Good morning. My name is Chantal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Welltower Second Quarter 2022 Earnings Call. As a reminder, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. And with that, I'll hand the call over to Shankh for his remarks.

Thank you, Matt, and good morning, everyone. I'll review high-level business trends and describe our capital allocation priorities before handing the call over to John, who will detail the operational trends and provide more details on the operating platform that he is building. Our total revenue is up 29% year-over-year, driven by both organic revenue growth and contribution from significant capital deployment activity over the last 18 months. On a same-store basis, our senior housing operating portfolio revenue is up 11.5% year-over-year, driven by a 5% occupancy growth and a 4.5% REVPOR growth. All this translated into a 15.4% same-store NOI growth in Q2. Our annual EBITDA is back above $2 billion. Annualized in-place SHOP NOI is at $895 million. Though shy of $923 million of pre-pandemic numbers, our revenue has surpassed pre-pandemic levels. However, I'm not happy with these results, which I would characterize as mediocre at best. Why? Because the size of our portfolio is much bigger today, given the significant amount of capital deployment over the last 18 months, and yet our quarterly results are not reflecting the cash flow that this portfolio is capable of generating. I'll give you a few things to reflect on. First, we have about 120 senior housing properties that are generating negative cash flow today. In other words, if we just shut down these buildings, our earnings would be significantly higher. Clearly, we would not do such a thing as they were recently developed or going through a value and repositioning program. Hence, the timing mismatch. Second, while I don't like to fixate on short-term trends and instead focus on long-term prospects of the business, I'll offer a few observations on the second quarter. We started the quarter with results coming in better than expected, only to get hit simultaneously by multiple challenges primarily related to another COVID spike during the last couple of weeks of June. Only this time, we didn't see it coming as the testing requirements have been lowered in recent months, particularly for those residents who are not experiencing symptoms. In instances where few residents or team members develop symptoms, an entire building would be tested only to find out many asymptomatic residents and staff were actually COVID positive. This created some disruption to move-ins, but was particularly impactful to the use of agency labor in June. Our operators are walking through as we speak and made very good progress in July. Let me dig into some recent trends even a bit more. From a demand standpoint, we always see the first half of July as two last weeks, similar to the last weeks of December as families celebrate 4th of July weekend and don't usually move parents and grandparents in. This July, we lost an additional week. And as a result, almost a whole month was shut from a move-in perspective before we gained significant traction later in the month with tour activities returning to the levels experienced in June. We and our operators have a few theories of why that might be the case. One, the hyper-positivity rate of COVID over 20%. Despite people reporting to the government, families know from home testing that they're COVID positive and are delaying move-ins as they wait for this wave to subside. And number two, travel. Summer travel has surged as families took advantage of looser COVID restrictions. Again, I would describe this as our conjecture because we don't know for sure. But we are clearly seeing broad-based demand recovery continue, particularly towards the second half of the month in terms of leads and tours, which led to a recent rebound in move-ins across the portfolio over the last couple of weeks. On the cost side, it is important to understand the progress we made on agency labor. In the U.S., most of our operators have decreased agency labor from June to July, resulting largely from favorable net hiring trends. The July books have not closed yet, but we're expecting a decline in agency labor expense in the high single digits from the month of June. In terms of net hiring, our operators have continued to make significant momentum with July's increase alone in headcount nearly equal to the net hires of the past six months of the year combined. As a result, we're already starting to see the benefit of this trend, which should reduce the dependence on agency labor in the second half of the year. The downside of high-frequency data is that you get a lot of noise. And I strongly believe that's what you're seeing in the numbers today, a lot of noise. I encourage my team and will encourage you not to confuse any short-term high-frequency noise, whether good or bad, as a signal and project that into the future prospect of the business. For a few quarters, I've been talking about the run-rate earnings or the true earnings part of this portfolio being significantly different from our current reported earnings. Clearly, some of the anticipated second half growth has slipped into the next year, but this should only be a timing mismatch. As we focus on '23 and '24, I continue to believe that this earnings power will shine through. Before I move on to the capital allocation priorities, let me make a comment on ProMedica. When we bought the HCR ManorCare portfolio out of bankruptcy, we did not outsource our underwriting to rating agencies. Clearly, there was no way for us to predict a global pandemic or a day when almost every hospital system in the country would lose money similar to what happened in Q1 of this year because of COVID. We got comfortable because our basis of $57,000 per skilled nursing bed, we saw very minimal risk of permanent capital loss, which is at the core of how we think about risk. Of all the structuring bells and whistles aside, which we're very proud of, we fundamentally believe investment basis, not cash flow in a given building at a given point in time, determines investment success. Having said that, the ProMedica team has been able to reduce agency labor almost by half over the last four months and significantly narrowed their operating losses. We have below market basis and thus, below market rent here. I remain very comfortable with our rent and longer-term expected IRR from this investment that we discussed with you when we did this deal four years ago. Turning to capital deployment. I cannot overstate how favorable of an environment we find ourselves in today. During the second quarter, our off-market, privately negotiated transaction machine kept humming, having deployed an additional $1.1 billion of capital. Today, there is definite stress in the lending environment given the significant rate and credit volatility and increasing recession talk. Cap rates are going up across the board and most institutional capital is waiting to see where the chips fall. We're seeing many high-quality opportunities, and we think the environment will only get more favorable as the Fed continues to raise rates at a rapid clip. Our pipeline remains robust, having replenished after all of our Q2 and Q3 closings. Our fundamental investment thesis remains intact. One, we need to buy at a favorable basis relative to replacement cost; and two, we need to be able to add value through our platform. We're not spread investing deal junkies and instead remain laser-focused on total return or unlevered IRR. I continue to believe this year will be a record year for Welltower from a capital deployment standpoint. The cost of capital has surged for everybody, including governments, and access to capital remains very sparse for most people. In this environment, we remain in a very favorable capital position with over $2 billion of equity capital that has been raised but not settled and almost full availability of our $4 billion line. Sellers who did not like our price six months ago are realizing that glossy broker packages and nonbinding LOIs are not cash in a bank. This environment reinforces the value of a counterparty like Welltower, which always acts on a very simple principle. We say what we do and we do what we say. And in that vein, as our long-term investors have come to expect from us, we exercise utmost discipline on every transaction we look at, large or small, and will not chase any deal. As we have said in the recent past, price is the price, and we only act in a manner that creates long-term value for our shareholders. With respect to capital deployment over the last 18 months, some of you have asked me if I'm satisfied with the performance of these properties. In many cases, in the case of many of these acquisitions, including some larger ones, the answer is no. The same-store challenge that I have described above are accentuated in many non-same-store properties, which are being repositioned through operator changes. However, I do believe that we have turned the corner as we approach the completion of our operator transition and system integration for the COVID class of acquisitions. We should see significant progress from these properties as we enter next year. Please recall, we make investment decisions based on long-term IRR, with an exit cap rate going up every single year from the duration of the ownership. And we feel strongly about achieving those return targets as we have discussed with you. As frustrating as near-term challenges of operator transition might be for reported earnings, and trust me, I share those frustrations with you, we have to do what's right for the long-term interest of our owners. I will give you two examples. Vintage and Gracewell, two of the most ill-fated HCN acquisitions from many months ago. Despite some of the most coveted locations and CapEx plans, these assets did not live up to our expectations. We finally pulled the plug over the last 12 months, frankly, because we're not permitted to do so earlier. Our Gracewell assets were transferred to Care UK and the Vintage assets were mostly transferred to Oakmont with one each to Kisco and Cogir. Oakmont has already made incredible progress with the first tranche of the asset they received last fall, with occupancy up 13%, and I believe you will see this repeated in the most recent tranche as well. Care UK is having similar success with Gracewell assets taking occupancy above 80%. And I believe they will be stabilized or get close to it in 2023. We made similar decisions for our other properties, which come with some short-term pain. But as capital allocators, we strive every day to create per-share value by compounding over a long period of time while we hope near-term priorities do not conflict with those long-term. Practically speaking, we often encounter situations where those time horizons diverge. And it is critical for our investors to understand that at these crossroads, we'll always follow the path to long-term value creation at the expense of short-term gains. The good news is that all of these, as my partner, John Burkart, would say, is baked in the cake. With that, I'll hand the call over to John, who will describe to you perhaps the most exciting set of initiatives that will transform the business as we know today and create tremendous value for our residents, team members, operating partners, and most importantly, our shareholders.

Thank you, Shankh. Today, I will discuss the performance of our operating business, share insights on our vision for senior housing, and provide an update on our platform initiatives. To begin with our medical office portfolio, in the second quarter, our outpatient medical business saw a sequential increase in occupancy of 30 basis points and achieved 2.5% same-store NOI growth compared to the same quarter last year. We are experiencing strong retention rates exceeding 89% this quarter, along with good demand and rising new lease rates. Now, moving to our senior housing operating portfolio, the sector continues to recover. As Shankh pointed out, revenue in our same-store portfolio grew by 11.5% in the second quarter year-over-year. All three regions reported solid revenue growth, particularly the U.S. and UK, with growth rates of 13.1% and 14.7%, respectively. The quarter's revenue was supported by a 500 basis point increase in occupancy and another quarter of healthy rate growth. Sequentially, the portfolio's occupancy rose by 100 basis points during a period where average occupancy typically experiences slight declines. Although expenses increased by 10.5%, our operators managed to keep the expense per occupied room to a growth rate of only 3.5% year-over-year. Furthermore, we are optimistic about recent trends in agency hiring and new staffing, which should help slow the growth of expenses in the latter half of the year. Despite facing short-term challenges due to COVID, a tight labor market, and inflation, the portfolio achieved a 15.4% year-over-year same-store NOI growth, marking the second highest in the company's history, while the U.S. portfolio recorded over 20% same-store NOI growth. Looking ahead, we anticipate the portfolio will generate external NOI growth over several years, aided by an improving supply and demand situation, alongside our business optimization efforts. Regarding the overall market, summer traffic has been impacted by COVID in various ways. For instance, while June experienced excellent traffic, it dropped significantly over the Fourth of July weekend and remained low until a resurgence in the last weeks of July. We saw total traffic in July matching that of June, and we expect this uptick in late July to result in increased move-ins in August. The average occupancy in July rose by over 40 basis points in the same-store portfolio. I also want to mention recent management changes within the senior housing operating (SHO) portfolio. As we adjust our operators' portfolios, we correctly exclude transitioning assets from the same-store portfolio since they often underperform early in the transition before later improving—a scenario akin to removing an asset for full renovation. Transitions need considerable time, impacting staffing, sales leads, and other operational aspects negatively. The new operators face significant challenges during the takeover, but these issues typically resolve over time, and performance improves beyond pre-transition levels, as intended. With 59 assets currently in transition, it reflects management’s commitment to endure short-term earnings challenges to enhance future performance. Had we not excluded transition assets from the same-store portfolio, our NOI growth this quarter would have shown a year-over-year improvement of 14.9%. In summary, strategic transitions are worthwhile and can generate significant long-term value, even if they create short-term volatility in the same-store performance. Now, to provide an update on our operating platform. I previously mentioned the potential to significantly enhance growth by establishing a full-scale operating platform and pursuing operational excellence within our senior housing portfolio. I would classify the senior housing business as being in its infancy but quickly moving towards growth. This mirrors the transformation I observed in the multifamily sector years ago. Businesses in their infancy focus on effectiveness, which is crucial for long-term sustenance. As the industry transitions to growth, maintaining effectiveness remains imperative, with a strong emphasis on operational excellence and efficiency distinguishing the successful firms. To illustrate, I liken it to the diner industry in the 1950s, where serving quality meals was necessary for survival. However, to thrive in a growing industry, the focus shifted to operational excellence, which is what Ray Kroc implemented while franchising McDonald's. Senior housing operators face numerous small business challenges, particularly in recruiting and retaining talent in critical areas such as technology and data analytics due to their size and compensation constraints. Additionally, a fee-based structure minimizes incentives for fully investing in optimizing operations. For instance, a fee manager earning 5% of revenues would only logically spend 5 cents to earn a dollar, unlike owner-operators who might invest 99 cents for the same revenue. We are addressing this unfavorable incentive structure through our aligned RIDEA 3.0 contracts and are developing the next generation of contracts to better tackle the small business challenges that senior housing operators face. These challenges range from basic operations to more complex needs like maintaining modern customer expectations, integrating quality technology systems, and delivering real-time, actionable reporting for operational enhancements. Focusing on operational excellence encompasses more than just digital transformation; it involves people, processes, data, and technology, with people being the critical starting point. We aim to enhance customer and employee experiences while optimizing various processes and using data to derive actionable insights that improve stakeholder experiences. Subsequently, we will integrate cutting-edge technology to simplify and automate operations, ensuring we provide relevant, real-time information to enhance both customer and employee interactions and optimize outcomes. This transformation is not merely about acquiring new software; it is about fundamentally rethinking our business model. Over the years, many industries have transformed significantly through digital advancements, resulting in improved overall experiences. One of the essential tenets of operational excellence is recognizing that data is an asset. Welltower is uniquely positioned to harness data effectively as we build an operating platform aimed at enhancing overall experiences via our data analytics platform, Alpha, which we have developed over the past six years. Welltower is poised to improve experiences for customers and employees alike while creating shareholder value through this transformative business process. I have shifted from observation to planning to implementing actions. While I won't divulge every detail of our forthcoming strategies, I can confirm that we are moving swiftly. Recent highlights include assembling a multidisciplinary team focused on improving senior housing operations, hiring a Chief Technology Officer to spearhead our technology initiatives, and successfully completing the implementation of Welltower's ERP system, which is vital to this effort. Additionally, we are initiating a data analytics pilot to leverage available information, with an expected rollout in the next six months, allowing us to start generating value. Finally, we are developing a sales force automation plan aiming for a pilot launch in early 2023, with other modules in progress to be updated as needed. Although this represents a significant undertaking, Welltower is strategically positioned to execute this faster than ever before. Our strategy involves utilizing existing high-quality modules and only creating new ones where necessary for strategic advantages, like our developing revenue management module. Another distinct advantage for Welltower is the number of top-tier operators in our portfolio. We are conducting pilot modules as parallel initiatives with different operators, minimizing potential delays that could arise from limited employee capacity or fatigue that have historically hindered progress. As we refine each module, we will efficiently roll it out to the broader group. This transformation will only strengthen the competitive edge Welltower has built while enhancing overall experiences for all involved. I will now turn the call over to Tim.

Thank you, John. My comments today will focus on our second quarter 2022 results, the performance of our triple net investment segment in the quarter, our capital activity, a balance sheet liquidity update; and finally, our outlook for the third quarter. Welltower reported second quarter net income attributable to common stockholders of $0.20 per diluted share and normalized funds from operations of $0.86 per diluted share, which included $17 million of Provider Relief Funds from the Department of Health and Human Services, approximately $11 million or $0.02 per share more than was assumed in our initial guidance for the quarter. This quarter represented our second consecutive quarter with a year-over-year normalized FFO growth since the start of the pandemic, a positive 8.9% or 7.7% when normalized on HHS funds received and year-over-year changes in FX rates. We also reported our second consecutive quarter of positive total portfolio same-store NOI growth of 8.7% year-over-year growth. Turning to our triple net lease portfolios. As a reminder, our triple-net lease portfolio coverage and occupancy stats reported a quarter in arrears. These statistics reflect the trailing 12 months ending March 31, 2022. In our senior housing triple-net portfolio, same-store NOI increased 9.9% year-over-year, driven by improvements in rent collections and leases currently on cash recognition and the early impact of rental increases tied to CPI. Trailing 12-month EBITDAR coverage increased 0.01x to 0.83x in the quarter. Next, our long-term post-acute portfolio grew same-store NOI by positive 2.8% year-over-year and trailing 12-month EBITDAR coverage is 1.31x. And lastly, health systems, which is comprised of our ProMedica Senior Care joint venture with the ProMedica Health system, which had same-store NOI growth of positive 2.75% year-over-year and trailing 12-month EBITDAR coverage was negative 0.29x as operations continued to be impacted by high agency utilization in the first quarter. Turning to capital market activity. We continue to enhance our balance sheet strength and position the company to capitalize on our robust and highly visible pipeline of capital deployment opportunities by utilizing our ATM program to efficiently fund those near-term transactions. At the start of the second quarter, we sold 18 million shares via forward sale agreement at an initial weighted average price of approximately $87.67 per share for expected gross proceeds of $1.6 billion. We currently have approximately 22.5 million shares remaining unsettled, which are expected to generate future proceeds of $2.0 billion. Taken together, our unsettled equity proceeds include some committed OP units on pipeline deals and $257 million of expected property dispositions and loan payoff proceeds, totaling $2.3 billion in equity capital, providing ample capacity to fund our current investment pipeline. During the quarter, we closed on an amended $4 billion unsecured revolving line of credit, along with an upsized term facility comprised of a $1 billion USD term loan and a $250 million CAD term loan. At quarter end, when factoring in cash and restricted cash balances, our liquidity position exceeded the $4 billion of borrowing capacity on our line of credit. And when combined with the previously mentioned $2.3 billion of unsettled equity proceeds and expected disposition proceeds, we remain in a very strong liquidity position. Lastly, moving to our third quarter outlook. Last night, we provided an outlook for the third quarter of net income attributable to the common stockholders per diluted share of $0.12 to $0.17, and normalized FFO per share of $0.82 to $0.87 or $0.845 at the midpoint. This guidance includes $7 million with HHS funds expected to be received in the third quarter. Excluding HHS funds, guidance represented a $0.005 increase at the midpoint from 2Q normalized FFO. This $0.005 increase is composed of $0.025 from incremental SHO NOI growth and SHO investment activity and $0.01 from performance across the rest of our investment segments and from lower sequential G&A costs. This is offset by $0.03 of higher floating rate interest costs and unfavorable FX rates. Underlying this FFO guidance is estimated third quarter total portfolio year-over-year same-store NOI growth of 7% to 9%, driven by subsegment growth of outpatient medical 1.75% to 2.75%, long-term post-acute of 2.5% to 3.5%, health systems of 2.75%, senior housing triple net of 5% to 6%; and finally, senior housing operating growth of 15% to 20%, driven by year-over-year revenue growth of 10%. Underlying this revenue growth is an expectation for approximately 400 basis points of year-over-year average occupancy growth and continued robust rate growth. We continue to be pleased with the momentum of the top line recovery in our senior housing operating portfolio, driven by a combination of rate and occupancy growth. As I remarked last quarter, as we realize the recovery in our core portfolio, we have made the conscious decision to steadily allocate capital to distressed, under-operated, and often initially diluted properties, along with high-quality development projects. While this capital allocation is the effect of offsetting some of our core growth today, it should substantially amplify in years to come. And with that, I'll hand the call back over to Shankh.

Thank you, Tim. If I may distract you all from the short-term noise and focus on the main drivers of long-term earnings and cash flow per share growth, there are really four large buckets that we must pay attention to: occupancy, rates, labor cost, and external growth. In 2021, whenever we were hit by a massive COVID wave, it felt as though we were taking one step forward and two steps back in terms of occupancy, rates, and labor costs. Thankfully, the health impact of COVID has been getting milder and the psyche of the population has significantly improved. Now we are taking two steps forward and one step back in terms of occupancy and labor cost, and it appears from the July trends that we're making that one extra step forward very quickly. So COVID impacts are getting less pronounced and rebounds are getting quicker as we learn how to live with COVID. Despite the reported issues of agency labor, the team member count in our communities has grown significantly since then, and while we have not seen any let-up in the cost of labor, there is no question that we have seen the availability of labor increase meaningfully since then. The portfolio has almost the same net hiring in July as we had in the first six months of the year combined. Though our operators have had success in net hiring members over the last few months, as you can see from the case studies on Slide 7 and 8, it appears that the labor market is finally on demand from the significant success of hiring trends in July. Assuming these trends continue, this bodes very well for agency labor costs as we move into the second half of the year. And where we continue to make the largest strides is through pricing power. The recent COVID spikes have not dulled our operators' ability to push through strong rates. What is particularly encouraging is that street rates are up from high-single digits all the way up to 15% to 20% in the case of some large operators. Given the sharp acceleration in the growth of the senior population and plummeting new supply of few projects penciling for developers today, our confidence in driving occupancy and rate growth for the next few years continues to strengthen. As for external growth opportunities, our prospects, which have been very good, are only getting better. The willingness of owners to transact has grown over the last two years as they struggled with COVID-related challenges and debt maturity. And now with the recent surge in borrowing costs and tighter lending standards that are keeping many borrowers at bay. If we overlay all this with how John is fundamentally transforming our business, I have not been more excited about the future prospects of our firm. We know we need to translate all of this into significantly higher earnings run rate and cash flow per share, and our team, which thinks and acts like long-term owners, is hyper-focused on that mission. With that, we'll open the call up for questions.

Our first question comes from Michael Griffin with Citi.

This is Michael Bilerman here with Citi. Shankh, I was wondering if you can just step back and look. I appreciate the comment about the downside of using high-frequency data and the noise and effectively not to confuse the short term, whether it's good or bad to project on the future. And you guys have been very all over COVID providing us a lot of business updates. And I think back in June, you used that data to lift guidance, right? And you issued the business update. And so I'm trying to understand whether you're thinking about a change and how you communicate to the street and the reads that you're feeling, right? Because you took that data and you lifted the street, and you raised a bunch of equity and now things are a little bit lower. And I'm wondering, as you think about that short term, whether it makes sense to really start putting out the building blocks for all these things that you've done. I mean, 20% of the portfolio has been bought since late 2020, and start to pencil that out on a three- to five-year basis and go through all the building blocks of all the deals you've done, the 120 assets that are negative cash flow and all these things to try to model out where that future growth really is because of all of these, what you call them noise today?

Yes, Michael. I'll start with that, and then Shankh can come in. I think the point on NAREIT and the guidance change there, I think Shankh spoke to this in the script. But we've tightened guidance at NAREIT based upon the trends that we saw, and those trends reversed towards the end of the quarter and up towards the lower end of that range. So I hear you on the high frequency of data and frankly, what we've been trying to do is give updates because the longer-term view has been tougher to project. And given COVID is a backdrop, right? And we've been trying to balance essentially since we've been able to provide less of that long term need to provide more of that short-term information. And I will speak for Shankh, if you can give a comment on this. But I think part of the commentary on the short-term noise is just trying to see the long-term trends continue to be strong on the recovery side. And we're certainly focused on that, and we continue to evaluate that piece of it. And although we understand the market's need for frequent updates on data, we're trying to make sure that you see how we're looking at it and keeping our long-term focus on the core fundamentals of the business.

Yes. I'll just add one thing, Michael. As I mentioned, when we experienced the impact of BA.5 in the second half, it was about a week after NAREIT, and this impact persisted until around mid-July. You may have noticed that we provided another business update a few weeks ago to ensure everyone understands that our perspective has changed based on what we discussed at NAREIT. There was indeed another business update beyond the ones you mentioned. We aim to provide information so that investors can see what we see. Fundamentally, as I stated in my last quarter call, we share our thoughts, but if we are hit by a COVID wave, we are better prepared. I mentioned this in the previous call, as well as in five calls prior, and that holds true. The good news is that with each passing wave, the impact is diminishing, and rebounds are occurring more quickly. However, we just went through one wave, and we are approaching the end of it. We are unable to predict how and when we will encounter COVID in our communities, and I’m not aware of anyone who can. We are sharing our observations to help you grasp the business fundamentals. For instance, there has been considerable noise regarding agency labor. The improvement we saw in July is meaningful, but it’s important to note that the July net hiring numbers do not immediately impact the agency numbers since there is a delay in training and when new hires start working. We aim to keep you informed about what we are experiencing, and it's crucial for us to communicate if trends change due to COVID or other factors. We appreciate your understanding as we remain transparent and share the information as we see it. If circumstances change, we will inform you.

So maybe, Shankh, John, Tim, as well, I just want to kind of take the pricing power comments you echoed and just think about leaving costs aside, as you mentioned, COVID comes and goes, it's tough to predict. But would it be unfair or reasonable to say given what you're seeing on the bumps, the re-leasing spreads, as we head into '23, given demand supply, pricing power should only accelerate, and I should not be surprised if we see call it, a mid- to high single-digit REVPOR growth for a couple of quarters? And lastly, can you just translate that pricing power into your latest thoughts on margins in the senior housing space?

Vikram, I won't provide specific guidance on pricing power, particularly for next year. However, I can say that we are noticing a significant acceleration in street rates. During my recent trip to the UK, our operators there mentioned potential midyear pricing increases in September and October, which I've not encountered before. There are also discussions among U.S. operators regarding similar adjustments. Most importantly, street rates are rising sharply, which should lead to sustained pricing power in our portfolio, especially given the favorable demand-supply dynamics for next year. We are focused on optimizing revenue growth, and we believe that pricing power will continue. As you know, we experienced pricing power last year, resulting in REVPOR growth, and we plan to maintain that momentum. There are two types of pricing power to consider. The first is driven by the need to increase prices due to cost inflation, which we are currently experiencing. The second will emerge as we stabilize various buildings and raise prices because of limited room availability. You should see the effects of this trend in the coming year.

I just wanted to ask something quickly about the differences in labor cost growth between AL, memory care, and IL wellness and how that's factoring into your capital allocation of what you want to buy and invest in?

On the wellness side, there aren’t significant costs related to personnel. However, I should mention that costs are mainly influenced by taxes and rising energy prices. Our approach to capital allocation is not based on labor considerations; we can account for that. Instead, we focus on the available opportunities and compare them to replacement costs. That's our perspective. Even if we were to assume that labor costs will always remain high, which I don't believe will happen, labor expenses have been a longstanding issue in this industry. It seems likely we are starting to recognize this trend. We'll have to see how it unfolds, but the initial signs are suggesting some challenges ahead. Nevertheless, we can factor that into our pricing strategy. We base our investments on prices, rather than solely on labor dynamics. We explore thematic ideas and adapt accordingly because we can incorporate these elements into our pricing strategy. I hope this provides some clarity.

Could you just talk about the recurring CapEx spend trajectory? I see it is expected to kind of more than double through September from last year's pace. Is that higher spend due to some deferred or lower spending in the past few years during lockdowns and we're just catching up? Or much higher construction costs, a bit of both? And then kind of an extension of that, how that CapEx spend should trend in the next year and help fuel increased competitiveness of your properties and ultimately, revenue growth potential?

Yes, I'll start with that, and then John can add anything. Part of it is, we have been certainly in 2022 playing a bit of catch-up in the costs of the senior housing space and just the buildings being less accessible over 2020 and 2021. And then efficient for us a lot of the acquisitions we've made have had substantial value-add opportunities. So we've highlighted that with some of the larger ones and explicitly stated how much kind of redevelopment capital or value-add capital we put into it. But I think that's what's driving that right now is a combination of a little bit of deferred or catch-up capital from a period of time in which the buildings were, for safety reasons, less accessible. And on top of that, we put a lot of capital to work into opportunities that have high return value-add investments.

Yes. And I'll just add. You're actually pulling something from a certain sense from a future script because I talked about the operating platform. The next initiative that I'm focusing on in a big way or workflow really relates to capital and internal investments, what I'd call as how we reposition the portfolio. Our senior housing business portfolio age is at the absolute sweet spot, just right under 20 years old on average, providing tremendous opportunities to reposition those assets. So I'm actually building out a capital team right now, and we will align our CapEx with our value-add initiatives and drive pretty substantial value over the coming three to five years. So it will be a very big effort, and we're at the very front of that effort right now.

I'm just curious about the 120 senior housing facilities currently generating negative cash flow. What is the NOI drag from those facilities? Can you give us what percent of the $538 million of total NOI upside in SHOP that they represent? And do you expect them to stabilize at a faster pace than the overall portfolio?

Well, Austin, we're not going to give you a number on how much cash flow that's losing today. Maybe I'll talk to Tim and see if we can quantify that for you. Should they grow faster? The answer is obviously yes, right? They are losing money because they're at lower occupancy. And as they stabilize over, say, a number of years, just from the base they're coming out of, and if you think about the trajectory of the margin, they should grow faster. But a lot of these properties have been recently built or we bought the properties at a very, very low occupancy, right? So if you look at the last tranche of, for example, the StoryPoint acquisitions we did, I think the average occupancy was like 40%, right? So if you think about it, the average age of the portfolio, I think that we bought is between 2 to 4 years, and they're at 40% occupancy. So there's no question there's a lot of those buildings that opened in the last year, year and a half, and we bought a lot of these things from developers from multifamily developers from banks. They're just a drag. But the point here is they're not a sequential sort of a linear progress to your NOI growth, right? As they go from a negative margin to the margin inflection, and that sort of margin grows after you hit the J curve, right? So that's sort of the way to think about it. I mentioned that for you to understand that something very simple. Right? Just take an example of our East 56th Street property. That property opened 7.5 months ago. It's probably low 30% occupied today. And our average rate of those residents that we have received, of the people who are living there is $23,000, $24,000. Okay? Clearly, that has negative margins. But you would think about it as we thought about that property when we developed it, we're getting significantly high rates, and the trajectory of East sub is doing better than we thought. Still, that's a negative value add. So as you think about negative value, as you think about putting a multiple on our income, understand that you are valuing 120 buildings at a negative value. That's all, right? So I'm not going to add anything more to that at this point, but something to just reflect on what's dragging on our earnings and cash flow today.

On John Burkart's operational initiatives, what's his team hoping to accomplish and really to build confidence that these endeavors can bear fruit? How are you guys measuring success? And what's the upside here?

The key to measuring success is to modernize our processes and technology within the business. For instance, I tested our customer response system and discovered that out of 200 inquiries, 50% were never responded to. Among those that were, the average response time was around 13 business hours. If someone needs urgent assistance, like after a family member falls, they might not receive a call back until Wednesday—or worse, not at all. This is an unacceptable experience and one that can be improved. The existing customer relationship management systems rely heavily on salespeople to input data, which leads to inefficiencies. I approached one of our larger operators with their results showing no returned calls despite a report suggesting they respond to 85% of inquiries within an hour. This discrepancy highlights the problem: the salespeople self-report their performance, which creates inaccuracies. The tracking systems are inadequate, resembling a collection of lost sticky notes rather than a robust CRM. We intend to bring a higher level of professionalism to the business, which will lead to better financial outcomes, such as increased occupancy, higher rates, and an improved experience for our consumers. This hopefully addresses your questions about our goals, though we aren't disclosing specific timelines and details at this moment.

I appreciate the case study pages showing that you're hiring in recent months. I guess I still don't have a sense for the magnitude of understaffing. Assuming occupancy starts climbing. So to the extent we get positive surprises on the occupancy upside in the next six to 12 months, are you going to have to lean on agency expense to kind of meet that demand? Or do you think properties on average are staffed properly right now to handle additional occupancy?

I think that's a very fair comment. We talked about how July was a positive month for net hiring. Our operating partners hired as many people in July as they did six months ago. Importantly, hiring has put us about 2% above last year's total employee count on a net basis. This is something we should have shared earlier. Regarding the agency cost dynamic, it started about a year ago, and we have finally worked our way through that. With the July hiring, we are now about 2% above our total employee count compared to last year. While what you're suggesting is possible, it's probably unlikely since we are seeing improvements. Our operators have noted an increase in the availability of labor in June, suggesting that the labor market is beginning to improve. We hope this trend continues and that it positively affects labor costs in the near future. Although agency labor was quite challenging in June, it improved in July. As reflected in the net hire numbers, we should see positive impacts as we approach the end of the quarter.

I wanted to actually touch on the study that you just answered, but I guess just to frame it slightly differently, not to get redundant here. What percent of total open positions across all the senior housing were filled in July? If you think of it that way, are we talking 75%, nearly 100%? I think that's 2% above where you were before; it's still kind of hard to, I guess, frame that perfectly in our own minds. So another thing is just on the double staffing. What's the typical time period of training where you have that double staffing? Are we talking weeks or months? Just any rule of thumb would help around that too, as we think of magnitude of potential expense reduction for Q3 versus Q4, etc.?

Net hiring in July was approximately 3% of the total employee count. You should consider the second half in terms of weeks rather than months. The hiring in July is likely to influence agency numbers in August and September. There are case studies on Pages 7 and 8 that illustrate this. Page 7 features an operator who has significantly reduced costs, going from about $2 million a month to approximately $0.5 million a month over four months, from April to July. Page 8 presents an operator whose numbers remained flat from June to July; however, the hours booked have decreased considerably, indicating that if this trend continues, there should be substantial improvements in August and September. These two examples provide a diverse insight into our agency labor costs, representing nearly half of the total. While we are not forecasting the future, we are sharing insights on our portfolio's positioning, which should help clarify future expectations.

I was wondering, can you tie together the 4.5% on same-store revenue REVPOR growth? And maybe talk a little bit about the sequential trend there relative to Q1? And can you dissect a little bit and talk about roll-downs and just, I guess, pricing by unit type?

On the REVPOR side, it's important to note that about half of our portfolio resets on January 1. This section of the portfolio is also heavily weighted towards our higher acuity unit types, which typically see increases on January 1. These increases are primarily among daily billers, who represent the higher acuity assisted living portion of our business. In the first quarter, we observed these increases, and now they're continuing from the first quarter to the second quarter. Historically, in this business, we've seen roll-downs between move-in and move-out rates at around 10% or high single digits, primarily due to acuity changes. However, last year, this figure widened to over 20%, and it has now tightened to the mid- to low single-digit range. While some of the January 1 increases have slightly tapered off, we are still experiencing negative leasing spreads in that area, which are being counterbalanced by annual increases occurring evenly throughout the year in the other half of the portfolio.

As I mentioned in my last call, if the street trade continues to rise as it has been, the gap will keep narrowing. It’s possible that they could get very close to each other. We have seen a few operators where the rates have actually crossed over. Overall, it’s feasible that they could come very close together, which would eliminate the negative re-leasing spread we discussed earlier. However, keep in mind that this is an issue that recurs as you issue in-house increase letters and adjust the numbers again. This is a trend we haven’t seen in eight or nine years, where street rates are approaching in-place rates, so we are quite optimistic about this development.

Shankh, you and Tim both mentioned ProMedica in your prepared comments. You discussed some of the coverage ratios and agency labor statistics. I was curious why you spent a bit more time on this topic this quarter. Was that related to their coverage situation, and are you reaffirming your comfort with that? Or have there been discussions or inquiries from them about possibly making changes? That would be my first question. My second question is about how that portfolio compares to the other one you own, particularly regarding the recovery statistics you mentioned that have been lagging.

Yes. I will reiterate what I said earlier. First, it's important to note that much of that portfolio includes skilled nursing, which has been greatly affected. Agency labor has had a significant negative impact on that portfolio. Our reports reflect a one-quarter lag in a four-quarter average of EBITDAR. If you review the transcript, you will see that the improvements have primarily occurred in the last four to five months, leading to a substantial reduction in losses as occupancy has increased and agency labor costs have decreased. This provides an overall picture of the situation. It's crucial to understand that rent does not solely come from the physical space itself; we engaged in that transaction because the rent was backed by market share. This aspect is vital to grasp. Once again, I want to express my confidence in the income from that portfolio, as well as our commitment to achieving long-term returns as we invest our capital. I want to emphasize again that I am quite comfortable regarding our income and return from that portfolio.

I was just hoping to understand for the operator transition assets in senior housing. What's embedded in the guidance for the third quarter about any incremental sequential NOI drag there since I think you said those assets are not in the same-store calculation?

Yes, that's correct. The assets we discussed in our July business update regarding the transition are still part of the same-store portfolio and completed the quarter under the previous manager. They will be transitioning out going forward. We anticipate a slight impact of about 0.5% on a sequential basis from these transitions.

So I think we all get the message here on the short term versus the long term, but I want to see if I can get some kind of quantitative evidence of that. So the occupancy guide for the third quarter is 400 basis points year-over-year, and that seems to imply 120 basis points sequentially, which compares to 100 basis points sequential in the second quarter. So we didn't get the seasonal pop in occupancy and understand for the reasons you described. When you were sitting in your seat at NAREIT and you were thinking about the third quarter at the time, how much do you think we lost by virtue of what happened with the COVID wave in June and the kind of the lost month of July? And where do you think the sequential number, landing at 120 basis points as of now, would have been if not for the disruptions that you faced after NAREIT?

Yes. To address your question, there’s no doubt that in the third quarter, some of the growth has shifted to next year because we did not achieve that growth in the third quarter. This is primarily due to the loss of July, which significantly impacted our traffic, making recovery challenging considering the sales cycle from tours to sales. It’s important to note that last month was crucial for us, achieving an average occupancy growth of about 40-plus basis points, which should have been double that had we not faced setbacks. The good news is that while the first two weeks of July saw tours down 40% compared to June, we managed to nearly recover to 95% of June’s cumulative figures by the end of the month. This reflects significant progress in the second half, with move-ins increasing back to pre-setback levels based on the tours. However, there’s no denying that the COVID wave affected our expenses and revenue in July, which had a clear impact on our June numbers. I hope this clarifies the severity of the disruptions we encountered and how they affected our performance across the quarter.

John, I know you're hesitant to provide too many details on your data plan, but I wanted to touch on your comments in your prepared remarks that Welltower is initiating a data analytics pilot that's expected to roll out over the next six months. I guess what does this actually mean? And how is this different from the company's current data analytic programs that you have right now?

Yes. It's more effective to evaluate it in relation to the operating platform. The operating platform will generate significant amounts of data because it allows us to collect detailed information, from web hits to traffic patterns. Currently, we are able to obtain more insights from our operators, and that presents an opportunity for us in the medium term to gather additional information. We have been collaborating with our operators to establish connections, specifically linking our cloud system to daily retrieve the information they have from their current platforms. We have not previously accessed this level of detail. While we receive good reporting from them, we are now enhancing that process. This improved interim data will provide us with much better insights than we currently have from an operational standpoint. The company's investments are impressive, but there are additional opportunities I am pursuing that should contribute positively to our asset management efforts.

Just a longer-term question, you've noticed some transitions happening and near-term drag for a long-term opportunity. At this point, how should we consider the risk of further transitions into 2023? Are you confident that most potential transitions are behind us? Or is this just part of the business where there will always be some laggards? For instance, thinking about how Goldman calls 10% of the staff annually, is that how we should approach it? Will there always be some underperformers that you will address as things progress? Or are we at the end of that phase, considering the current situation with COVID and the cyclical nature of the business?

So Juan, I think the way you should think about it for the COVID class of acquisitions that we have done, the transition, operator transition, and system integration, all of those things are reaching nearing completion. Right? So they are nearing completion. Now from the perspective of what you are asking, which is more of a philosophical question than a planning question, right, we are of the belief that you have to earn your keep if you want to manage our properties. It's very simple, right? Managing our properties, which had a substantial amount of capital is a given. And you see that in all other businesses, whether it's a competitive business. Just take an example of multifamily, right? And if you look at people who are managers, fee managers, they expect to earn their right to manage for fee. And frankly speaking, in the senior housing business, there has been a very significant amount of complacency, and we have not seen that. So as long as people perform, we have absolutely no desire to move assets because it's disruptive. No one wants to do that. But if people don't perform, there will be a transition. It's a lot of our shareholders' capital that is tied up into these buildings, but we're not going to see it tear and take underperformance. That's just not what we do. Near-term underperformance because something happened to an asset is completely understandable. But as John mentioned to you, some of the basic operating standards are expected. And if people don't perform, they're not going to be in our portfolio.

It's Bilerman, again. I have two quick follow-ups. Shankh, regarding ProMedica, who is currently funding the operating cash flow losses? Is the entity simply increasing its debt for that? Can you discuss the capital structure and how that is being managed? Secondly, going back to my initial question about the longer-term perspective and all the initiatives and investments you've undertaken, Burkart, when you were at Essex, you released a three-year plan. I recall UDR and Aimco doing similar things. Do you think the company could benefit from sharing more about the impacts and opportunities to better understand the earnings and asset value? It seems like the market is focusing on the short term, and providing more details could be very beneficial. You've mentioned issues like the $120 million negative cash flow, but actually providing in-depth information and laying the groundwork for your three-year return based on all factors involved would be very helpful. If you could address those two points, that would be great.

I will address the first question. ProMedica is supporting the operating cash flow losses. As you know, the funding for this entity is straightforward; it currently has $2 billion in cash on its balance sheet, which they are utilizing to cover these losses. John, would you like to add anything?

Yes, I will provide more insight into the platform. As I mentioned, I like to keep it simple. We'll begin with traffic, such as web analytics, and move through sales force management and the operating platform, including the ERP, along with other business aspects like HRIS. We will begin to share more information. From my past experience, companies typically do not provide specific timelines for financial outcomes. Instead, they outline the paths toward expected achievements and their positive impacts on the business without directly linking time to revenue, and I do not plan to deviate from that approach. However, I am happy to offer more clarity over time. We’re currently operating at a rapid pace, and we will share additional details in upcoming calls and at NAREIT.

And Michael, just a continuation to answer your first question. I think overall, you should certainly hear from us that we've adapted the way that what we've disclosed over the last 2.5 years in a pretty dynamic environment. So a lot of it has been driven certainly by what we think is important. And a lot of this has been driven by feedback from individuals with yourself and investors. So I hope you've seen that and certainly continue to have a dialogue with the market on what is helpful to be seen, and we'll continue to adapt what we disclose based upon that. So you shouldn't think there'll be any change in the way that we approach that.

We have reached the end of the question-and-answer session. This concludes today's conference call. You may now disconnect.