Hello. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Welltower Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Mr. Matt McQueen, General Counsel. Please go ahead, sir.

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. Today, I would like to describe our capital allocation priorities, the ProMedica Senior Care transaction and the rapidly evolving capital markets environment. I will also review some high-level business trends before handing the call over to John, who will provide details on operational trends and a brief update on our operating platform. I'm very pleased with the progress we have made since we last spoke 90 days ago, despite flattish earnings trends on a sequential basis, driven by several existing headwinds, including FX, interest rate, and utility expenses. Our underlying business is actually improving meaningfully and setting up for the coil spring recovery that we hoped for. In our senior housing operating business, same-store revenue is up 10.8% year-over-year, driven by strong occupancy gains, and most importantly, pricing power. 5.3% same-store rate growth is the best we have seen in our recorded history, and I want to remind everyone that we're compounding already industry-leading rate growth from last year. From these early trends, I believe you will see a further improvement in Q4, which will create a strong setup for 2023. However, perhaps what I'm most excited about is the progress we're making on the labor front with compensation for occupied units is up 4.3% year-over-year, the lowest level of growth we have reported since the beginning of the pandemic. Our operating partners are experiencing a significant surge in applications, which has translated into a strong increase in net hiring. In fact, in September, total portfolio monthly contract labor spend was the lowest since August of 2021 and subsequently improved in October. We believe this trend will continue into year-end outside the normal pickup agency use during the holiday season and well into the next year. We strongly believe the labor market is changing for the better, and it will help our sector be a total standout amongst all real estate sectors next year on a relative basis. The same-store NOI growth for the SHO portfolio was 17.6% in the quarter, led by the U.S., which posted a third quarter of 20-plus percent growth, and the assisted living product reported same-store NOI growth of an impressive 25.1%. Let me highlight three operating partners for you, that provide further insight into why I'm so pleased with our progress over the last 90 days. Number one, Oakmont. As you recall, we transitioned 10 top California assets to Oakmont in August. While we expected some initial disruption to occupancy and NOI during that transition, in actuality, we recognized immediate benefits due to remarkable performance from Courtney's team. These assets have experienced a slight increase in NOI and occupancy despite challenges that are normally incurred during a transition. This is the first time I've seen a transition with no negative P&L impact, apart from the six assets we transitioned to Oakmont last year. I expect these properties, as well as the other assets that we transitioned to Oakmont, to add significantly to our 2023 growth. If you're visiting San Francisco this month for the NAREIT Conference, I recommend you join our property tour and experience firsthand the remarkable job this team has done. To my earlier point about the shift in the labor market during the summer, open positions across the Oakmont platform were 16% of total jobs; it is down to low single digits at this point. Number two, StoryPoint. StoryPoint is one of our best operating partners and will likely be the source of the biggest NOI swing next year, with a billion dollars of investment with low occupancy properties, which is generating approximately 2.7% yield in Q3. StoryPoint made remarkable improvements at the top line on both occupancy and rates, but the properties have not generated significant NOI in 2022, as these properties were just over the breakeven occupancy, and agency costs were very detrimental. Their open positions are now down more than 50% through the end of October, and we expect an 80% reduction of agency by the end of this month. We believe that stabilized NOI for this group of portfolios is about circa $80 million, which will be substantially achieved in 2024. While we will not close this gap in 2023, I expect we will make significant strides next year, especially over the halfway mark. We cannot be more pleased with the execution Dan and the team have pulled off. Number three, Sunrise. Sunrise is our largest operator. Due to a national presence, Sunrise experienced significant labor challenges and had to rely on contract labor for many quarters. Jack and his team have made remarkable progress in this area over the last 60 days. Contract labor is down 52% from the year-to-date run rate, and I believe Sunrise will be the biggest contributor to contract labor improvement in the coming months and quarters. Given strong rates, Sunrise benefits from being in this incredibly well-located Welltower building, and we should see extremely strong NOI growth contributions from Sunrise. While we're very encouraged by these trends and our fourth quarter guidance of 21% growth at the midpoint, I'll remind you that we are in the very early innings of the senior housing recovery. We remain as excited as ever about the growth prospects in the coming years as the population over 80 years old will continue to accelerate, and new construction in the sector will come to a near standstill. In fact, 2023 should see a 4.5% increase in the population over 80. As you may have observed, only 2,700 units began construction in Q3, and frankly, I don't even understand how developers will make any money. While new development should continue to decline, assuming developers want to build profitably. Another interesting phenomenon we're observing is that thousands of units have been taken offline, either due to obsolescence or due to higher and better use like behavioral health. As of 9/30, almost 15,000 units were taken offline on a trailing twelve months basis. I also want to highlight the consistent and steady performance of our outpatient medical group under Ryan's leadership. Our retention rate for the quarter is a remarkable 92.7%, and rent spreads are ticking up into the mid-three percent. I'm pleased that for both new and renewal leases, our weighted average escalators are now about 3%. I'm also pleased that the low interest rate environment and the wall of capital that drove 2% to low 2% escalators seem to be a thing of the past. Kelsey-Seybold, which is our largest medical office building tenant and also represents a significant portion of the Helmand pipeline, was acquired by United Health this summer. The significant credit upgrade of our largest tenant and our development client represents a meaningful value creation for our shareholders. The most significant change we observed in this, however, in the MOB space, is the remarkable widening of cap rates. I've said like a broken record for a long time that the MOB cap rate made no sense to us, given where the forward view of inflation was relative to the underlying growth rate on cash flow. I'm pleased to see other capital sources are now waking up to the ugly realities of real returns on capital in this inflationary environment. There is nothing wrong with this asset class except for its price. I am relieved to see that has finally changed. Billions of dollars of transactions were consummated at low cap rates, often with short-term floating-rate debt; the party is over with capital structure and cash flow, as many of these vehicles are now upside down. We'll be observing the space closely in the coming months and quarters. Now, I would like to discuss our recent restructuring of a lease with ProMedica health system. I’m not going to bore you with the details our fundamental thesis of this investment in 2018. I laid it out clearly when we did this transaction; we didn’t predict COVID and its impact on the cash flow portfolio, and frankly, we were underwhelmed by the execution. But the fundamental investment thesis of the original transaction should still protect our shareholders' capital; that basis, and appropriate structure are critical to any real estate investment. While we have historically relied on our operators to drive cash flow and that yield, we never make real estate investment decisions based on yield. We believe success in real estate investment over a long period of time is a function of the right basis and staying power. If you own an apartment in New York City for $400,000, while everybody else owns an equivalent apartment for $1 million, you can still charge rent for that unit and generate strong returns. That is such a simple yet perhaps one of the most overlooked concepts on Wall Street. The cacophony of noise around ProMedica as negative dark coverage over the last few months have reached a fever pitch. We honestly understand and empathize with this Pavlovian response, as the history of the healthcare REIT sector is full of remedies such as massive red cards or disposal of assets at fire-sale prices that result in significant value destruction to shareholders. Even though I'm personally humbled by the cash flow deterioration in the ProMedica portfolio, let me repeat that we are not experiencing a rent cut on a cash basis, and our investors are benefitting from satisfactory total return to date. This goes back to an incredibly favorable basis and structure. To continue my previous metaphor, Manhattan apartment rents might come down from $5,000 to $4,000 in a bad year, but we never hypothetically charged $4,000 as we bought our unit at such a low price. That is why our rent is now going up, not down after this transaction. I continue to believe it remains below market and will be a source of future value creation. As I mentioned in our last call, ProMedica has made significant strides in reducing its operating losses, which have narrowed further in the last 90 days due to both occupancy gains and lower contract labor costs. Integral, or its parent entity—which we have done multiple transactions previously—has successfully executed many turnarounds, including those involving our assets that we sold to them in the last couple of years, and is well-positioned to return these assets to their previous glory using a regional operating strategy, just like they have done over the last couple of years. We are looking at Integral's parent entity and the owner for downside protection through subordination of their equity as well as significant other guarantees, which will subsequently share significant value creation with us. But I cannot overemphasize that the fundamental idea of below market rent basis equal to below market rent is not about ProMedica; it is about our belief in how we invest and protect our shareholders' capital. If a business has demand growth, and you can own it for significantly less than what it costs to build, with a low leverage capital structure, it is challenging for me to see how we lose money in most scenarios. We remain partners with ProMedica, albeit on a surface level on a much smaller scale, and we'll be delighted to see the significant credit improvement of this important institution in Toledo. Finally, let's discuss the current capital markets environment, which excites me to no end. Before I go into what we might do in the future, let's discuss what we have done in the past under this leadership team. If we go back and read all our comments about capital deployment in the last few years, you will notice a few attributes: one was unlevered IRR buyers, and we underwrite significant cap rate expansion at exit. Hence, the recent rate increase doesn’t fluster us, just as we have never chased low rates down under the guise of low cost of capital. Two, our unrelenting focus on basis relative to replacement cost, and as a result, we seriously dislike low cap rates in stabilized occupancy scenarios. Nothing has happened so far, even in this turbulent capital markets backdrop that requires us to change how we invest capital. We are experiencing historic volatility in the treasury market, with significant parts of the yield curve inverted right now, with the most important two to 10 curve being as inverted as it was during Paul Volcker's time 40 years ago. One approach for us would be to ride out the storm in a shelter and do nothing. But those of you know us well, know we’re unlikely to do so. We maintain a fairly favorable capital position and a war chest due to our extremely talented capital markets team under the leadership of Tim. Despite our unfavorable public cost of capital on a spot basis today, we have no dearth of global institutions wanting to partner with us. Let me remind you again of a simple capital allocation framework I've described to you before. Every company effectively has four choices for raising capital: one, tapping internal cash flow, two, issuing debt, three, issuing equity, and four, disposition of existing assets. It also has five essential choices for deploying that capital: one, investing in existing assets, two, acquisitions, three, buying debt at a discount, four, paying a dividend, and five, buying stock at a discount. You can loosely call the first set of choices as selling, but the right description would be sourcing or raising capital. You can loosely call the second set of choices as buying, but the correct description will be the deployment of capital. Following the same line of thinking loosely, consistently buying low and selling high creates value for shareholders. In a more wholesome and thoughtful description, optimizing these choices from this menu of sources and uses in a tax-efficient manner creates meaningful value for continuing shareholders on a partial basis. Our goal is to maximize partial value and partial cash flow, not to become the biggest or most revolutionary. Our capital allocation team on both sides of the balance sheet is poised to pounce on these great manual opportunities while the most volatile interest rate environment in four decades has put in front of us. At the same time, John's team is just getting started on the journey of cash flow and platform optimization. With that, I'll pass it over to John.

Thank you, Shankh. I'll provide some insight into our operating business, starting with the medical office portfolio. In the third quarter, same-store NOI growth for our outpatient medical business was 1.4% over the prior year's quarter, which was below trends due to some timing issues on tenant improvements, delaying moves and higher utility expenses. We continue to see strong retention levels at 93% in the quarter and accelerating renewal rates in the marketplace. Turning to our senior housing operating portfolio, the recovery in the sector continues. As Shankh mentioned, revenue in our same-store portfolio came in at 10.8% in the third quarter compared to the prior year's quarter. All three regions showed strong revenue growth, starting with Canada at 4.4%, and the U.S. and the UK growing at an impressive 11.6% and 18.9%, respectively. Revenue growth for the quarter was driven by a 390 basis point increase in occupancy and another quarter of healthy pricing power with REVPOR growth of 5.3%. As Shankh mentioned, this is the highest we've witnessed. Sequentially, the portfolio occupancy continued to improve with a gain of 110 basis points during the quarter. While expenses remain a challenge, our operators continue to control expense per occupied room. The cost for compensation per occupied room only grew at 4.3% in the third quarter over the prior year's quarter, the lowest growth rate since 2019. Expense growth was at a rate of 3.7% in the third quarter on a year-over-year basis, well below our REVPOR growth and 5.3%, driving an expansion of 130 basis points on a year-over-year basis in our margins. As our operators have pivoted from the COVID state to normalized operations and as labor and materials have become more available, we have aggressively addressed maintenance that was delayed during COVID, which resulted in slightly elevated repairs and maintenance during the maintenance expense during the quarter. Overall, the quarter's occupancy gains, strong REVPOR, and expense controls enabled the senior housing operating portfolio to deliver 17.6% year-over-year same-store NOI growth in the period, led by the U.S. with over 20% year-over-year growth. While Canada NOI grew at 6.3%, and the UK was up 9.8%. Going forward, we expect the operating portfolio to continue to deliver outside NOI growth, with each geography expected to experience accelerating NOI growth in the fourth quarter. As we look forward to what many believe will be a weaker labor market in 2023, it's important to realize that labor as an expense represents about 60% of our total expenses. Additionally, nurses are only about 5% of the labor force in the communities. And although there are other more specialized positions in the communities, most of the physicians require skills that are transferable from other sectors of the economy, allowing us to benefit from the softer labor market, as Shankh noted. Regarding our operating platform, we continue to quickly move forward on plans to pilot our first module in early 2023 with several other modules in the works. Like all technology rollouts, it's about people, processes, data, and then technology. So it's not about flipping a switch; it takes teamwork. The results will show up over time. Our meetings with our operators have been very productive as we bring together their skills and experience with our own to build a better future for the industry. Finally, I would like to thank our operators and their employees for making these results possible. It's been a full sprint since the beginning of COVID, and they have addressed one challenge after the next. We are finally at a point where it seems like there's light at the end of the tunnel. Occupancy continues to rise, net hiring is occurring month after month, REVPOR continues to outpace expense growth, which will drive further margin expansion, and so much more. We wish to thank everyone and wish them a wonderful Thanksgiving. And thank you for your hard work. I'll now turn the call over to Tim.

Thanks, John. My comments today will focus on our third quarter 2022 results, the performance of our triple-net investment segments for the quarter, our capital activity, our balance sheet liquidity update, and finally, our outlook for the fourth quarter. Welltower reported third quarter normalized funds from operations of $0.84 per diluted share, representing 6.2% growth over the prior year period when adjusted for HHS funds received and changes in FX rates, marking our second consecutive quarter of year-over-year growth since the start of the pandemic. We also reported our second consecutive quarter of positive total portfolio same-store NOI growth, at 7.2% year-over-year growth. Turning to 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 reflect the trailing 12 months ending June 30, 2022. In our senior housing triple-net portfolio, same-store NOI increased by 1.6% year-over-year, below the low end of our guidance range, which is primarily timing-related. The trailing 12-month EBITDA coverage is 0.83 times in the quarter. Next, same-store NOI in our long-term post-acute portfolio grew by 3.1% year-over-year, with trailing 12-month EBITDA coverage of 1.31 times. Lastly, our health systems, which comprises our joint venture with ProMedica Health System, saw same-store NOI growth of positive 2.75% year-over-year, and trailing 12-month EBITDA and EBITDAR coverages were negative 0.01 and negative 0.6 respectively, as operations continue to be impacted by higher agency utilization costs in the second quarter relative to the prior year. Regarding these coverage figures in context of our announcement last night, the trailing 12-month ProMedica senior care EBITDAR coverage of negative 0.01 implies a trailing 12-month EBITDAR of negative $1.6 million relative to $106.68 million of cash rent paid in the trailing 12-month period ending June 30, 2022. The transition of the skilled nursing business will bring the remaining ProMedica senior care EBITDAR back to profitability with the trailing 12-month coverage of nearly two times relative to the remaining rent and the 58 assisted living facilities they will continue to operate. Thus, the transition to Integra Health has a dual benefit, providing us with a well-capitalized strategic partner to focus on the skilled nursing properties while also leaving ProMedica senior care in a substantially better financial state following the transaction. Turning to capital market activity. In the quarter, we continued to enhance our balance sheet strength by utilizing our ATM program to raise approximately $760 million of equity at an average price of $80.12. We settled 9.1 million shares for total proceeds of $842 million to fund $1 billion of net investment activity, leaving $1.5 billion of unsettled forward ATM as of September 30. Post quarter end, we settled additional ATM proceeds to fund investment activity and pay down $850 million of total debt, $817 million of which was floating rate. Following that pay down, we have the full $4.0 billion available borrowing capacity on our line of credit, and no unsecured maturities until 2024. We expect to finish the fourth quarter with consolidated net-debt-to-EBITDA below 6.5 times for the first time since 2020. From a liquidity perspective, in addition to the $4 billion we have available on our line of credit, we have $1 billion in cash, and forward equity and $580 million in remaining near-term dispositions and loan pay down proceeds, yielding a 4.6 yield representing $5.6 billion in total near-term liquidity. Lastly, moving to our fourth quarter outlook. Last night, we provided guidance for the fourth quarter of net income attributable to common stockholders of $0.08 to $0.13 per diluted share, and normalized FFO of $0.80 to $0.85 per diluted share, or $82.5 at the midpoint. As mentioned in the release, our fourth quarter guidance contemplates no HHS funds to be received. After adjusting for $1.5 million in non-recurring items, including HHS funds received in the third quarter, we are effectively flat for sequential FFO. The sequential change is composed of $0.02 from sequential increases in the senior housing operating portfolio and $0.01 from sequential increases in outpatient medical and senior housing triple net. These are offset by $0.03 of interest expense and foreign exchange headwinds. Underlying this FFO guidance is an estimated total portfolio year-over-year same-store NOI growth of 8.5% to 10.5%, driven by sub-segment growth of outpatient medical at 1.5% to 2.5%, long-term post-acute at 2.5% to 3.5%, senior housing triple-net at 5% to 6%, and finally, senior housing operating growth of 18.5% to 23.5%, driven by revenue growth of approximately 9.5% year-over-year. Underlying this revenue growth is the expectation of approximately 200 basis points of year-over-year occupancy increase and rent growth of approximately 7%. With that, I'll hand the call back over to Shankh.

Thanks, Tim. One of my mentors, Peter Kaufman, often says, life is not about predicting; it's about positioning. Did we predict that ProMedica EBITDA coverage will turn negative? Absolutely not. But we positioned for it and structured as such. Did we know COVID would happen and weaken credit availability in the senior housing sector? No, we didn't. But we have positioned for it. We own more than 11,000 units of age-restricted and age-targeted apartments that will benefit from government agency-backed financing at very attractive pricing from which we can generate a couple of billion dollars of proceeds. Did we predict that our stock price would be in the low 60s and we would lose our access to equity capital? No, we didn't. But we have positioned for it and raised $3.28 billion of capital at an average price of $86.55 this year. We have no idea if rates are going back down or back up and how unfavorable the capital markets environment might become before it gets better. We're laser-focused on what we can control and have an incredible organization that is rallying to take advantage of the opportunities with thoughtful strategies rather than gambler's thoughts. I cannot be more excited about the period of unprecedented shareholder value creation that we are embarking on for our existing owners. And with that, I'll open the call up for questions.

Your first question comes from the line of Vikram Malhotra with Mizuho.

Morning. Thanks so much for taking the questions. Just a quick two-parter here. One, you talked a lot about pricing power. You gave the examples across operators on how pricing and labor are improving. Just how sustainable is this across your regions, maybe within the U.S. but also globally? And then can you just add on to that, any early signs that the elevated flu is impacting fundamentals?

I'll take the pricing power, John, if you take the flu, that's great. So from a pricing standpoint, Vikram, if you just look at what we said at the beginning of the year, nothing really changed. The industry has a lot of renewals at the beginning of the year, and this year, we got strong pricing obviously. Given that the gap between where market rent is as well as where your renewal rates are—with the rents rolling off—there’s a gap over a period of the year that sort of comes down, right? That's sort of what happens in a normal year. What we have said this year, given that market rents have been rising at a faster rate than annual rates for the first time in honestly a decade, so we’ve seen that gap close down pretty meaningfully. You're seeing RevPOR increases actually getting better throughout the year. You add on top of that that we are seeing some early renewals for next year in that sort of, call it, another 10% range. We expect that we will also do similar types of pricing increases as we come to next year. You will see that pricing power will continue to hold up, and RevPOR rate increases will continue to hold up. So we're pretty excited about it. But remember, pricing power also comes in many forms and substances, right? In the portfolio, many parts are getting to a point where overall, the portfolio might still be at 80% occupancy, but there are segments well above high 80s and 90% occupancy, where it starts to get pretty meaningful pricing power because you have no innings left to sell anymore, right? So as we get into that environment more and more, I believe you will see sustainable pricing power. I have no crystal ball on exactly what the macroeconomic environment would be next year. But as we sit here today, we feel very good about pricing.

Yes. On your question regarding the flu, I most certainly can't predict the future. But what I can say is that the COVID protocols, I think, will mitigate the situation within our communities. They're still in place. I was at one of the properties very recently, and I waited in line to get in; we washed hands, did a temperature check, wore a mask, et cetera. That's the protocol—a safe, thoughtful protocol. My expectation is that this will have a very positive impact in the communities, how the flu season goes in the U.S. and otherwise, I can't predict that. But I do think the COVID protocols will be very positive going forward.

Your next question comes from the line of Derek Johnston with Deutsche Bank.

Hi, everybody. Good morning. Can we discuss the newly authorized $3 billion share repurchase program? How do you feel about the shares at current levels? And I guess, what is the possible timing of execution, given the announcement comes in conjunction with earnings, which seems unique? Thanks.

Good morning, Derek. I think I laid out clearly what our possible capital deployment opportunities look like—buying back shares is one of them. Frankly speaking, as you know how we think, we are unlevered IRR buyers; we look at everything from that lens or you can also look at it from the basis lens, and you will see that we find our stock to be very, very attractively priced, and we'll measure that against every other opportunities we have. I cannot predict timing. That's just not—we just don't do that, as you know. But you know how we think. We consider the basis of replacement costs, and we consider unlevered IRR. If you do those calculations, you will come to the same conclusion that we have.

Your next question comes from the line of John Pawlowski with Green Street.

Thanks for the time. John Burkart, as operations recover in the SHO portfolio, do you expect structurally different margins between assisted living versus independent living once fundamentals stabilize?

There naturally are different margins starting out. But I think the endpoint will change. I think what we're doing with the operating platform will change that across the board. Assisted living may have more opportunity, and the impact might be slightly greater there. But I think the whole business is going in the right direction at this point in time, and I think we're benefiting across the board.

John, you didn't ask for my opinion, but my $0.02 on this topic is that you will see more improvement in assisted living than independent living, but improvements will be seen in both sectors. But you asked the right person that question.

Your next question comes from the line of Wendy Ma with Evercore.

Hi, good morning. Thank you for taking my questions. Could you please provide some insight into the moving trends of different senior housing project types like independent living, assisted living, and senior apartments? Also, given the current slowdown in the housing transaction market, have you observed any slowdown in your independent living move-ins?

I'm not sure I completely followed that question, but do you think—let me clarify. I think you asked about the moving trends in the senior apartment businesses. If I heard that correctly, I will tell you that if you think about product-types, as I mentioned, assisted living is going through perhaps the most robust recovery, partly because it is the most need-based environment. It's more susceptible to the macroeconomic environment—you need that product when you need it. And it has fallen further, so we have more rooms to climb back up. This is why we're seeing the most robust recovery. The NOI growth in that sector for the quarter was over 25%. As for the senior apartments business, it has been an outstanding business for us. As for independent living, it has not fallen as far as assisted living, and it's coming back more slowly. But I believe it is a good business when combined with other property types. I think, obviously, Canada, which is our majority independent living exposure, has been tough to recover, but we are starting to see improvements.

Your next question comes from the line of Daniel Bernstein with Capital One.

Hey, good morning. I just wanted to kind of expand on your comments about the upside-down, I guess, private buyers in the MOB space. Just trying to understand if lenders are actually foreclosing on assets? And maybe if you are already seeing some opportunities there to buy assets at a better IRR? And on a related note, do those comments also apply to seniors housing and skilled nursing, where I believe there are some upside-down loans as well?

Yes. So, Dan, we haven't seen lenders foreclosing on medical office loans yet. My comment was about the convexity of the situation, right? When you have very, very low rates, and you have people buying at cap rates that are in that environment, that makes sense. Then the treasury curve moves by 200 or 300 basis points. The treasury card is sitting on top of or above the cap rates that you are paying—that's a prior upside-down convexity situation. It takes time for lenders to foreclose. But we are starting to see some meaningful increases in the cap rates there, which is interesting. We're not at the point of whether we will look at that or execute on it yet. We have lots of relative opportunities. Senior housing has remained one of those for the last 18 months, but now the MOB space has become interesting.

Your next question comes from the line of Ronald Kamdem with Morgan Stanley.

Just a two-parter. Looking back at the slide in the deck on the long-term $543 million embedded NOI, my question is about the $230 million that comes from getting back to Q4 '19 NOI levels. Your comments suggest you are constructive about margin improvement with the acceleration you saw in revenues relative to expenses this quarter. Can you just remind us of how you're thinking about the margins of that $230 million versus Q4 '19 level as part one? And for part two, on the ProMedica consideration of about $0.5 billion, how much of that is from the 15% stake they're giving up, and how much is from working capital?

Yes, I'll start with the first comment on the margin side. The assumption is we get back to pre-COVID levels. So there's no assumption on change in margins. We assume we get back to pre-COVID level profitability and operating margins of about 30.8% across the portfolio.

On the consideration, it's roughly half and half.

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

Yes, I just wanted to touch on the new SNF JV. I know you just kind of highlighted the rough size of the operating reserves ProMedica is going to be providing. But how is that going to be distributed to the new operators? Are they simply earmarked to fund near-term cash flow losses during the transitions? And what happens if these new operators don't actually need to access those reserves?

The reserves are earmarked for operating losses and working capital losses. Those reserves will go to them to improve the quality of the portfolio. If they do a good job and don't need all of it—that's great for them. They will share the risk and then benefit from their savings.

Your next question comes from the line of Tayo Okusanya with Credit Suisse.

Yes, good morning again. Congrats on the quarter and the transition. I have been covering this for 15 years. I don't think I've ever seen a rent restructuring where the rents went up, so that's impressive. In regards to Integra, and again, this idea that they're going to be subleasing a lot of the assets to regional operators. Just curious a little bit again. Your mantra in the past has always been to be as close to the operator as possible. You even sat on the board at ProMedica. How is that relationship going to be with these subcontracted operators? How do you manage that to ensure you continue to get operational excellence out of them?

Tayo, extraordinarily good question, and thank you for your comment there. I'll just add one thing to that: not only is the rent going up, also the previous tenant was being close to $0.5 million on the table. To ensure that these properties are taken care of going forward. So I'll add to the question of why we didn't go and find offers. Our mantra is to get close to the operators, but that's in the senior housing business. I fundamentally believe in the expertise, and we've worked with Integra and its parent company on many of these transactions before. There’s no caution that they are significantly better in the skilled nursing business than we are—or will ever be. We are sharing and creating that value with them. I mentioned in my remarks that we're seeing significant upside that they can create with them. In return, they provide us downside protection, which is very important for us. You have to do in life what you are best at. We believe we understand the operations of senior living, wellness housing business, and MOB business, and we want to partner with people who we believe are very good at other businesses. That's what you're saying. Fundamentally, it is about the decision-making process going to the people who are the best at what they do. At the same time, it mitigates the risk-reward ratio in terms of who creates value. It's a win-win-win for all three parties. ProMedica wants to focus on its core business and be in the higher margin business—that's the leadership they are taking forward. There's a significant improvement in their credit. For Welltower, it's a great day for value realization and taking this portfolio into the hands where we can create another round of significant increases in value. For Integra, they can buy it at a very attractive basis. There is a lot of value to be created for residents, employees, and capital, and that will be shared between us. It is fundamentally the belief that they're giving us downside protection for the potential upside that they can create; on the other hand, for us, it's about where we sit in the risk spectrum. So it's a win-win-win on all fronts.

Your next question comes from the line of Mike Mueller with JPMorgan.

Hi. We appreciate the expanded development disclosure. But what's the timeframe that you see for ramping the developments from the 1.6% initial yield to the 7% stabilized yield?

Yes, Michael, I appreciate your recognition that we're trying to help shape the ramp or trajectory of how that cash flow comes through. It depends on the type of development. A lot of our starts have been in the senior apartments on the housing side, where you're talking about more 12 to 18 months type ramp towards stabilization. In traditional senior housing, it is more of a 24 to 36-month ramp. That's where more of the lower yields may be seen in the first 12 months.

Your next question comes from the line of Nicholas Yulico with Scotia Bank.

Thanks. Good morning, everyone. I just want to go back to ProMedica. Clearly, the strong pricing you got there and the cash rent going up is attractive. I just want to see, though, if you could let us know the GAAP impact, because I didn't see mention of lease escalators for the new arrangement you had previously. So just trying to understand the FFO impact from this. And separately, if you had—I don't know if you're going to file details on the new lease, but if you had anything you can share right now in terms of escalators, financial covenants, CapEx requirements, because those were specific, very onerous conditions of the last lease with ProMedica, which kind of strengthened I think the whole process you went through. So any detail there would be helpful? Thanks.

Very good question. The escalators remain the same at 2.75%. The GAAP impact, as we mentioned, will be roughly neutral to slightly accretive. One of the leases will remain the same, Lease ManorCare; the Aramco senior living lease is going to 10 years. So net-net, you will be roughly neutral to slightly advantageous.

Your next question comes from the line of Austin Wurschmidt with KeyBanc.

Hi, good morning. Curious, first off, if there were other partners you approached for the ProMedica joint venture? How do we think about you going from a health system investment with feeders into these assets to the more regional operator approach? And then just lastly, I'm curious, going back to 2016, 2017, wasn't the plan to ultimately exit the SNF business? So I'm curious how you think about the strategic direction of that segment of the portfolio?

Can you please repeat the first part of your question again?

Yes, I was just curious if you approached any other partners beyond just Integra for the new joint venture.

So look, it is no secret that we have been considering this particular portfolio for a long time. We have been approached by at least five parties interested in this transaction, similar or higher value structures. We went with a partner that we know well, where we felt the execution risk is much lower. But I think if you heard correctly, we have been approached by many groups because these assets are not only very attractive, they have very good history, but the basis remains very, very attractive. Going back to 2016, '17, I think your question was about exiting the SNF business. We laid out two years ago when I took over as CEO that we have a very simple strategy—we want to make money on a risk-adjusted basis for our existing shareholders. That's the strategy, whether it's skilled nursing, medical office, senior apartments, or senior housing. We will go anywhere we can find opportunities to make money on a risk-adjusted basis for existing shareholders. It's a simple strategy.

Your next question comes from the line of Juan Sanabria with BMO Capital Markets.

Hi, good morning. Shankh, I was just hoping you could talk about maybe opportunities you see outside of the U.S. given the unusually strong U.S. dollar, and whether that presents a wider opportunity set for potential acquisitions?

One extraordinarily good question. As you know, we get excited about basis and the USD; we raised capital in USD, our expenses are mostly in USD; our capital structure is in USD. We think about basis in terms of USD. The U.K., on a USD basis, has never looked more attractive, and Canada looks pretty attractive as well. The U.K. particularly, given what happened to the currency situation, is extraordinarily attractive. If you add on top of that that you don't have a functioning debt market in the U.K. like you have the agency support in the U.S. and Canada, it's a very, very interesting market. I've never seen U.K. opportunities as cheap as they look today from a USD investor perspective. That probably goes for any asset class—including retail. You're absolutely right; we're thinking about it.

Your next question comes from the line of Rich Anderson with SMBC.

Thanks, good morning. Congrats on the ProMedica Integra transaction. The market seems to be rewarding you for that resolution. But the way I look at it is you were kind of married to ProMedica in 2018, but you signed a prenup. That protected your downside. This is all based on basis and it's all clear and understood. But now you're selling 15% to Integra. What happens to the basis for that 15%? In other words, I assume that 85% stays put. But are you selling—are you upping your basis and eliminating some of that component so that if there is a disruption going forward with Integra and its regional partners, that you still have an equal amount of protection should something go wrong here? Because a transition isn't a silver bullet; it usually sometimes works, but sometimes does not. I just want to gauge how you're protected going forward. Thanks.

Yes. So our basis remains the same, and you can do the calculation on—again, you have the total rent. You know what the approximate yield is in the business. You can get to the total value. Rent divided by the yield equals value. You can divide that by the total number of beds, and you will see Integra's basis is also very attractive. Our basis remains very attractive. Remember, what we sold to Integra is what we got from ProMedica for nothing. It's important for you to understand the nuances here. Our basis remains attractive. As I mentioned, we have $0.5 million on the table to ensure these properties are well taken care of. We created another structure where that 15%, which Integra is paying for, remains subordinated, further lowering our net basis, which is the first time I mentioned that condition remains, and we have other guarantees. If that is not the case, it remains. Remember, as I said earlier, people want these assets because they are very well-located and have a very attractive basis. We don't foresee any problems, but as I've mentioned before, it's possible for anything to happen. We need to consider probabilities, not possibilities; it appears favorable to me.

Your next question comes from the line of Michael Griffin with Citi.

Thanks. It's Nick Joseph here with Michael. You've talked a lot about the opportunity for improvements in modernization in senior housing. But when you look at the skilled side, and I recognize it's a very different business, with more regulatory considerations and everything like that, are there opportunities to improve either the operations or share best practices that might be applicable so that you could help with coverage going forward?

Nick, first, congratulations for getting the top job. We have been a big fan of yours for a long time, and thank you for your question on the call today. I've mentioned that we do not consider ourselves skilled nursing experts. If we did, we would not bring in our partners in this deal, who we consider knows the business better than we do. I will leave it to our partner to execute the strategy; we know they have done it before, at least with these 21 assets we transacted with Integra. They have a track record. We remain focused on our core businesses—senior living, wellness housing, and medical office—and that’s where John spends all of his time.

Your next question comes from the line of Steven Valiquette with Barclays.

Great, thanks. Good morning. Just sticking with ProMedica for a minute here. I guess one of the expected operational synergies from ProMedica acquiring the ManorCare SNF assets in the first place was likely centered around good flow of patient referrals from ProMedica hospitals into a lease of the ManorCare SNFs where it made sense geographically. I guess I'm curious, with hindsight, did that part of the strategy play out the way you thought it would? Perhaps the underwhelming execution that you alluded to was just more a function of tough industry dynamics for SNFs overall? Also, under the new agreement, do patient referrals to the SNFs under Integra's operating control stay intact as part of the strategy for Integra to turn things around?

Let me try to address your question, Steve, and then Nikhil, you can jump in. Initially, the strategic patient flow point did not play out. It hasn't played out due to walking directly into a challenging period with COVID or because the execution simply wasn't there. I don't know the answer to that question. Hindsight is 20/20, and the leadership at ProMedica will tell you that they were underwhelmed with the execution as well. So there is no question it did not play out. But if you think about it, I recommend you go back to the call where I described why we did this transaction and see how much emphasis we placed on our basis. Think about it as I mentioned before: if you owned a two-bedroom apartment in New York City for $400,000, while everyone else owned it for $1 million, you do not need to charge what everyone else is charging. Our fundamental idea of making money stays intact without taking much risk. That's what we saw—that has played out, hopefully you'll agree, in this transaction. Nikhil, do you want to add anything to the second part of the question?

Yes. From a clinical programming perspective, I think this ManorCare ProMedica portfolio has always excelled at providing good clinical programs, and they work closely with hospitals across different markets, whether for medical hospitals or not, to create programming that serves the needs of local hospitals. That programming stays in place, and obviously, as new operators come in, they'll decide if they want to keep that in place, scale it back, or enhance it. The whole platform has been known for its incredible clinical programming, and that stays in place.

Your next question comes from the line of Dave Rogers with Baird.

Yes, maybe for John Burkart. John, as you grow occupancy in the SHOP portfolio, you have more assets likely now at stabilized occupancy. Can you talk about the margins at the stabilized assets and if they stabilize at pre-COVID levels? Also, is there any delay between the occupancy stabilization and margin you are witnessing for that larger group of assets?

Yes. Let me just give you an interesting piece of data. One of our operators that has very high occupancy in the 95% range has actually had expenses going backwards. You're seeing some tremendous margin improvement there. The whole portfolio is going that way. As Shankh mentioned, higher occupancy levels allow us to push rents to achieve higher rent, driving better margins. But on the expense side, we see opportunities to improve as we go forward; we've just come out of the COVID situation. As I mentioned in my prepared remarks, COVID caused challenges in getting maintenance done and getting people into buildings, et cetera. Our numbers today even reflect some elevated maintenance expenses, which will reduce over the coming quarters and provide a stronger run rate. Yes, things are going well at all levels.

Your next question comes from the line of Josh Dennerlein with Bank of America.

Yes, I appreciate all the color on ProMedica. I guess maybe one question on the senior housing side for ProMedica: was there any discussion of potentially moving that to another operator, or are you guys pretty comfortable with how they're performing?

As Tim mentioned, those assets are performing with a decent amount of profitability. ProMedica has committed to retaining those assets, as they are, as you know, high-margin businesses. They have performed even before COVID, and I expect they will continue to come back. Remember where pre-COVID assets were at 80% occupancy, generating high 30% margins. As we recover from COVID, I foresee those occupancy levels stabilizing. I'd venture to guess that will be the best margin part from all of ProMedica's businesses. So that is where we stand today—there's no reason to believe these assets won’t succeed. As part of this recovery, we’re seeing strong indications that margins will recapture their high levels, and ProMedica should enjoy that like everyone else in the business.

At this time, there are no further questions. This concludes today's conference. You may now disconnect.