Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Welltower Second Quarter 2026 Earnings Call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A session. Press star then the number 1 on your telephone keypad.
And if you would like to withdraw your question, again, press star 1. Thank you. I would now like to turn the conference over to Matthew Grant McQueen, Chief Legal Officer and General Counsel.
Matthew, please go ahead.
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 will hand the call over to Shankh for a few remarks.
Thank you, Matthew, and good morning, everyone. I will review business trends, our capital allocation priorities and the team will follow the usual cadence. I am pleased to report a record quarter for our company.
As the end market demand for our needs-based senior housing business remains resilient, despite continued macroeconomic and geopolitical uncertainty. The uncorrelated nature of demand growth combined with the mix shift of our portfolio resulted in 25% year-over-year increase in per-share FFO growth, one of the highest levels achieved in our history. As Tim would describe shortly, our strong start to 2026 and increased confidence in the back half of the year enabled us to increase the midpoint of our full-year FFO guidance by $0.12 to $6.40 per-share.
Notably, our second quarter bottom line growth would have been even stronger absent nearly a billion dollars of dispositions during the quarter, as well as more than $11 billion over the past year. Our maniacal focus remains on compounding per-share growth well into the future for existing owners. And incurring near-term dilution from $3.6 billion of disposition completed year to date is a trade-off we will gladly make.
Remember, every decision we make is evaluated obsessively through an opportunity cost lens to extend the duration of our growth curve. And the trade-offs we made last year vis-à-vis the sale of our outpatient medical portfolio and concurrent redeployment of proceeds within senior housing are clearly being reflected across our P&L. This includes revenue and adjusted EBITDA growth this quarter, which increased 39%, 36% respectively. At the same time, we maintained an underlevered balance sheet and continue to invest heavily in operations and technology side of the house.
Turning to operating results. We are pleased with our second quarter performance particularly when weighed against an economic backdrop fraught with uncertainty. Organic revenue growth of 9.2% was driven by another quarter of strong occupancy gains and healthy pricing power.
Same store occupancy increased 330 basis points year-over-year which follows a 420 basis point increase in the second quarter of last year. And our sequential spot occupancy growth in the quarter was 100 basis points reflecting a strong start to the summer leasing season versus 80 basis points in Q2 of last year. We also continue to be pleased with the pricing power that our operating partners are achieving with RevPOR, or unit revenue, increasing 5.2% during the quarter relative to 4.9% achieved in Q2 of last year.
We believe this reflects two powerful dynamics. First, capacity in the system continues to shrink with a strong percent of our portfolio rapidly crossing 90%, 95% occupancy thresholds, creating additional pricing power, This is not solely a supply demand story, though. We serve the wealthiest of age cohorts in history, with a significant concentration of wealth held by baby boomer generation.
This cohort increasingly prioritizes exceptional experiences and high-quality amenities and service particularly later in life. This is also a highly discerning customer base that expects the best and willing to pay for it. Our operators and their on-site teams work relentlessly every day to deliver that exceptional and differentiated experience.
Ultimately, we believe the combination of supply constraint and a highly affluent need-based customer will continue to support healthy rate growth for many quarters and years to come. It is also worth highlighting that RevPOR growth continues to meaningfully outpace the growth of ExpPOR, or unit expenses, which resulted in another strong quarter of operating margin expansion of 300 basis points to over 32%, surpassing pre-COVID levels. And we believe that meaningful margin upside remains for the portfolio driven by operating leverage inherent in our high-fixed-cost business, coupled with structural changes being effectuated by Welltower Business System. ¶ Turning to capital allocation.
Transaction activity across seniors housing space has picked up in recent quarters, but our ability to execute on highly attractive investments in the U.S., U.K., and Canada has not diminished. In fact, the pace of activity has picked up meaningfully as a result of geopolitical uncertainty coupled with a spike in interest rates. Even after a record level of investment activity in 2025, we have already completed or under contract to close on approximately $15.5 billion of investments this year.
The vast majority of these opportunities are off-market in nature, with sellers coming to us first, knowing our reputation as a fair counterparty and our ability to provide certainty at lightning speed and close quickly as depicted on slide 15 of our business update presentation. This is particularly important given the recent rise in interest rates and growing uncertainty with respect to the direction of the economy. Our investment teams remain busy as ever and I suspect that will be the same will be the case in the fall in fall and into the year end.
Not only does our investment pipeline remains robust, visible, and actionable, but our conviction in deploying capital is enhanced by our ability to meaningfully increase cash flow post-acquisition through transitioning assets to one of our best-in-class operators, and the implementation of the Welltower Business System. Despite this confidence, make no mistake, that we remain exceptionally disciplined in deploying our shareholders precious capital. We will not compromise our standards for asset quality, management contract structure, or host of other criteria which are embedded in our investment process in pursuit of near-term accretion or overall size.
Our goal is simply and only per-share growth. And while we almost invariably remain the first call from sellers, we have passed on tens of billions of dollars of transaction this year alone which did not meet our stringent criteria for quality, price, acuity, future growth, and contract structure. At the risk of sounding like a broken record, this is not a spread investing business.
At least not for a product-obsessed operating powerhouse like us. I cannot speak for the shadow banks in our space, who only understand the spread investing language, and are perhaps particularly impressionable by silver-tongued investment bankers. Lastly, we are delighted to have announced an increase in our quarterly dividend by 15% to $0.85 per-share, This marks the third consecutive year in which the board has elected to raise our dividend and marks a step-function higher from the previous increases.
This increased size of the dividend reflects board's continued confidence in the growth trajectory of the business and health of our balance sheet. At the same time, our free cash flow generation continues to grow rapidly providing us with greater flexibility to allocate capital in ways to maximize shareholder value and extend the duration of our per-share growth. With that, I will pass it over to John.
Thank you, and good morning. The second quarter not only marks another period of substantial growth for the business, but also continued progress on Welltower Business System initiatives, which I will get into shortly.
As Shankh mentioned, we reported another quarter of stellar results. With the company firing on all cylinders. Total portfolio same-store NOI increased 15.5% year-over-year marking the second highest level in our company's recorded history.
As we discussed last quarter, the portfolio is growing at a meaningfully faster pace driven primarily by the continued mix shift towards senior housing operating portfolio, which now contributes approximately 70% of our total NOI. Importantly, seniors housing remains largely insulated from the various cyclical and secular pressures affecting many sectors across corporate America. The business continues to perform at a high level resulting in our 15th consecutive quarter where NOI growth exceeded 20%.
Top-line growth remained strong, supported by another quarter of 330 basis points of occupancy growth and 5.2% RevPOR growth. We are pleased to report that expense pressures remain subdued with year-over-year growth in ExpPOR, or unit expense, of just 0.7%. This is largely a function of scaling benefits received from the rapid increase in occupancy across the portfolio.
And with the properties fully staffed, and with continued normalization of wages, comp, or compensation per occupied, room came in at just 0.8%. one of the lowest levels in our recorded history. As a result, we achieved flow-through margins of 65% a continued improvement from prior years. The combination of healthy RevPOR growth and constrained ExpPOR growth drove another 300 basis points of year-over-year margin expansion during the quarter.
And as Shankh mentioned, we believe that significant margin upside remains given the inherent operating leverage in our business combined with the competitive advantages we are building through the Welltower business system. one of the most important ways in which we are expanding our moat is by attracting exceptional talent from a broad range of industries highlighted on a slide of our business update presentation. The tech squad represents an expansion of the tech quad we introduced last year. Tasked with accelerating the reimagination of our technology ecosystem including all initiatives related to data science, information, technology, and innovation.
Their objectives feed into our broader companywide mission to dramatically improve the customer and employee experience and provide a fantastic value proposition for our residents and their families. In this light, our goal has been to attract the highest caliber professionals with tech or tech-adjacent backgrounds to execute on this vision. We will continue to allocate significant resources and talent as we continue to deploy WBS across our portfolio.
We have already seen encouraging early results across the properties where WBS has been deployed, including operators refining their site labor model enabled by WBS automating previously paper-based back office workflows, allowing community-level employees to reinvest their time savings into improving the resident experience. Overall, WBS is beginning to result in meaningful improvements in cash flow. We believe that expanding the platform across the portfolio will further extend the duration of our growth.
To sum it up, it was another strong quarter for the company. But as you know, we take nothing for granted and remain relentlessly focused on every operational detail not simply to produce strong results this quarter or this year, but to build an organization capable of sustaining exceptional performance for years to come. That requires a culture of continuous improvement, a willingness to upend the status quo, and an unwavering commitment to execution and operational excellence.
Finally, I would like to thank the Welltower team, our exceptional operating partners, and the dedicated, caring community employees for their tireless efforts, and for embracing this journey alongside us. Their dedication is what makes these results possible. With that, I will pass it to Nikhil.
Thanks, John, and good morning, everyone. Since our last call, the macroeconomic and geopolitical environment has remained highly fluid. The Middle East war has seemingly been both on and off, and markets have repeatedly moved between expectations of de-escalation.
Globally, central banks such as the ECB and BOJ have recently tightened their policy rates, while in the U.S., the 30-year Treasury has reached levels not seen since before the global financial crisis. And the Federal Reserve has adopted an increasingly hawkish posture as inflationary pressures have persisted.
In an environment like this, the margin for error narrows. Asset quality and basis become the primary sources of downside protection, and the ability to distinguish between genuine value and a compelling narrative becomes increasingly important. Our competitive advantages continue to show through.
For counterparties, we remain the preferred and most reliable buyer, one with the credibility and track record to provide certainty, regardless of what is happening in the capital markets. Our advantage lies in the ability to identify value at a-- at a highly granular level underwrite with conviction, and move with unparalleled speed when the facts support doing so. Since our last call, our investment activity has increased by another $5 billion and now totals $15.5 billion for the year.
During the second quarter, we completed more than 30 transactions totaling $6.2 billion. With a median transaction size of $46 million and approximately 96% of our second quarter activity was sourced off-market. Through these transactions, we acquired 138 communities across the three countries where we do business.
Through the end of the second quarter, we had completed nearly $9.5 billion of investments. The remaining $6 billion of announced activity consists primarily of newer vintage senior housing assets, across 26 transactions in the United States, Canada, and the United Kingdom. These assets have an average age of six years and in-place occupancy of roughly 75%.
Providing us with attractive physical plants and meaningful embedded opportunities to improve operating performance. These assets were acquired at an approximate 20% discount to replacement cost. Importantly, approximately 20% of these transactions were sourced directly by our key growth operating partners, through relationships in their local markets.
Many of these partners have elected to receive their incentive compensation in Welltower stock. As a result, their alignment with our owners is not theoretical. They participate directly in the value they help create.
That alignment is producing tangible results. We operate as one team, developing relationships, identifying opportunities, and improving the business together. These network effects strengthen our platform and make the entire ecosystem more valuable.
The flywheel is humming. Our confidence in these investments is grounded in what we are already seeing across our portfolio. As the Welltower business system continues to mature, our ability to increase cash flow following an acquisition has become both more significant and more repeatable.
That distinction matters. Spread investing and cost of capital arbitrage are not value creation. Nor are they durable investment strategies.
Our focus is different. We seek to acquire assets at a fair price based on a reasonable view of their prospective cash flows. While retaining for our owners the upside we believe our platform can create beyond that.
I would also like to spend a moment on how we define success. In parts of the market today, simply completing a transaction appears to be treated as an accomplishment. A deal is announced.
The champagne is popped. Victory is declared. Attention quickly turns to the next opportunity.
We see it differently. Closing an acquisition is not the culmination of the work. It is the moment the work begins.
There is nothing inherently worthy of celebration about winning an auction or signing a purchase agreement. After all, any fool can write a check. The more difficult task is determining whether the prospective returns adequately compensate our owners for the risks being assumed.
And having the discipline to walk away when they do not. At times, that means watching others claim victory in processes in which we chose not to participate. We are comfortable with that.
To us, success is not simply buying something. Success is establishing a thoughtful business plan, executing against it, achieving the cash flows we underwrote, and continuing to push for outcomes that exceed our original expectations. It means never becoming satisfied with current performance.
It means improving the experience of residents creating a better environment for employees, and generating durable value for our owners. The acquisition itself earns no credit. The results that follow are what matters.
In an uncertain environment, the temptation to confuse activity with accomplishment becomes even greater. Our focus remains unchanged. Pursue the truth rather than the narrative.
Maintain a margin for error, and deploy capital only when the prospective returns justify the risks through the arc of time. Our objective is not to win the announcement; it is to win the outcome. With that, I will turn the call over to Timothy.
Thank you, Nikhil. My comments today will focus on our second quarter 2026 results, the performance of our triple-net investment segments, our capital activity, our balance sheet and liquidity update, and finally, an update to our full-year 2026 outlook. Welltower reported second quarter net income attributable to common stockholders of $0.61 per diluted share, and normalized funds from operations of $1.60 per diluted share.
Representing approximately 25% year-over-year growth. Also reported year-over-year total portfolio same-store NOI growth of 15.5%. Driven by 20.5% growth in our SHOP portfolio.
Turning to the performance of our triple-net properties in the quarter. In our senior housing triple-net portfolio, same-store NOI increased 5.2% year-over-year and trailing 12-month EBITDAR coverage was 1.23x. Next, same-store NOI in our long term post-acute portfolio grew 2.9% year-over-year, and trailing 12-month EBITDAR coverage was 1.3x.
Moving on to capital activity. During the second quarter, we raised $3.9 billion through share issuance OP unit funding, and capital recycling. Which when combined with internally generated cash flow, allowed us to repay nearly $1 billion of senior unsecured notes and fund $6.3 billion of gross investment activity.
While ending the quarter with net debt to adjusted EBITDA of 2.99x. In line with a year ago. During the quarter, S&P revised our outlook on our A- credit rating to positive. following Moody's decision earlier this year to revise the outlook on our A3 rating to positive.
Together, these actions further validate what we believe has become one of Welltower's growing strategic advantages, differentiated access to capital supported by an exceptional all-weather balance sheet. We ended the second quarter with $2.1 billion of cash on hand. Which together with recent capital activity, and $1.1 billion of incremental dispositions, position us to fund approximately $6 billion of incremental investment activity.
The majority of which we expect to close later in the year. Subsequent to quarter-end, we successfully returned to the Canadian unsecured debt market for the first time since 2019, issuing $1.15 billion of senior unsecured notes across two tranches at a blended coupon of 3.95%, extending the duration of our liability profile at attractive pricing. Taken together, this net investment activity and continued cash flow growth from the in-place portfolio are expected to result in near end net debt-to-adjusted EBITDA of approximately 3x.
In line with our prior expectations. Before turning to our guidance, I want to come back to a point I highlighted last quarter around how the vertical integration of our model and the portfolio transformation underpinning Welltower 3.0, is creating a powerful compounding network effect that is only beginning to unfold. While our updated outlook reflects another quarter of strong execution, we continue to believe the more important story is the structural evolution of the business.
As we have increased our concentration in senior housing operating assets, we have fundamentally changed the earnings profile of the enterprise. One example of this is the operating leverage now emerging within the portfolio. For the second consecutive quarter, our SHOP portfolio generated flow-through margins in the mid-60% range.
As occupancy continues to trend higher, unit economics should improve further as a higher proportion of incremental revenue is translated to bottom line net operating income. This fundamental strength is reflected in our guidance. We began the year with an outlook that already reflected a substantial amount of visible year-over-year earnings growth.
Driven by the continued evolution of our portfolio toward higher growth senior housing operating assets. Two quarters later, we are raising that outlook for the second consecutive quarter. Reinforcing both the strength of our underlying portfolio and the continued momentum of the business.
Moving on to guidance. Last night, we updated our full-year 2026 outlook for net income attributable to common stockholders to $3.11 to $3.19 per diluted share and normalized FFO to $6.36 to $6.44 per diluted share. Or $6.40 at the midpoint.
Our normalized FFO guidance represents a $0.12 increase at the midpoint from our prior normalized FFO range. This increase is composed of a $0.03 increase from our senior housing operating NOI, an $0.08 increase from investment and financing activity, and a $0.01 increase from better than expected income tax and other. Our updated outlook assumes total portfolio year-over-year same-store NOI growth of 13.75% to 16%, driven by subsegment growth of outpatient medical, 2% to 3%; long-term post-acute, 2% to 3%; senior housing, net, 3.5% to 4.5%; And finally, senior housing operating, 18.5% to 21.5%, which is driven by the following midpoints in their respective ranges.
Revenue growth of 9.3%, comprised of RevPOR growth of 5.1% and year-over-year occupancy growth of 350 basis points, and expense growth of 5%, equating to ExpPOR growth of approximately of approximately 1%. And with that, I will hand the call back over to Shankh.
Thanks, Timothy. I want to make two general observations before opening the call up for questions. First, exactly two years ago, on our July 2024, earnings call, we laid out our macro view of the world.
Suggesting that the powerful secular tailwinds experienced over the last 40 years which resulted in subdued levels of inflation, and a historic bond bull market could diminish or yet turn into headwinds. This includes shifting from a period of globalization to deglobalization from an abundant labor force driven by baby boomers in their prime working years, to a scarcity of labor due to a rapidly aging population. We reflected on increased deficit spending across the world, and growing international conflicts after a period of relative peace and cooperation.
And we specifically called out structural changes in Japan, the global anchor of low interest rates. Which has been experiencing the highest level of inflation in decades. While the 10 year treasury has increased over 100 basis points in the past two years, we believe we are still in the early innings of the structural forces playing out.
How has this been reflected at our company? Through both transformation of capital and resource allocation. First, we executed a massive portfolio rotation from bond proxies such as Outpatient Medical, into higher growth senior living communities where we believe we can meaningfully outperform inflation and where we can effectuate positive divergences in outcomes through our competitive advantages.
And second, through a substantial resource reallocation to increase talent density in operations and technology. Over the past few years, we have recruited incredibly high caliber technology and operating talent from some of the most sophisticated and innovative firms in corporate America. The acceleration of this trend during past 6 months can be seen on page 13 of our business update presentation.
This is a testament to our transformation from Welltower 2.0, a capital allocator with strong asset management expertise, to Welltower 3.0, a customer obsessed operations and technology first company with a complementary disciplined capital allocation function. As a result, we do not achieve returns like spread investing shadow banks whose currency is either interest compression or leverage.
Instead, we create returns by driving cash flow the old-fashioned way in our pursuit of dogged, incremental and continuous progress over a long arc of time. Finally, I want to provide an update on an important topic that I had anticipated eventually discussing after we established the RIDEA 6.0 construct 9 months ago. Although I certainly did not expect it to become relevant this soon.
As you might recall, many of our growth operating partners have elected to take their multiyear promoted interest in Welltower stock. The ultimate value of the wealth they create will not only be a function of their own achieved results, but also perhaps turbocharged by their peers in other parts of the country or different countries. As I have sat down with many of these operating partners during the summer, I have heard unprompted more about the cooperation they are receiving from other well tower operating partners than ever before.
Imagine historically, for example, Coursier and Walter would be working on culinary initiative. Or StoryPoint and World Tower would be working together on a digital marketing priority. Now you have other operators such as QSL, Amica, KRUK are jumping in at the same time as a team and amplifying the outcome regardless of who started the project.
Organizations spent an inordinate amount of time and resources to deconstruct intricate complexities. However, together as partners, we are maniacally focused on capturing unrecognized simplicities that are hiding in plain sight. Quickly resolving pain points for both customers and employees to consistently deliver a better experience.
What started as a shared incentive is now turning into a shared dream and shared sacrifice. I have never seen and felt this level of deserved trust amongst the ecosystem with true unity of purpose and mirrored reciprocation. I want to thank my operating partners who are pushing us and pushing each other every day to get better.
As the old adage says, if you want to go fast, go alone. If you want to go far, go together. Life is more fruitful and fulfilling if we focus on growing the size of the pie versus the share of the pie.
This unprecedented level of cooperation is reflective of a win additive-sum mentality as opposed to a narrow zero sum mentality which is prevalent in our industry. I am confident that we are gathering tremendous momentum at the beginning of a leaping Red Queen effect that will shape our shared future together and transform this industry. With that, I will open the call up for questions.
Thank you. If you would like to ask a question, please press [Operator Instructions]. We also ask that you limit yourself to one question.
And your first question comes from Ronald Kamden with Morgan Stanley. Please go ahead.
Great. Good morning, everyone. You mentioned the term shadow banks twice in your opening comments.
We are just we are just wondering if you could elaborate on fundamental differences between how you view your business and those players. And if I could ask a second part or just a quick update on the 95%-plus of your portfolio that you gave last quarter. Wondering how they are doing this quarter.
Thanks.
Thank you, Ronald. So if you think about what a bank does, it takes deposit. It has a cost of funds.
And it lends money on a spread on that cost of funds. If you look at health care REIT industry, which is why this industry started, they are all in triple-nets, and that is all they did. And despite this industry has gone from a credit investing to an equity investing, that mentality of spread investing has not changed.
It sees the industry as a zero sum financing game rather than an additive sum where we can create value together. that is not what we do. If you think about the transformation of this company, what we have been trying to do from a spread investing vehicle, which was before us, to a true capital allocation powerhouse to finally change into an operating and technology first company whose entire focus is to enhance resident and customer experience to create value. With a complementary capital allocation side.
We are not saying that is not what we do. We are saying our first every day we wake up, think about how to create value by enhancing what we own which is to increase customer and resident experience. that is the key difference. Right?
Hence, the question of what Nikhil's, you know, sort of talked about, we define our success differently. And that is the difference. Right?
Second, and that is just percolates through our culture and percolates through our entire ecosystem. So that sort of is a difference in how we think about the business and how we allocate both capital and resources. Right?
Very, very important part. The second question, the 95% plus of the portfolio, obviously higher RevPOR growth, 6%-plus, and it also a higher NOI growth of 20%-plus. Hope that answers your question.
Your next question comes from the line of John Kilichowski with Wells Fargo. Please go ahead.
Good morning. Nikhil, you made some very helpful comments in the opening remarks in regards to the composition of sellers. And I was hoping you could, dig in there a little bit and talk about what constitutes the rest of that pie of sellers, and also what is driving this acceleration in transaction activity?
You know, as you put it, any fool can write a check, and Welltower's always prided itself on offering a fair price for assets. So what do you think is the driving factor or factors that are, you know, one, bringing sellers to market in the best senior housing operating market, and two, to Welltower when there may be a higher bidder.
Yeah. I think, John, I think first and foremost, you know, if you look at how many transactions we did and how I quantified, know, that practically 96% of those transactions are off market. You know? it is a it is a the model has been changed.
Right? I mean, sitting here backed by all the tools that our data science team has provided to us, we have a very granular view of all the assets that are out there. Who owns them, and what the expected performance of those assets is.
And so then we turned the model around, and go pursue those assets rather than wait for those assets to come to our desk. Right? So in some cases, these are family businesses.
Where, you know, the one generation that created the business is not looking to hand it off to the next generation as they have other priorities. And so we go unlock those opportunities. And at times, you know, those conversations take years. eventually come together.
And then there is, you know, local owners who own a handful of assets where, you know, we get together with our operating partners and say, who has the best relationship? Who has the ability to go unlock these opportunities? And it is just old school classic business development to go pursue specific assets, specific portfolios that we have been tracking and have a strong view of what the performance can be.
So that is how we go pursue these opportunities.
I just cannot overemphasize what Nikhil says. The first 1, which is there is a tremendous amount of generational transfer that is happening. It is happening across our society with many, many businesses are changing hands, and you will see a lot of write ups on this over the over the years.
But we are seeing that in our in our industry. It has been tough last 5 years, six years in this industry. And finally, cash flow has sort of come back to pre-COVID levels.
And, a lot of the owners are, ready to move on. Into their retirement. Or in other pursuits and enjoy their life.
And that is sort of what we are seeing driving across all three countries.
Your next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.
Thanks so much for the question. Maybe, I guess, Shankh, I am sort of thinking about durability and longer term cash flow from the perspective of your operators, I am wondering if you can give a bit more color. You have sort of alluded to maybe consolidating a bit going forward and sort of the operators that got you here today versus the operators that will get you to where you want to be in 5 years.
Particularly as you referenced that 95 plus percent is still growing 20%,. And so the operators that can get you that high occupied pool to compound in that range or maybe a plus minus. I am just wondering if you can give us a sense of where are we in that evolution of operators and what we maybe see that allows you to keep that durability on.
Yep. Thank you, Vikram. First, I want to be very clear that, you know, Ronald asked the question I answered the question.
The goal is not same-store NOI growth of any number. That is not our goal. Our goal is per-share earnings growth and cash flow growth.
Very, very important. You understand that. And that is not a function of a myopic view of occupancy growth, rate growth, expense growth, NOI growth.
Is a pure function of what we are focused on is what is the ultimate per-share cash flow growth and per-share earnings growth that shareholders eat. Everything else is irrelevant, just an input to the ultimate that system not anything else. And I have talked about this very specifically in our annual letter that how mix shift impacts and also very importantly, how as free cash flow generation goes up in the system, how that impacts and all of those things.
So there is a multiple input to that. Now going back to your question very specifically, performance and a pursuit of excellence that you are alluding to in that question is extraordinarily important. But what is more important is the culture.
At this operating level, whether they are aligned with us, they see the world the way we see it, nobody's saying we are right, or some of our growth operators are correct in every of everything. But do they have that mentality, the culture, to have a long term view of taking care of the resident and taking care of the customer, having an obsessive view and maniacal focus on increasing the standards every day, and see the world in a win-win way like the way we see it. Not saying that if you do not subscribe to that view, Vikram, you or anybody else, is correct or incorrect, but that is just our view. that is how we live and run this business 24/7.
This is a very, very hard business. And because this is a very hard business, you know, you gotta be somewhat stoic about how you see the good days and the bad and there is been plenty of both, particularly the bad ones in the last 10 years, 11 years that have been doing this. So we are we are looking for a particular group of people who share that view of the world, with that long-term focus, and had a similar culture of shared sacrifice shared dreams, and we will see where we get to.
But there is no question that we are increasingly concentrating our portfolio with people who have that mentality of an additive sum.
Your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Please go ahead.
Yes. Good morning, everyone, and congrats on an excellent quarter. Shankh, in the business plan presentation, I think you make a very strong point.
Around lack of supply and kind of, you know, all the different factors that probably lead to, lack of supply for a while. But, you know, one of them is high construction cost, and it is really hard to kind of get really good returns. At this point.
I also did not-- you kind of have a fair amount of development going on in almost $1 billion of commitments on that side. At pretty attractive yields of >10%. So I am just trying to understand how you are finding these opportunities that are really good returns when, just kind of, generally the industry should be struggling with development at attractive yields.
Understand. Majority of this that you see is the increase has come with the first three buckets. Some are, you know, organic expansion opportunities in our own portfolio.
But majority of them has come with either Amica or Barchester acquisitions. You think about it, what we discussed during Amica, that team has worked relentlessly eight, 10 years to assemble these lands in places that there is no land. Right? one house at a time, you know, two houses at a time, and 10 years working with that to create a, you know, land assemblage and inflating through that some of the most difficult parts of in North America.
And what you saw is that sort of the addition is assuming those. Right? I have said this many, many times that I have no problem.
You know, I have started to help during COVID. If it is an exceptional product in exceptional location, we will do it. Right?
And for example, I have talked about Brookline development. Right? This is an, you know,, it is a truly replaceable community.
You cannot build it. You cannot buy it. We did it during COVID at the height of COVID.
I have said it many times. Do I want to do Cupertino? We will do Cupertino.
Right? Palm Beach, we will do Palm Beach. Places like that.
At the same time, Tayo, you can see this quarter, I believe we mentioned this in our earnings release or one of those documents, that we have taken impairments and given up our pursuit of several lands that we have been working on 10 years. Including, I believe, a big one in Wellesley after working years on it. Right?
So it is just a question of economics If the economics works out, we will be-- we will engage in an economic activity. We have no bias against it or for it. The point we are trying to make in that segment that we operate which is luxury senior housing, cost has become so prohibitive that it is very difficult to make returns work.
And we think about returns as very simply untrended versus, you know, untrended returns relative to untrended construction cost. And as you know that you have to have that view in a world where construction cost is rising rapidly, You cannot just think about what will be the yield seven years from now if you keep trending your rent. You have to have that view.
And that is how development should be done. And very few things work out in that world.
Your next question comes from the line of Nick Yulico with Scotiabank. Please go ahead.
Oh, thanks. I want to ask about the, non same-store pool within the senior housing operating segment. So about 30% of that segment's NOI is non same-store.
It looks like it has lower occupancy, lower margin. So if you could just talk about how the assets have been performing and how we should think about growth there over the next year versus the same-store pool since it looks like there is more occupancy upside and more margin upside in those non same-store assets? Thanks.
Let me start, and, Timothy, you jump in. If you think about the volume of acquisition in last 12, 15 months, that should be the case. Right?
It takes some time to season They will come in same-store after five quarters as it always has. But the acquisition volume in last few quarters would suggest that would be the case. You make a very good observation that the, occupancy is lower, which means there is obviously more occupancy up and there is a significantly more margin upside.
For example, if you think about what Nikhil said, this quarter with the second quarter activity, not second-quarter close, but the activity, you know, these close to $6 billion of single living assets we bought at 75% occupancy. As you know, Nick, at 75% occupancy, you know, these communities are not making much money. it is really you start to make money after 80, and your margin really goes up after high 80s, low 90s. Right?
So there is tremendous amount of opportunity Clearly, they are moving really, really well from an NOI standpoint as they are going through our platform, new operators, WBS initiatives, everything. So that sort of I would not say sort of, you know, low-hanging fruit. Occupancy is never a low-hanging fruit.
But there is occupancy upside. Having said that, we will expect they will transition into same-store They will get to a high level of occupancy, and then pricing power will kick in. So this is sort of think of this as a more of a manufacturing process, if you will, You have same-store, where the handover from occupancy to rate has happened or is sort of happening right now.
Non same-store is more still an occupancy story, not a rate story. that is why sort of cash flow is moving, and it will happen as we go forward.
Yeah. And I would just add to that, Nick, that, so about our overall-- our same-store portfolio approaching 89.5% occupancy. That non same-store portfolio is about 550 basis points lower than that.
On occupancy. To Sean's point, this has kind of been the consistent strategy. We gave some color around our current pipeline is 75% occupied, What we expect to close in the back half.
So consistency on that kind of manufacturing line analogy of continuing to bring in assets and as we build out WBS and implement Nikhil is keeping us very busy with the additional assets. And I think about it in terms of kind of, like, TAM that we continue to see really good results in what we are bringing on board as far as the more mature portfolio.
We continue to bring in a larger opportunity set.
Your next question comes from the line of James Cameron with Evercore. Please go ahead.
Obviously, Welltower has an extensive and fertile plate of SHOP opportunities. But I was just curious, what is your thinking at present regarding the, I guess, TAM, to use Timothy's word, recently there and/or financial opportunity, if you will, for Welltower in active adult?
Jim, active adult is a space we like.
Wellness housing portfolio has compounded very strongly, high single digit, low double digit for a very long period of time. Imagine think about this that, you know, going back to 2018, when it is the first time we did it, our first transaction into the space to today, we had you had COVID. You have massive spike in, you know, inflation, interest rate.
To all of these, it has compounded that meaningfully. Which is obviously what we like. And we think there is a tremendous sort of, you know, position in our portfolio but it is a very small sort of an industry.
We are the largest owner in the industry. We continue to be active. But it is not a scaled opportunity.
We like a specific price point in that particular asset class. And we continue to grow. And we will continue to do that.
But we like that cash flow compounder that industry is or that those assets are. But it is highly unlikely a scaled opportunity. Do not know what else you want me to add to that.
Yeah. Our next question comes from the line of Farrell Granath with Bank of America. Please go ahead.
Good morning. I wanted to touch on your comments about diversified, especially sources of capital. You know, we have seen some unique JV structures that have been announced with other peer companies, especially partnering with private equity to source capital.
And I am curious about your appetite for doing that on the go forward, especially as you consider this investment opportunity.
Farrell, I am pretty rusty in this area. We have explored doing that with the sort of the one of the largest or probably the first one who came up with that idea a few years ago. So maybe the structures have changed, evolved, So I am not the right person to comment on it.
But if I remember that, and I personally engaged a lot in that conversation, and the structure. My understanding is every way you look at it, it is a debt structure. it is not an equity structure. So I would not describe what you call the JV equity structure.
Debt is debt. A piece of capital cannot be debt and equity at the same time. And that is my understanding of it.
As you can see where our balance sheet has gone, we can raise, you know, bonds today. for sub-4%. So, obviously, we would not engage in that We would not engage in some sort of that kind of structures. We understand some people raise debt where they probably do not have better access to capital.
It makes sense. Right? You know?
But I do not know how this structures have evolved. I am not the right person, but to comment on it, But when I did engage, it my understanding is unequivocally, it is a debt structure, and the JV structure and sort of the that I understood it to be that the asset values of those are, you know, just sort of a marker that does not drive obviously, the return of the debt. And it is sort of an interesting piece of debt that is both secured and unsecured with a You know, first, your first round of defense is the assets, and then second round of defense is the sponsor.
So that is sort of my understanding what was what has become. I have no idea. I do not comment on things I do not understand.
Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. In your June 1 press release, you noted that unlevered returns on acquisitions that are comparable or at least higher than returns achieved on acquisitions made in prior years by leveraging Welltower Business System.
Can you help us reconcile that statement with the acquisition yields in the quarter of 6%? Thanks.
Yeah. I mean, you know, the yields are going-in numbers and that is, at that time, just the seller's cash flow. Right?
So now what has changed is with WBS, we have more and more confidence on what the end state is. And so that is part of the underwriting. Right?
So you have got going in, and then what is the stabilized, you know, trended cash flow. And going from the starting point to the ending point is what creates the total IRR. So the point is that the terminal yields are much greater than what they used to be given how we are improving cash flow.
Michael, if those yields were zero or negative, which we buy, you know, we continue to buy four to five years later, I would be equally pleased. All we care about was the end state looks like, not the beginning state looks like. As I have said, you buy 75% occupied assets, your yields would be substantially lower than percent.
And we are completely fine with that. We are total return investors, and we are not yield-driven spread investors. My earlier point.
Your next question comes from the line of Michael Stroyeck with Green Street. Please go ahead.
Shankh, and good morning. Can you just talk a bit about pricing power in the U.K. relative to the U.S.? And RevPOR growth has decelerated a bit over the past couple quarters.
At least in the same-store pool. Just what is driving that recent deceleration, and how do you view the long term rent growth potential of that market versus the U.S.?
Yeah. Michael, if you just look at it, it is a lot of change of asset mix. I understand that we have bought a lot of assets in the U.K. in the last 2 years.
So quarter-to-quarter changes are driven by a lot of pool changes, this, that, and others, But generally speaking, if you just think about take a, you know, not an optics view, which is what that is in the sub, but economic view the occupancy in the U.K. is 300-plus basis points lower. Than that of the U.S. On the other hand, you can see occupancy in Canada which is, call it, give or take, circa 300 basis points higher than the U.S., you are seeing pricing power change like exactly what you should see. Which is where higher occupancy drives higher RevPOR growth and where occupancy is lower, you have, you know, the focus is on bringing occupancy up, but you get a lower RevPOR growth.
And that sort of is the fine-tuning of the model. I would not worry too much about quarter-to-quarter. As you know, that, you know, we have a historic and a very long term unchanged consistent policy of bringing in assets after five quarters in the same-store, A lot of assets are coming in.
So that sort of it. Do not worry about sort of the optical nature of basis point, that basis point from this quarter to that quarter. But generally, your observation is correct.
And that is because the occupancy is lower.
Your next question comes from the line of Juan Sanabria with BMO. Please go ahead.
Good morning. Thanks for the time. Shankh, at the beginning of the call, you made comments around the aging of the workforce and kind of alluded to Japan.
Just curious on how you expect ExpPOR to trend, particularly as we are seeing maybe a decrease in the immigration available labor with the setting of TPS here in the U.S..
Yeah. So as it relates to that specific issue, we have discussed with all of our operating partners, the majority of the operating partners, the impact has been pretty minimal. My comment is more of a societal change.
Of, you know, sort of lack of labor force, as or diminishing labor force and sort of family caregiver and all of those things that we have talked for a long period of time, there is a reason why we specifically focused on the highest end of the senior living. And, you know, things are good now. it is a cyclical turnaround. Everything is everybody is dancing.
I see it. No problems. We are very, very focused on a price point and a product combination, you know, sort of a I have always said this is an optimization game.
Of product, price point, and service level. And that at the highest price point level at the higher acuity level where we think we understand the business, and we believe that there the pricing would be you know, pricing power would negate the increase long term increase of labor cost. Right? that is what we believe.
You are not seeing that cyclically, I would say, right now labor is going the other way. Right? You know, labor cost is rolling over.
You are seeing that. Right now. But from a long term standpoint, availability of labor is something that I worry about.
Just purely from numbers standpoint. And that is why we want increasingly, we have focused and narrowed our focus on a specific product price point range where customers are willing to pay, and they understand they do not want you know, their providers to cut services. And they are willing to pay for that services and where the pricing could negate increase of inflation and labor, and that is why we do what we do.
Your next question comes from the line of Seth Bergey with Citigroup. Please go ahead.
Hi. Thanks for taking my question. Shankh, you gave some comments about kind of the collaboration with the operators and the focus on capturing unrecognized simplicities Just curious.
What does the operator performance gap look like between your strongest and weakest operators running on Welltower Business System? And how much does that gap narrow when a new operator comes on to the platform?
So if you are talking about you know, sort of what is the operation sort of results spread best performing operators to weakest performing operator. Tell you, this is the conversation. there is no beta in this business. You got NOI growth of approaching zero negative, very low single digit to NOI growth of 30, 40%.
Everything in between. Right? So, you know, the spread is as big as it gets.
And that is sort of my historic point. I have written about this topic for a very long period of time. That the returns of this business will be in the tails.
Right? And you see that you know, you guys do not see it we have a very large portfolio. We manage the volatility.
You know, and some days better than others. But that is what you do not see. Now focus on what our business system has been primarily not necessarily to just reduce that voltage.
There are certain things that are uncontrollable in life. You just have to live with. Right?
The there is a fundamental misunderstanding of what Welltower Business System is or what we are trying to achieve. Efficiency is a very small part of it. We are really focused on the efficacy.
You know, obviously, you do not want to pay, you know, late utility bills. that is-- and you want to, obviously, for a company and, you know, when you when you go from manually processing your utility bills to systems, you will not. that is efficiency. What we are really, really focused on capturing every interaction between residents, their caregivers, their families, and in a timely basis, that is the key In human-intensive systems, what happens is cumbersome technology and workflow to more than waste time. They reduce quality, completeness, and timeliness of that information as details are omitted, delayed, or inconsistently recorded.
What happens is because of that, there is a consequence not just lower productivity, but less accurate understanding of the business. that is what we are trying to do throughout our business system, helping our operators. This Welltower business system is built with the operators for the operators, and that is what we are doing. We have a long way to go.
But that is the key is we are trying to bring in a level of efficacy in this business that you do not see in more of a cumbersome workflow managed by a lot of papers, and all of those things. I hope that sort of helps you understand that the goal is not necessarily just the performance. that is an output. The input is what we are focused on which is to enhance customer and employee experience.
Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Thanks. Shankh, can you give us an update on the fund business that Welltower is currently pursuing? I mean, how much of Seniors Housing Fund I has been deployed at this point, and where does the seniors housing debt fund I stands right now?
Mike, I gave a pretty extensive update last quarter but, you know, the fund the senior housing equity fund was fully deployed or fully committed, I should say, as of last quarter. And on the debt fund, you know, we raised a pretty small discrete debt fund, very targeted. About $750 million.
And that is also practically fully deployed.
Your next question comes from the line of Richard Anderson with Cantor Fitzgerald. Please go ahead.
Hey, thanks. Good morning, everyone. So I wanted to talk a little, maybe, finer point on the future tail of the opportunity set from a demand point of view.
And specifically, when you think of, like, the silent generation, 50 million people, baby boomer, about 67 million, sort of, I mean, still alive today. What percentage of those two groups do you think can afford your product? And second, you know, what do you think the timeline for these two generations to be supportive of your ability to continue to produce you know, outsized organic growth.
My point being there is a finite to this and not to be tongue in cheek, but these are older folks You know, how long can this go on, and, you know, when does the music at least start to the volume of the music start to come down?
Thanks. Yeah. So very good question.
I would like to point out a couple of new slides that you can find on our business update, 1 is Slide 10. And it talks about sort of the concentration of wealth in the baby boomers as they become part of the customers. The silent generation was not they did not have the wealth. there is just not been a growth of silent generation, which you saw the impact on the demand last cycle.
If you look at the baby boomers generation, you can see not only the growth of that generation as they come of age, to become our customer, but all we can see it is the wealthiest generation of all time. Right? Roughly controlling about $100 trillion of assets.
And that is also equivalently true for Canada and the U.K. And that generation wants to spend money on themselves but they are extraordinarily discerning customer that they will only spend money where they perceive value. And so the point that you are making I think the trends are going to be the exact reverse. And you are seeing that across all luxury segment of the economy.
So I am actually very optimistic about it. Now from an affordability standpoint, we have a new slide, or maybe an update of a slide that I just noticed Let me pull it up. Which is Page 27 and it shows you how affordability has actually meaningfully improved.
So look at the right side of the page Slide 27 in our deck. And you will see that what happened The rise of the net worth has meaningfully outpaced rent growth in the sector. So I am actually very optimistic at this particular topic, which I am not a very optimistic person to begin with.
But on this particular topic, at least for next 20 years.
Your next question comes from the line of Michael Mueller with JPMorgan. Please go ahead.
Yes. Hi. The portfolio that you own today, how long should we think about a time frame to fully implement WBS?
The so you were saying just the portfolio we own today? Because the portfolio is expanding.
Right? So you sort of think about, you know, we own today what? 2,500 assets, give or take.
So if you think about, you know, last year, we did 240 to 250 assets. I think Timothy said, 600 to 700 this year. that is the right cadence. So I will call it another three years on after that.
Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.
Just, Shankh, going back to comments about labor and just tying in kind of focus on resident and employee experience through WBS and some of the operational efficiencies you are achieving or at least have a line of sight to. Are you getting to a point where the FTE needs or even labor hour needs are less at certain occupancy or maybe even on a stabilized occupancy basis?
I will frame that in a different way than John did. If you just think about there are several positions in a community that you have to have, whether that is you have 1 resident or 100 residents. Right?
So there is a tremendous amount of fixed cost associated with the business. And as occupancy sort of expands, you see more incremental sort of flow-through to the bottom line because it is a cost nature of the business. And that way, I am saying, you know, WBS, as I have gone through, I do not want to repeat what I said earlier, we are very focused on decreasing the friction points between residents you know, customers, their families, and the employees of the community so that they can do the job that they have signed up to do, which is to care for the customers.
Right? that is the goal You know, whether we can you know, some administrative function can be more, you know, sort of automated or systematized, that probably that is the right word. We shall see. that is our that is our hope. And as I have said in the last earnings call, that we should not expect as analysts and investors in and including us with the you know, our entire life's work and net worth is in this company To come back to investors I wrote about this topic several times that we see this as a you know, scaled economic share, but shared with who?
Investors. Operators, but also the customers. Right?
So we think about what we if we are you know, successful in systematizing part of the workflow you would expect that we will contribute that back. Some of that back into the communities for improving resident experience. And part of that, obviously, will enhance margin that is how we are thinking about the business. it is sort of a-- go and read the trade-off section on my annual letter. there is a long conversations about this stuff.
But very, very good question.
Thank you. Your next question comes from the line of Richard Hightower with Barclays. Please go ahead.
Hi, good morning everybody. Thanks for taking the question here. I had a question on the under contract pipeline and sort of, you know, had a stable, approximately 75% kind of going-in occupancy figure for that.
For a while. Is there something structural about those assets where occupancy is just you know, materially lower than what we see maybe elsewhere around the industry, especially given that it is presumably, you know, the highest quality stuff available. Is there something that we should understand about that dynamic?
No, Richard. it is just the average. Right? So the average is made up of a bunch of assets that are, you know, call it, 90% occupied and a bunch of assets that are newly delivered.
That are 10%, 20%, 30% occupied. So the average, again, average age is 6, The median age is 4. Right?
So half of these assets are below the age of 4. And so, obviously, there is newer assets in lease-up.
Couple of other points, Richard. That number was not stuck at 75%. Some quarter.
Nikhil said it was 80%, low 80s%. I think I heard the 75% after, actually, a long period of time. it is been yeah. it is been a really long time. That caught my attention.
But what you are alluding to which is if there are some structural issues with these occupancies, that was the case, overall portfolio occupancy would not be where it is. Because all these assets were bought at a much lower level. More importantly, per-share cash flow growth would not be mid-20s%.
Right? That sort of you can think through from overall operating metric level You can also think through from a per-share impact of cash flow level and we will come to the conclusion from a basic understanding of numbers the impacts have been exact reverse.
Your next question comes from the line of Wesley Golladay with Baird. Please go ahead.
Hey. Good morning, everyone. Going back to the comment about the wealthiest cohort, looking for a more discerning, customer experience.
Are you seeing that same dynamic in the U.K. and Canada?
100%. The same, you know,, it is an extraordinarily if you think about what happened in these three countries post World War II, the wealth creation, and whether it is stock market, it is housing markets, no matter how you look at it, this is the generation that controls the majority of the wealth. If you just look at how small baby boomer generation is as a percent of the overall U.S. population, for example, it controls more than half of the overall consumer wealth.
Of in The United States, and they are very similar in the U.K. and very similar in Canada. And they are very similarly discerning. These people are anything but idiots.
They are very discerning customers. They understand what they want. They are willing to pay for it only if they perceive value.
So this is much more than whereas just a question of, you know, demand and supply,, also a question of are we providing the best of experience and services to this customer? If not, no matter what the demand and supply is, we will be a giant failure.
Your next question comes from the line of Dave Rodgers with Raymond James. Please go ahead.
Yeah. Good morning. You guys have framed path to mid-30s margins kind of on a pre-COVID flow-through getting occupancy back to historical levels, but you seem to be clearly ahead of that. path right now.
So a couple of questions on that. 1 is, is there additional details you can give us around flow-through, you know, at different points in the portfolio that would kind of shine a little bit more light on kind of where all that is coming from. Are there components that are performing much better than you had anticipated that are getting you higher? You have a new kind of, I do not know, say target, but a new thought in mind of where you can get margins to given where you are today.
Let me try and Timothy, you jump in. As I invariably will miss part of the question. Timothy said, flow-through margins in the mid-60s.
If you look at 95%, you should be in sort of 70-plus. that is sort of the markups we are willing to give you. We have never put a marker on overall portfolio margin, neither we will. Is a journey for us, not a destination.
I have said on the call today that we believe that there is a significant margin upside remains. Why is it, you know, outperforming our expectation? Nothing ever outperformed my expectation.
I just have too high of an expectations. On everything in life, Why is this happening?
It is just this is what we do. This is what the whole idea of WBS was. That we have been on this journey for a very long period of time.
As you can imagine, at least at this point. And, John, when did you start? five-plus years ago, right, at this point? That was the change of this company.
When we changed our view from what we wanted to be when we grew up, which was be a centralized capital allocation and decentralized execution. That was our view in you know, going back 10 years ago, call it, to a centralized capital allocation, decentralized execution but in a whole network of you know, platform technologies That was the initiative that we started 5 years ago and completely changed this company. Good, bad, ugly, does not matter in that direction.
Right? that is that is what we do. that is what we are seeing. But nothing is ever done well or fast enough as far as I am concerned. So it has not exceeded my expectation.
I am very encouraged by all the things we have seen on the 250 communities that are on WBS But we working with our operating partners as we have talked about Just in last 90 days, our operating partners have come up with ideas that, frankly speaking, I absolutely have not thought about, and I do not think they have thought about. This is what happens when collaborations come together and we are trying to solve problems. So there is a lot of long way to go.
We will see where we end up.
And ladies and gentlemen, that does conclude our Q&A session. And that does conclude today's conference call. Thank you all for your participation and you may now disconnect.
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