7%, 0.5% and 1.1%, respectively. The combined total portfolio metric is being impacted by considerable changes in composition of occupied units in the year-over-year portfolio, as lower acuity properties, independent living and active adult, have held up considerably better on the occupancy front since the start of COVID. We just had the mathematical impact of having a higher portion of our total portfolio occupied units being lower acuity and therefore lower rent-paying units. The point being rental rates are proving more resilient across our portfolio than would appear in our aggregate reported statistics. And lastly, expenses: total same-store expenses declined 2.1% year-over-year and increased 50 basis points sequentially. I'll focus on the sequential since the changes are more relevant to trends in the current operating environment. The 50 basis point increase in operating costs was driven mainly by higher sequential COVID costs as a result of the surge in cases in the fourth quarter. Decline in topline combined with these expense pressures had a meaningful impact on our operating margins, which declined 220 basis points sequentially to 22.3%. As I noted earlier in the call, we did not include government reimbursement that was not tied to period expenses in our same-store results, and therefore COVID expenses negatively impacted same-store results by $18.9 million in the quarter. We will stay consistent with distribution in Q1, where we've already received a net $31 million in HHS funds that would likely turn COVID expenses into a net benefit if included in our same-stores and offset. Looking forward to the first quarter and starting with 2021 year-to-date data we have already observed: we've experienced a 180 basis point decline in occupancy through February 5. Given the still heightened presence of COVID, we expect average occupancy to be down 275 to 375 basis points from fourth quarter to first quarter. Note that we are providing the average occupancy as opposed to spot occupancy as a former better tie to our reported financials, and therefore, 260 basis points of our expected 275 to 375 basis point decline is already baked in given the swift drop from mid-November to date in occupancy. We expect monthly REVPOR to be down 20 basis points sequentially, although it should be noted that actual rent per unit is up 2.1% sequentially due to mix shift and two fewer days in the quarter; Q1 reported REVPOR versus actual rent growth will differ for that reason. Lastly, we expect total expenses to be effectively flat as higher sequential COVID costs are offset by less labor utilization due to lower occupancy levels. Turning to capital markets activity. Throughout 2020, we took a series of actions that were difficult but resulted in our ability to retain significant cash flow and ultimately gave us greater control to navigate through the pandemic. It's worth highlighting that despite the stress driven by our business, we've avoided destabilization of the balance sheet by borrowing to pay the dividend or being forced into raising equity or selling assets on attractive valuations. Given where we sit today, with $2.1 billion of cash and over $5.1 billion of available liquidity, we are pleased with our course of actions being the most prudent way to maximize balance sheet stability and positioning us to take advantage of attractive capital deployment opportunities. In addition to shoring up the balance sheet, we undertook a series of actions to optimize spend and maximize retained cash flow by reducing our corporate overhead through tighter cost controls and fine-tuning of capital expenditure plans. We also made the decision in May to reduce our quarterly dividend by 30%, given the uncertainties from the pandemic timeline and severity. Despite the pandemic's substantial negative impact on our business, our actions throughout 2020 removed any dependence on a quick recovery, and also afforded us the opportunity to be patient with respect to the transaction market and take advantage of attractive private market valuations relative to public markets, while also highlighting institutional demand for a high-quality portfolio. Over the course of the year, we sold $3.7 billion of pro rata assets at a blended 5.4% yield, including $1.3 billion of senior housing operating assets at a price per unit of $332,000 per PPE. Most recently, during the fourth quarter, we sold a portfolio of senior housing operating properties operated by Northbridge for $200 million, representing a 4.9% cap rate on trailing 12-month NOI and $395,000 per unit. Also in the fourth quarter, we announced a new joint venture partnership with certain investment vehicles managed by Wafra. The joint venture comprised a portfolio of 24 outpatient medical properties previously majority owned by Welltower. Many of these transactions were completed in the midst of significant disruption to real estate and capital markets, when the long-term viability of our senior housing assets in particular were being called into question. While we are pleased with execution on the disposition front, we’re excited to now be executing on the acquisition side with financial flexibility and ample liquidity. On our third quarter earnings call, Shankh described a $1 billion acquisition pipeline. Since the start of the fourth quarter, we've closed on $657 million at a blended initial yield of 4.5% with an expected stabilized yield over 7.5%. Lastly, moving to our first quarter outlook. Last time we provided an outlook for the first quarter of net income attributable to common stockholders per diluted share of $0.24 to $0.29 and normalized FFO per diluted share of $0.71 to $0.76. The midpoint of our guidance, $0.735 per share, represents a sequential decline of approximately $0.105 per share from the fourth quarter. The $0.105 decline is composed of a $0.08 decline in senior housing operating results driven by $0.06 of fundamental decline and $0.02 of increased COVID cost; a $0.03 per share sequential decline in triple-net senior housing NOI, a little over $0.02 of which is related to the Capital Senior and UK transitions mentioned earlier with the remainder due to fundamental declines on cash recognition leases; a $0.02 per share decline related to net investment activity in Q4 and Q1; and $0.03 related to a combination of other items mainly made up of increased G&A, income tax and a slight decline in interest income. These declines are offset by a 5.5% increase in pro rata HHS funds received to date in the first quarter. As a reminder, we are only guiding the HHS funds that have already been received as of today's call. And with that, I'll hand the call back over to Shankh.

Thank you, Tim. I want to end with two things before we open it up for questions. First, I'm excited about the collaboration that is occurring among our peers and us. We have worked diligently with Ventas and Omega to address operator and industry issues and toward mutually beneficial transactions. For example, it was an absolute pleasure to work with Tom DeRosa and his team on two separate transactions totaling $170 million. I'm positive we are embarking on a new era of collaboration among the public companies in our space. Second, in spite of the stress our industry is facing today, our confidence in our business has not changed, and I'm hopeful that my comments this morning have provided you with a framework for how we intend to create long-term value for all of our stakeholders. We are grateful to be part of your portfolio as our shareholders. Personally, this management team has established a highly concentrated position in Welltower. In fact, neither Tim nor I have sold a single share of the stock that we have received on a post-tax basis since we have come on board a few years ago, which should be an indication to you, our fellow shareholders, of our conviction and personal stake in this business. As Buffett taught us, diversification may preserve wealth, but concentration builds wealth. This does not mean the path forward will be without challenges, but it is clear that we are all in on this company and that our alignment with you, our shareholder, is strong and significant. With that, we'll open the call up for questions.

Thank you, sir. Operator instructions: To ask a question, press star then the number one on your touchtone phone. I show our first question comes from the line of Juan Sanabria from BMO Capital Markets. Please go ahead.

Hi. Good morning and thank you for the time. Just on the acquisition front, you guys talked about the $1 billion pipeline and being confident on more opportunities. I was hoping you could provide a little bit more color on what the focus is. Is it still on the kind of the value opportunities in seniors housing buying at a great basis? And if that's the case or more generally, if you can give color on the timeline to stabilization from the low cap rates going in, what we should expect in terms of when you get those stabilized yields?

Thank you, Juan. Good morning. Our focus is to buy, at least in the near term, value opportunities at a significant discount to replacement cost where we can bring in the right operators or buy with the right operators if it is owned by other capital partners of our operators. So we're focused on basis, we're focused on operator, we're focused on structure. Interestingly, we're starting to see some opportunities where the initial yield is not as much of a drag. That’s just a coincidence; we're not focused on that. We're focused very much on basis, structure, and operator. I expect that our blended yield of the opportunities, when we talk about next quarter, will actually be dragged up overall by this set of opportunities. But I can tell you that is not our focus. We're purely focused on basis, structure, and operator.

And any color on timeline to get to the stabilized deals? I mean, it just generally ties to the overall length of the recovery. I know it's just…

Juan, it is purely dependent on the shape of the recovery and when it troughs, which I already said that I'm not going to comment on. It is a very uncertain environment. That is precisely why we're buying these value opportunities so that we don't have to be dependent on that. If we had a perfect sense of what the shape of the curve looks like and when it perfectly troughs, then we would be buying everything we possibly can, which we are not. We're very focused on a significant discount to replacement cost for that very reason. But again, we need more time to give you a general sense of what that looks like; it depends on asset to asset. We're buying assets that are 82% occupied and we're buying assets that are 22% occupied. So, it's very hard to make a general comment on the timing of stabilization for the acquisition set.

Thank you. I show our next question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.

Thanks. Good morning. Shankh and Tim, I know you can't really comment on sort of the exact bottoming and timing of the recovery, but maybe talk about sort of the move-ins and the conditions that you think you need to see within your facilities and in the macro in order to ultimately start to drive move-in volume given what we've seen on the decline?

Thanks, Steve. The first and foremost thing we've seen and learned over the last 10 months is that cases nationally and cases in our buildings have very much tracked each other. The virus has presented itself as pretty challenging to keep out of anywhere. We have seen both negative and positive case counts rise and fall and start to impact our business 30 to 45 days afterward. That makes sense given the sales cycle on average is about 30 days from start to close. So what we need to see is the direction we're seeing right now in case counts to continue. We need to see the vaccinations that are going on at a national level in our buildings and then allow for that to be held at a low level. We're seeing those things take place now, but as of today’s call, we're still very much at an elevated level of cases nationally and in our buildings. So I think what we need to see is for current case levels to move drastically lower and sustain those levels, and we'll start to see some early indicators of that if that direction continues over the next month or so, and the fundamental impact in our business would come, as I said, roughly 30 to 45 days after that. So I think it comes down to simply the path of COVID. It's a big reason for providing a one-quarter outlook rather than a full year: any full-year outlook would essentially be just more guidance on where the path of the virus goes, which we don't think we have better visibility on than others. So it really comes down to COVID.

Thank you. Our next question comes from the line of Connor Siversky from Berenberg. Please go ahead.

Good morning, everybody. Thanks for having me on the call. Appreciate the detail on the prepared remarks. I'm looking at lease maturities, specifically as it relates to the post-acute care portfolio in 2021. I'm just wondering how those conversations are progressing and if there's any kind of expectation for renewal rates?

I'm sorry, say that again, Connor, you said which leases?

So the lease maturity is related to the post-acute care portfolio and then how those conversations are progressing?

Connor, the conversation with all tenants is the same. If a tenant wants to focus on near-term fundamentals right now and project that as the future, then I don't think that's our right tenant. We have to think about this business beyond today's fundamentals. I laid out the whole framework of how we think about leases in a previous call; I won't bore you with the details here, but the conversations are always the same: what is the normalized cash flow of a business? What does that mean from a value as well as the last-dollar basis of that lease? What does the leverage look like? That's how we think about leases—new leases, renewal leases—and that's how we'll move forward. If we think that our tenants and we cannot agree on what the long-term value of our real estate is, then we have to move forward with a different operator. Our value is in the real estate and we know how to preserve it.

Thank you. Our next question comes from the line of Michael Carroll from RBC Capital Markets. Please go ahead. Mr. Carroll, if you have your phone on mute, please unmute your line.

I do. Sorry. Tim, with regard to the seniors housing triple-net portfolio in your prepared remarks, can you provide some color on what percent of the operators are being recognized on a cash basis? And I guess what are they paying today versus their contracts for the rents? And just real quick off of that, in that payment coverage stratification heat map that you have, is that coverage ratio reflected on their contractual rent? Or is that reflected on the rent that they're currently paying today?

Thanks, Mike. A little over 5% of our triple-net NOI is reflected as cash and not as contractual rent. On the heat map, if things move to cash they are removed from the heat map because at that point they are one-for-one relative to what's being reflected in earnings and cash received. If it is moved to cash, earnings reflect that cash, and including them on the heat map could inflate coverage metrics. So if it moved to cash, we essentially move it off the heat map. Where we've seen coverage fall relative to rent has been in roughly the 0.5x to 0.75x coverage areas.

Thank you. Our next question comes from the line of Derek Johnston from Deutsche Bank. Please go ahead.

Hi, everybody. Good morning. Spot occupancy stands at 74.4% for SHO, and with COVID cases declining and most of your residents likely vaccinated by the end of first quarter, is this 275 to 375 basis points of further decline in occupancy that you're guiding your estimate of Welltower’s pandemic trough occupancy given what we know today?

What we're estimating in our actual first quarter guidance is explained in my prepared remarks. If today's occupancy was held from here through quarter end, we'd end up at an average occupancy decline from 4Q to 1Q of 260 basis points. Our guidance is for 275 to 375 basis points. So given the heightened COVID cases on a national basis, we expect declines in occupancy to continue. We're not making a call on the direction of COVID, which would therefore impact occupancy. So in short, no, we're not calling today's occupancy the trough.

Thank you. Our next question comes from the line of Jordan Sadler from KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning. I know that you guys have some optimism because you've sort of transitioned from defense to offense and began buying assets again. So I just wanted to get a little bit of a sense of what you are thinking as you're underwriting these assets in terms—specifically in seniors housing—in terms of the pace of potential lease up on the other side of sort of this spike in COVID. How do you think about what lease-up occupancy might look like during peak leasing season, like April to September? Any brackets?

I can put some brackets around it by thinking through pre-COVID occupancy levels. We've looked at move-ins as a percentage of pre-COVID levels. If you were to look at move-in levels from April to September 2019 and compare that to recent levels, 100% back to pre-COVID would imply monthly occupancy increases in the 90 to 110 basis points range. To give you context, in January 2021 move-ins were about 50% of prior-year move-ins. To get back to breakeven on occupancy, we likely have to get back to around 65% of pre-COVID demand levels, and from there build. When COVID declined in late summer and early fall 2020, we did see move-ins move back to roughly 70% of prior-year levels. So we've seen demand recover into that range during COVID pre-vaccine. Current trends have moved worse, but that gives you an idea of where things could move if demand comes back to pre-COVID levels and where we need them to get to see stabilization.

Jordan, this doesn't mean that we're underwriting a short-term rebound in April through the early summer to late fall leasing season. If we were, we'd buy everything we could. I want to remind you we're focused on basis so our value creation is not dependent on pinpointing the shape of the recovery. It is dependent on what it takes to build a building. If you can buy at a significant discount to replacement cost, two things happen: you can wait for demand to come back, and if you can make money at a 50% to 60% discount to replacement cost, then no one will build a new building at replacement cost because they would need to charge a lot more. In any capital-heavy asset class like real estate, assuming demand increases long-term, demand-supply balances. If I can buy at a discount to replacement cost and make money, the next buyer analysis becomes much easier. Nothing has changed except price, and that price is why we're excited today.

Thank you. I show our next question comes from the line of Nick Joseph from Citi. Please go ahead.

Hey, it's Michael Bilerman here with Nick. Two-part question: Shankh, you talked about partners and relationships and the $10 billion pipeline, executed more partnerships over the last nine months than in the five years prior, and you mentioned the 600,000 pre-lease MOBs. Can you step back and break down that $10 billion—what comprises it, what sectors, and timeline? Second, regarding the relationships, what drove the change in those relationships with your peers? You've been a bit critical over time and I'd like to know what led to the newfound collaboration.

Let me take the second one first because it's easier. I don't believe I've ever been critical of our peer companies. What led to the collaboration is I reached out to my fellow CEOs, and we agreed we need to work on industry and operator issues together. I got a very warm reception. It's in our interest to work together to solve bigger issues rather than work alone. As for the first question, we are creating—on the acquisition side—two sets of opportunities: early-cycle value opportunities that we are executing on, and more normalized cycle opportunities that will come later. We have never stopped executing on normal-cycle opportunities. It's advantageous to be a large company in our space; we are expanding rapidly. We believe in the business. This is a business requiring collaboration with operators, developers, and other partners, and to create value together rather than at each other's expense. This period has given us the opportunity to work more deeply with operators, and being aligned with Welltower has created and will continue to create significant value for our operators. Regarding the 600,000 square feet of 100% pre-leased MOBs, you can do the math on the potential value creation. That is a program starting between 2021 and 2022.

Thank you. I show our next question comes from the line of Jonathan Hughes from Raymond James. Please go ahead.

Hey. Good morning. Could you talk about your underwriting assumptions on the recent SHOP acquisitions at a mid-three yield? Using some assumptions from prior investor materials, it implies a high single-digit NOI growth CAGR for the next decade. I know you won't comment on recovery trajectory, but have exit price or target returns changed versus two-plus years ago? Any details on how you underwrite SHOP compared to higher-yielding but more stable medical office would be helpful.

It depends—every asset is different, where you buy it and what basis you buy it on. When we made that prior presentation, we never thought we'd be able to buy assets at meaningful discount to replacement costs. Pre-pandemic, healthcare real estate, particularly senior housing, generally traded at a mild to modest premium to replacement cost, because healthcare has an income multiple. If an asset trades above replacement cost, next-buyer analysis assumes selling above replacement cost or NOI growth materially outstripping construction costs. That implied higher underwriting expectations. That equation changes completely when you can buy at a significant discount to replacement cost. If you buy at 50 cents on the dollar and later sell at par, the next-buyer analysis is much easier. The fundamental underwriting principles haven't changed; price has, and price explains why we're excited.

Thank you. Our next question comes from the line of Amanda Sweitzer from Baird. Please go ahead.

Great. Thanks for taking the question. As you think about building occupancy post-pandemic, how are you thinking about changing service levels or where and how you invest CapEx, if at all, to attract new residents?

This depends on the service level of the assets today. Increasing occupancy is the job of our operating partners and we work with them on service levels and CapEx needs. This is a collaborative process and more of an operator question than a Welltower question. CapEx decisions are something we work on together. Separately, on payer and provider integration, we have been leading efforts that could help margins, and that's a longer discussion we can take offline if you'd like more detail.

Thank you. I show our next question comes from the line of Rich Anderson from SMBC. Please go ahead.

Thanks and good morning. One of the things the gaming sector has noticed is the ability to expand margins post-pandemic and lessons learned about what was wasteful in their four walls. On SHOP, do you envision some positive lessons learned that could lead to margin expansion two to three years down the road, or should we not think along those lines?

That's a very good question. On lessons learned: absolutely, this has made operators look at cost constructs more critically given the pressure on occupancy. We've had feedback from operators that they've found ways to do things, especially from a labor perspective, more efficiently. There may be operating leverage once demand returns. I would hesitate to frame this as a near-term margin expansion story driven purely by cost reductions, because there are COVID-related costs being added now that we expect to be temporary. But long term, given an occupancy lift story in this space, we see potential for margins to move above pre-pandemic levels even without structural changes, because recovery in occupancy drives operating leverage.

I'd add two things. One, we're happy to set up a discussion with our team about what we're doing on the payer-provider side and how that could help margins. Second, a lesson learned is that we should not lend money to an operator where we're not willing to take the keys. As a REIT, we're restricted in owning operating businesses beyond certain thresholds, but we should—and now do—only extend credit where we are comfortable taking over the assets. Today, we're focused on writing credit only where we can become the owner of the assets in a downside. That's been an important lesson and will be beneficial for long-term shareholder value.

Thank you. I show our next question comes from the line of Nick Yulico from Scotiabank. Please go ahead.

Thanks. Good morning, everyone. A couple questions on the vaccine rollout. Could you give stats on adoption rates of the vaccine by residents and staff so far? Also, we saw an announcement from Atria requiring staff to be vaccinated by May. We haven't seen anything from Sunrise. As part owner in Sunrise, are you pushing for that policy and can you update on staff vaccination policies across your operators in assisted living?

Nick, I won't comment on the specific vaccine policies of different operators. We have tremendous respect for Atria and John Moore. We support our operators and their decisions on vaccination policy. We do not push a single policy; each operator's management makes that choice. Everyone's focus is the same: get to the right outcome for residents and staff.

The relationships the operators have with CVS and Walgreens have worked quite positively. We've seen over 120,000 vaccinations across the platform as of earlier this week. About 90% of our communities have completed their first clinic and are actively working through the second clinic; we expect most, if not all, second clinics to have taken place by the end of February or first week of March. With regards to adoption and consent, over 90% of residents have consented to or received the vaccination, while about 55% of staff across the portfolio have consented to receive the vaccination; that varies by operator. We won't get into more granular specifics because numbers can be skewed by individuals who had recent COVID and must defer vaccination for a period. Our focus is on consent and the percentage of vaccinations occurring across the communities, and those are the highlights.

Thank you. I show our next question comes from the line of Mike Mueller from JPMorgan. Please go ahead.

Curious: how are the yields on the various new developments you're looking at compared to underwriting pre-pandemic?

Our target yields have not changed. Market conditions have changed, and critically we think about cost and land price and how long it takes to stabilize and working capital loss during lease-up. For developments we're interested in, you're talking five- to seven-year cycles, so you must think hard about approvals and timing. Our return thresholds have not changed. We must make money on an untrended basis to start development, so that's how we're thinking about it.

Thank you. I show our next question comes from the line of Todd Stender from Wells Fargo. Please go ahead.

Your data analytics team has been instrumental in your MSA-level analysis for senior housing. Can you share the recommendations they're providing now in light of lingering new supply and migration from urban cities due to COVID? Any specifics?

We have built and enhanced the analytics platform significantly over the last few quarters. Our capability extends beyond senior housing into medical office and active adult. Regarding migration patterns, we have a team of data scientists and can now detect migration or in-migration on a weekly basis using cellphone data and other near-term indicators, not just longer-term ACS and IRS data. We can tell where people have moved on a near-weekly basis and that data is flowing through our models as we make investments. This predictive analytics platform is a reason partners are attracted to the capital we provide and helps us make smarter investment decisions.

Thank you. I show our next question comes from the line of Steven Valiquette from Barclays. Please go ahead.

Thanks. Good morning. REVPOR was encouraging in Q4 with positive year-over-year trends in certain segments. In your walkthrough of FFO sequentially into Q1, you mentioned a $0.06 hit from a fundamental decline in senior housing. What's the REVPOR assumption within that? Does REVPOR stay positive year-over-year, or does it start to decline?

Good question. Sequentially, that $0.06 decline from 4Q to 1Q is composed of revenue changes driven by both REVPOR and occupancy declines. Our REVPOR is down 20 basis points sequentially; that is driven by two things. First, about 40% of our senior housing revenue in the fourth quarter is from operators that receive rent on a daily basis—common in higher acuity units—and moving from a 92-day quarter to a 90-day quarter results in an apparent decline in reported REVPOR. Second, mix shift: higher acuity segments, which pay higher rent, experienced greater occupancy declines, so the mix shift lowers aggregate REVPOR. In combination, total revenue is down and REVPOR on a reported basis is down 20 basis points sequentially. Note that per day per unit rent was up 2.1% sequentially in Q4 due to Jan 1 increases and other factors, so on a per-day basis rent growth is stronger.

Thank you. I show our next question comes from the line of Lukas Hartwich from Green Street. Please go ahead.

Shankh, in the past you've discussed differences between senior housing NNN and SHOP formats. How is the team evaluating that question for the existing portfolio and acquisitions in this environment given uncertainty in long-term senior housing fundamentals?

Given the cycle, we are more focused on equity exposure in RIDEA structures where appropriate. That said, there remain opportunities to deploy capital in senior housing triple-net when assets are stabilized and you can buy cheap enough that the last dollar of the lease is in a place where both operator and owner can make money. You can create alignment through structure. If you buy below replacement cost such that the last-dollar rent is low relative to cash flow, you can create value. We're looking for margin of safety and buying where the economics make sense. Overall, the industry is moving toward greater margin of safety; when we find suitable NNN opportunities, we'll pursue them.

Thank you. I show our next question comes from the line of Joshua Dennerlein from Bank of America. Please go ahead.

Hey. Good morning, guys. Shankh, you mentioned hiring 41 employees last year. Curious which areas of the business you are hiring across?

We hired across the board: investment teams, the data analytics team, infrastructure, accounting, tax—across the firm. We've seen a resurgence of interest in our company from operators, developers, and prospective employees. We received more than 1,400 applications for a few MBA-level positions this cycle, which shows the interest. I expect we'll add 40 to 50 professionals across the company this year. Acquisition in this market is not just buying assets; it also means acquiring partnerships and talent. We're very focused on building a larger, deeper team to support future growth.

I show our next question comes from the line of Omotayo Okusanya from Mizuho. Please go ahead.

Yes. Good morning, everyone. First, I wanted to give credit for strong transparent disclosure. My question is on government support: post the Phase III vaccine announcements, what have you seen in the pipeline or what is the lobby group seeing regarding potential government relief for your operators?

I won't speculate on what might happen with government relief given the new administration and uncertainty—it's outside my zone of confidence. I will say Tom is doing well; I talk to him frequently. He has been an incredible mentor and friend, he remains a great supporter of the company, and he continues to help us think through issues.

Thank you. I show our next question comes from the line of Daniel Bernstein from Capital One. Please go ahead.

Hey. Good morning. It seems the initial acquisitions you've done are buying below replacement cost but not truly distressed sales. What's your view on the marketplace regarding lenders enforcing covenants and distress sales the remainder of this year? Also, can you comment on differences in distress between senior housing and skilled nursing?

Distress is in the eye of the beholder. We're buying assets in core markets—New Jersey, Seattle, California—for less than $200,000 a unit where replacement cost is $400,000, $500,000 per unit. If you don't think that's deep value, I don't know how to answer. We're executing on very significant discounts to replacement cost on some transactions and will report more in 60 to 90 days. Regarding banks, I don't know when banks will mark or move these construction loans or other exposures, but we've been working with many banking partners and executed on one such loan recently. We're open for business, we have conviction on values, and we're executing. I can't predict when banks will act.

Thank you. I show our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead.

Thanks again. On potential inflection: I know you can't give a near-term prognosis, but in terms of early indicators on move-ins and move-outs, and given different geographies have trended differently, any early signs you're seeing that would suggest move-ins are reversing?

Not enough of a trend yet to call. In some markets we've seen inquiries, deposits, and tours pick up; in others, recent surges have pushed things down. First indicators often lag cases by 30 to 45 days. Given the mid-January peak in cases, if cases continue to decline, you might see some early indicators move in the middle or end of the next month. We'll provide more color as we update the market over the next month or two, but it's too early to call a broad trend.

Thank you. I show our next question comes from the line of Omotayo Okusanya from Mizuho. Please go ahead.

Hi, good morning. If inflection trends have been getting better over the past few weeks and there's a 45-day lag, wouldn't that imply things should get better in the back half of the quarter? Yet you have 260 basis points of average occupancy already baked in and you're guiding 275 to 375 basis points decline. Could you clarify why guidance allows for further deterioration in the back half of the quarter versus improvement?

I appreciate the question. Our guidance does not take a position on the path of COVID. If trends improve and continue to improve, you could see better outcomes in the back half of the quarter, but our guidance is not a call on improvement versus deterioration; it is a current-state holding given the uncertainty. Case counts remain higher than any point we've given a forward look in the past nine months, so while trends feel better than a few weeks ago, we do not assume sustained improvement in guidance.

Also, Omotayo, note that the majority of the decline on an average basis is already baked in, so if improvement happens, it will more meaningfully impact the second quarter than the first quarter.

Thank you. Ladies and gentlemen, this concludes the Q&A session and today's conference call. Thank you for participating. You may all disconnect at this time. Everyone have a good day.