WELL - NYSE

Thank you for standing by. At this time, I would like to welcome everyone to today's Welltower Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the call over to Matt McQueen, Chief Legal Officer and General Counsel. Matt?

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. Given the sheer volume of announcements last evening, we'll keep our Q3 related comments concise, but I'm pleased to report that it was another record quarter with occupancy, margins and net operating income, all exceeding our already very high expectations. However, it was a watershed period in our company's history from 2 important perspectives: capital allocation and people. After I walk you through our significant capital allocation-related activities, the team will provide details of Q3 results. Then I'll return to discuss my favorite topics of people, culture, incentive design and beginning of a new era of our firm, Welltower 3.0. Let's start with acknowledging luck. Many of yesterday's transaction announcements started 6 months ago at the height of uncertainty post Liberation Day. We always believed that life is not about predicting. It is about positioning. So when the luck knocked on our door in April and May, we are positioned with our balance sheet, exceptional team, technology platform and perhaps most importantly, courage to run towards this uncertainty and chaos. This positioning drove more than $23 billion in incremental transactions, resulting in year-to-date activity over $33 billion and bringing us closer to ever realizing our decade-long ambition of transforming Welltower into a pure-play rental housing platform for the rapidly aging population. At the core of our offering will always be systems, process, technology and data-driven insights to enhance the experience of our customers and site level employees, not capital, which is ultimately a commodity. Every capital allocation decision made at Welltower is viewed through an opportunity cost prism, evaluating the value foregone by pursuing a specific course of action while considering all implication of those decisions well into the future. And that opportunity cost prism allow us to narrow our focus on technology-driven transformation of our niche housing business. There is always room in organizations to boost performance by amping up their pace and intensity. And the fastest way to move the dial is to narrow the focus in a maximum growth, maximum gain war. This is why we're exiting our Outpatient Property Management business. While we'll continue to own some outpatient medical assets, it will consume little management time and effort due to triple net nature of the retained properties. This is not to say a B2B business like OM is not a good business, but the intensity that is needed to achieve our audacious dream of transforming a tech for TAM-rich B2C industry like senior housing requires the laser focus of a hedgehog and the discipline to say no to hundreds of good ideas. While our motivation to go all-in on senior living with focus and opportunity to enhance the enterprise growth rate, we recognize that the direction of asset prices for what we are giving up is uncertain. Hence, we structured our large OM sale with significant participating profit interest while the deal structure reflects a degree of heightened creativity, it is by no means a novel approach within our firm. We applied a similar idea nearly 5 years ago when we wrote a participating senior credit note on HC-One assets in the U.K. with warrants and equity kicker at the height of Brexit and COVID uncertainty. I am delighted to inform you that the significant downside protected structure has generated a nearly 14% unlevered IRR at exit while providing us an opportunity for the seat at the table in a bilateral negotiation for this recap. This recapitalization transaction marks the beginning of new chapter of new operating income growth as our long-duration strategy unfolds for HC-One assets. Speaking of the U.K., I'm delighted to announce that after 6 years of conversations, negotiation and a near transaction, we're finally the proud owner of Barchester Senior Living portfolio. We recognize that buying highly successful family-owned businesses requires patience, finance and a commitment to excellence that their legacy deserves. While a large checkbook that no counterparty ever question is necessary, it is by no means a sufficient condition. We have carefully studied many transactions that Warren and Charlie have completed over the years with family-owned businesses. And I'm delighted to inform you that this $7 billion negotiation was done during a single sitting resulting into a firm handshake. Our years of conversation and close familiarity with the Barchester assets and management was certainly helpful as preparation. Equally important with the integrity and professionalism demonstrated by our counterparty. We're proud to welcome Pete and Barchester management team to Welltower operating partner family. Despite giving up in-place yield in HC-One and other loans and initial dilution incurred from 170 assets that are in lease-up from our recent acquisitions, together, the dispositions and acquisitions are expected to be accretive to FFO per share in 2026. To be clear, we would have completed these deals even if they are collectively near-term dilutive because of the significant opportunity of earnings and cash flow growth in '27 and beyond and due to the long duration aspect of the transactions. These capital allocation decisions together are expected to change the near- and long-term growth rate of our firm despite the significant size of our asset base. This speaks to the level of excitement and high expectations we have from this year's $33 billion of transformative capital allocation activity. With that, I'll pass it on to John.

Good morning, everyone. I'll keep my comments relatively brief this morning. But as Shankh mentioned, we reported another fantastic quarter with no let-up in the strong momentum experienced in the first half of the year. While uncertainty persists for the direction of the broader economy, our business continues to gain strength given the needs-based and private pay nature of our business, while our asset management initiatives through the Welltower Business System, or WBS, continue to bear fruit. Our strong results this quarter were once again driven by the exceptional performance from our senior housing portfolio. In fact, Q3 marked the 12th consecutive quarter in which SHO portfolio same-store NOI growth exceeded 20%. Attaining 20% plus NOI growth for any sector is an incredible achievement, but 12 consecutive quarters is truly exceptional and likely unprecedented. Year-over-year organic revenue growth remains at approximately 10%, driven by a 400 basis point occupancy gain and strong pricing power. Our solid top line results were led by our U.K. portfolio as a 550 basis point year-over-year ramp in occupancy drove a 10.4% increase in revenue. Operating margins across the same-store portfolio took another step higher, rising 260 basis points as growth in RevPOR or unit revenue continues to solidly outpace growth in ExpPOR or unit expense. And while we've experienced a substantial recovery in margins over the past few years, we have a long runway for further expansion due to the scaling benefits achieved through higher occupancy, i.e., greater operating leverage, which will be further amplified by our far-reaching WBS initiatives aimed at transforming the Senior Housing business. The backdrop for growth in 2026 and well beyond remains favorable as senior housing demand is expected to grow even stronger while supply remains dormant. The beta of the sector remains attractive. But what truly sets us apart are our efforts to generate outsized alpha through operational excellence. And with the exit of our Outpatient Medical Property Management business, we are doubling down our efforts, attention and resources to our Senior Housing business with a singular focus of operational excellence through digital transformation. This includes the appointment of Russ Simon, as EVP of Operations. Russ has created tremendous value for Welltower shareholders as Co-Head of U.S. Investments as well as partnering with me on asset management. Going forward, Russ will shift his focus to overseeing our asset management, capital planning and experiential solutions initiatives. Additionally, as Shankh will describe in greater detail, we are in the midst of a complete reimagination of our technology ecosystem. We're delighted to have Jeff Stott join us from Extra Space Storage as our Chief Technology Officer. While Logan Grizzel and Tucker Joseph have been appointed Chief Innovation Officer and Chief Information Officer, respectively. I'll conclude by saying that we've never been more excited as we are today about the prospects for our company. The Welltower team continues to work tirelessly alongside our best-in-class operating partners to reinvent our business through WBS and to elevate the experience of senior housing residents, their families and the site level employees. While I'm thrilled about the progress we've made to date, our excitement truly lies in what's to come as we enter Welltower 3.0, which will be defined by operations first. With that, I'll turn it over to Nikhil.

Thanks, John, and good morning, everyone. Since our last call 3 months ago, we have expanded our year-to-date transaction activity by $23 billion, including $14 billion of acquisitions and $9 billion of dispositions and loan payoffs. With today's announcements, our year-to-date investment activity now totals $23.2 billion, up from the $9.2 billion announced on the second quarter call. Of this $23.2 billion, $5.4 billion closed through the end of the third quarter and nearly another $11 billion has closed since, with the remaining $7 billion expected to close later this year and in the first half of next year. On the disposition front, we are under contract to sell an additional -- to sell an 18 million square foot outpatient medical portfolio for $7.2 billion, resulting in a $1.9 billion gain on sale. We structured this investment to retain a $1.2 billion preferred equity stake accompanied by a profits interest, giving us 25% of upside while protecting our downside through the buyer's subordinated equity. We closed on the first $2 billion tranche of this transaction last week with subsequent closings expected through next summer. Additionally, we will exit the OM Property Management business with over 160 of our colleagues transitioning to Remedy Medical properties, allowing them to continue their career growth. Following this transaction, our residual OM portfolio will essentially consist of premium net lease assets to high-quality investment-grade tenants. The long-term absolute net nature of these leases require minimal management intensity. Turning to acquisitions. We are pleased to announce the GBP 1.2 billion acquisition of the HC-One portfolio in the U.K. Many of you will recall our courageous GBP 540 million first mortgage investment in HC-One's recapitalization at the height of COVID and Brexit uncertainty. That investment was structured with downside protection through a claim on HC-One's real estate portfolio at a last pound basis of approximately 40,000 a bed and upside participation through warrants and equity kickers. We have enjoyed a close working relationship with the company's management and ownership and have supported the company's growth through modest additional capital support. This investment has now delivered a profit of greater than GBP 350 million and over the last 4-plus years with an unlevered IRR of nearly 14% and a 1.6x equity multiple. While the payoff of this high-yield loan is modestly dilutive near term, the equity ownership of these assets adds significant duration to our returns. By deploying significant value-add capital and leveraging Welltower business systems and the best practices from our broader U.K. business, we expect this transaction to generate an unlevered IRR in the low teens. Moving on to our GBP 5.2 billion acquisition of Barchester which spans 3 buckets. First, 111 assets under a highly aligned RIDEA 6.0 structure. These high-growth assets rank in the top quartile within the U.K. and have in-place occupancy in the high 70s due to 39 newly delivered assets. Second, 152 mature assets in a triple net structure. These mature assets are 90% occupied with strong coverage, 3.5% annual rent escalators and the ability for Welltower to reset rent every 5 years to capture additional upside. Third, 21 assets that are currently being developed. In addition, through several other transactions, we are acquiring an additional 9 assets under construction in the U.K. Given the significant nonpurpose-built stock and negative net supply growth over the last 10 years in the U.K., we are ecstatic about the significant growth opportunity embedded within this portfolio. While I have highlighted our larger transactions, our focus on granular activity remains unabated. The $14 billion of new investments announced today span more than 46,000 units across 700-plus communities across 50 different transactions. Our team spent the last few months walking every single one of these communities, conducting their diligence and establishing business plans with our operating partners. 91% of this activity was sourced off market. 16 of these transactions were in the U.K., 2 in Canada and the remaining 32 in the U.S. I expect that with our narrower focus and relentless pursuit of better outcomes, the transactions announced today will fundamentally enhance the long-term growth potential of our company's earnings. With yesterday's announcement, we have added over 170 senior housing communities to our investment pipeline that are under development or still in lease-up. These communities will be a drag on near-term results, but as we detailed in our letter to our future shareholders, we will not hesitate to make capital allocation decisions, which are a drag today, but have the potential to create significant value tomorrow. I'll now turn the call over to Tim to walk through our financial results and updated earnings guidance.

Thank you, Nikhil. My comments today will focus on our third quarter 2025 results, the performance of our triple-net investment segments, our capital activity, a balance sheet and liquidity update and finally, an update to our full year 2025 outlook. Welltower reported third quarter net income attributable to common stockholders of $0.41 per diluted share and normalized funds from operations of $1.34 per diluted share, representing 20.7% year-over-year growth. We also reported year-over-year total portfolio same-store NOI growth of 14.5%. Now turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage stats are reported a quarter in arrears. So these statistics reflect the trailing 12 months ending 6/30/2025. In our senior housing triple-net portfolio, same-store NOI increased 3.1% year-over-year and trailing 12-month EBITDAR coverage increased to 1.21x. Next, same-store NOI in our long-term post-acute portfolio grew 2.7% year-over-year and trailing 12-month EBITDAR coverage was 2.02x. Moving on to capital activity. We continue to capitalize our investment activity with predominantly equity, raising $2.9 billion of gross proceeds in the third quarter. Additionally, in August, we completed a follow-on issuance of $1 billion in senior unsecured notes across 2 tranches for a blended coupon of 4.875%. This capital, along with retained cash flow, allowed us to fund $1.7 billion in net investment activity and end the quarter with $7 billion of cash and restricted cash on the balance sheet, while driving net debt to adjusted EBITDA to 2.36x, representing yet another record low leverage level for the company. With our current capital position, near-term liquidity profile and expected proceeds from asset sales and loan payoffs, we are fully funded for the entirety of our acquisition pipeline, including the $14 billion of new acquisition activity, which we announced last night. And we expect run rate net debt to adjusted EBITDA to tick modestly higher by approximately 1 turn on a run rate basis for all of our announced transaction activity. Lastly, as I turn to our updated 2025 guidance, I want to remind you that we have not included any investment activity in our outlook beyond what has been closed or publicly announced to date. Last night, we updated our full year 2025 outlook for net income attributable to common stockholders of $0.82 to $0.88 per diluted share and normalized FFO of $5.24 to $5.30 per diluted share or $5.27 at the midpoint. There are 2 items I want to highlight in last night's net income guidance that relate to fourth quarter activity and beyond. The first is our medical office portfolio sale, which, as Nikhil detailed earlier, is expected to have a total gain on sale of approximately $1.9 billion, $400 million of which is expected to be reflected in net income in the fourth quarter with the remaining $1.5 billion expected in 2026. The second item relates to the 2035 10-year executive continuity alignment program. We expect approximately $1.1 billion of upfront costs associated with the initiation of the plan to impact net income in the fourth quarter, which will be adjusted out of normalized FFO. In addition, the program will result in a recurring amortization expense stream that will flow through normalized earnings over the next decade, alongside the ongoing impact of the increased diluted share count. Now turning to our normalized FFO guidance. Last night's increased range represents a $0.17 increase at the midpoint from our prior normalized FFO range. This increase is composed of a $0.045 increase from higher NOI in our senior housing operating portfolio, $0.105 from accretive capital allocation activity and a $0.02 increase from FX and income tax benefits. Underlying this FFO guidance is an estimate of total portfolio year-over-year same-store NOI growth of 13.2% to 14.5%, driven by subsegment growth of outpatient medical, 2% to 3%; long-term post-acute, 2% to 3%; senior housing triple net, 3.5% to 4.5%; and finally, senior housing operating growth of 20.5% to 22%. This is driven by the following midpoints in their respective ranges. Revenue growth of 9.6%, driven by increased expectations for occupancy growth of 390 basis points and RevPOR growth of 5.1% and expense growth of 5.25%. And with that, I will hand the call back over to Shankh.

Thank you, Tim. Before we start Q&A, I want to highlight the most important announcements we made last night, the launch of Welltower 3.0, an operations and technology-first platform. This is the third iteration of our company after refounding our firm from a deal shop called Healthcare REIT. We took HCN down to its studs and built Welltower 1.0 with a goal of being a great capital allocator. We turned over half of the assets, majority of the operators and 95% of the people. And we launched a data science platform that in words of a CIO from a leading private equity firm has become synonymous with the category, much like Band-Aid or Kleenex. Then came COVID. And with Charlie's prodding, I realized we needed to recruit individuals from industries of high standards or equivalent of short-haul trucking executives to address the challenges of the railroad industry decades ago. The hiring of John Burkart from multifamily industry and subsequent hiring of hundreds of our colleagues who are focused on operations and asset management to delight customers and site-level employees marked the beginning of Welltower 2.0, a well-oiled capital allocation machine with high-performance compute power to sort through trillions of data points to buy one asset at a time. We brought in best-in-class operators under aligned contracts and provided them with an end-to-end asset management and technology platform while also building regional density. Things have been going on well in recent years, which -- with performance, which I would describe as being somewhat satisfactory. And yet again, we are disrupting our own firm from within, which we believe will create a leaping emergent effect culminating into Welltower 3.0, an operating company in a real estate wrapper. This new era places operations and technology first with a singular focus on delighting customers and prioritizing site-level employee satisfaction with complementary capital allocation actions to go deeper in our markets with a narrower focus. This phase starts with a complete retooling of our organization, not writing a manifesto. Many organizations hire management consultants, create pretty PowerPoint decks, announce new mission and vision statement, but ultimately change nothing about how they go about doing business. There is no place for consultants, [ Silverton ] bankers or managerial layers at our shop, only leaders who are willing to get their hands dirty by actually doing the work and building the business, laying one airtight brick at a time. We're taking the best from our capital allocation side of our house, including Tim McHugh and Russ Simon to lead the next phase of our journey focused on operations, technology and innovation. Additionally, we are once again bringing in significant talent from industries with higher standards, which includes proven tech executives such as Jeff, Logan and Tucker to join Swagat to form a tech quad, which will serve at the core of Welltower 3.0's growth engine. I'm convinced you will see a new wave of talent from -- will follow these leaders, similar to what we have witnessed in recent years on the capital allocation side of the house, which has become the envy of the real estate industry. This newly established tech quad will be key to reduce latency in a complex adaptive system like our business. As latency shrinks materially, the network effect will kick in high gear, creating a new paradigm of maximum growth and maximum gain that simply does not occur in an industry like ours with changes at glacial pace. Lastly, today, I will describe a dramatic change, which strikes at the heart of this company's incentive structure. From my first day in this business, I've been bothered by the misalignment of the incentives between our company, the owner of our assets and our operating partners, the manager of the community. I wish I could have said better things about the alignment between management and forever owners of a company like ours. Hence, you have seen a decade-long effort from us to fix and align external and internal incentives. And Charlie would constantly tell us, show me the incentives, and I'll show you the outcome. Following years of deep structural changes in this area, I'm delighted to inform you that my utopian idea of everyone swimming or sinking together is finally taking shape, an ecosystem of internal and external participants where everybody is fully aligned and everybody is all in. I would urge you to read our press release from last night carefully to fully grasp the changes that are taking place in 3 distinct steps to achieve the same goal of alignment and ownership. One, elimination of compensation for Welltower management and making them owners through performance-oriented Welltower stock; two, introduction of RIDEA 6.0 construct where the operator wealth creation is now irrevocably tied to Welltower stock; and three, a $10 million annual grant for site-level employees for the 10 best performing senior housing communities also in Welltower stock. All of them capture the 5 key tenets of the incentive design that we have previously laid out to you. Simple, significant, nongamable, earned as a team and duration matched with the immediacy of a role's impact, 10 years to forever for Welltower management, 5 to 7 years for operating partners and 1 year for site level employees. I would underscore that my colleagues are betting their prime years of their career on this idea, and so are many of my operating partners, Dan Hughes at StoryPoint, Matthew Duguay at Cogir and Courtney Siegel at Oakmont. While we are embarking on -- what we are embarking on embodies a unity of purpose, shared sacrifice and perhaps some share dilution, woven in a seamless wave of deserved trust and mirrored reciprocation by a group of random employee people from different walks of life. And they share 2 rare genetic qualities, a fiduciary gene representing their innate desire to put the interest of our owners ahead of their own and a delayed gratification gene, which refers to their instinctive bias towards sacrificing an immediate reward for a much larger gain tomorrow. While a long-winded person like me with long attention span is perfectly capable of spending hours detailing every part of this plan, let's focus on my favorite, the Welltower grant for site-level employees to honor the memory of Charlie Munger. And let's start by inverting. Our ultimate goal is to delight customers and their family. And of course, they want a digital experience, the ability to find us easily in a crowded and rapidly changing digital world and so on and so forth. But more than anything, residents want a consistent and happy pace who cares for them. Imagine a world where our site level employee work in beautiful and inviting communities equipped with most advanced and easy-to-use digital tools, freeing them from paperwork and administrative burdens. Not to mention meaningful career advancement opportunities in sister communities with only regionally dense portfolio of scale in this business and they get paid more than they otherwise would in a competitive community, sometimes in a significant and life-changing way due to Welltower grant. Why would they leave? Costco's experience many -- over many decades suggest perhaps they won't. Instead, they will continue to delight our customers. Our reputation of happy customers will further attract even more customers who are willing to pay for that level of service in an industry where usually half of the phone calls go unanswered. That's network effect, pure and simple. And the fruits of this network effect will silently compound over many years and decades to come. Charlie often said, take a simple idea and take it seriously. He would be happy to know today that we have taken the simple idea of Berkshire-style stewardship, along with Costco-style customer obsession very, very seriously and betting our life on it. And with that, I'll open the call up for questions.

[Operator Instructions] All right, it looks like our first question today comes from the line of Vikram Malhotra with Mizuho.

Congrats on the strong results, all the transactions. I guess just, Shankh, you've outlined a lot of changes, portfolio, personnel, comp plan, et cetera. And I'm just trying to understand like you talked about Welltower 3.0, but things have been going really well for a while. The industry is -- you've got leading results, stock 2x, 3x depending on when you measure it. So I'm just trying to get a sense of like ultimately, 2 things. One, in general, is there a goal? Is there something you're trying to prove? And kind of how should we think about the growth engine from a cash flow standpoint from here on?

Thank you, Vikram. We're not trying to prove anything. We fundamentally believe -- I personally fundamentally believe that we're here to contribute. We have really nothing to prove. Fundamentally, what we are trying to do is to take away if you just think about agency problem from the system across the board and try to align people to be owners, right? So align interest with our owners across the way through the whole ecosystem. That's all we are trying to do. And bringing sort of the second question you asked, which is a very important one, which is how do we elongate the growth curve well into the future. Making real money is all about duration. And duration of growth is all that it matters. We're too focused on near term. We're too short term in this world. And if you think about -- think through how real value creation works. It's all about duration. So part of your question was why things are going well, why are we again disrupting it? Think about things were going well -- very well for Netflix when they're killing it by sending people DVDs. And what would -- where would they be if that's what they're still doing today, right? If you don't disrupt your organization from within, somebody else will do it for you. And so that's what we are trying to do, thinking through what the future of this business will look like, and we have taken it on ourselves to transform this business digitally to get to a better outcome for our customers and site level employees. That's all we are doing, and we hope that will generate very significant growth and compounding of cash flow over a period of time for our owners. And frankly speaking, that's the journey we're in.

My apologies for the delay. I had a network hiccup there. And our next question comes from the line of Jonathan Hughes with Raymond James.

And congrats on the announcements. A lot to talk about, but hoping you can share more details on this new comp plan. Was that presented by the Board as a team package as an all or nothing proposal? Did it evolve into that? And then the 3 operators that are now similarly changing their incentive fee to take units, is that structure being offered to other partners as part of RIDEA 6.0 to further align them with shareholders, now management and extend the duration of hopeful outperformance?

Okay. So let me answer the first question, and then we'll go to your second question. So our Board has spent enormous amount of time with leading comp consultants, several law firms and many, many consultants and advisers for months at this point and spend hundreds and hundreds of hours to come up with what they consider is the right plan, which you saw. So I have really nothing to add to that other than the fact that it aligns with the 5 tenets of the incentive design that we have always talked about, right? Simple, significant, earned as a team, duration matched and nongamable, right? That's really what it is. As I said, the first 3 operators that we mentioned, they're the founding class, they don't necessarily have to be the only ones, right? We are trying to simply align the interest of our operating partners with our owners. And obviously, as you know, that regional density is very important to us. So if there will be opportunities to bring in other operating partners into the fold, we'll consider it. But at this point in time, we only have the 3 partners who are the founding class of this new program, and we'll see where future gets us.

And our next question comes from the line of John Kilichowski with Wells Fargo.

Shankh, in the past, you've talked about the various source of capital available to the company. In the case of the acquisitions you announced yesterday, why not issue equity to fund some of those investments instead of the asset sales?

Very, very good question. So if you go to John, the first call I did as CEO, I laid out my belief of how capital allocation works. Most people think of capital allocation as a function of where capital goes or what you buy in a very simplistic term. It's actually so much more intricate than that. And then you have to think about your source of capital and you have to think about relative cost of that capital. And so as you can think about what we are doing, if you fix aside, which is the buy and just purely consider the sell, you're right, correct. We could have done it through equity. And frankly speaking, the spot cost of that equity is lower than the spot cost of that asset sales, which is like $9 billion of asset sales that Nikhil talked about. So it would have generated a higher near-term accretion and it would have created a disaster for the long-term value creation of this company. So in other words, if you think about our assessment of what we are giving up, you have to think about these things from an opportunity cost standpoint. What we are giving up by definition that we are not doing it through equity tells you that our view, which is a view you don't have to agree with, our view of our cost of equity is higher than the cost of the capital of the asset sales. So you can come to the decision, obviously, why is that? Because we have a higher view of growth and the duration of growth of that equity. It is an incredibly important question. I have seen so many companies and their management get sucked into near-term FFO accretion math and dilute their shareholders without thinking through how long-term value creation works. Thank you for the question.

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

Shankh, I wanted to circle up on the recent Care Home deals, the Barchester and HC-One. I mean how do these portfolios compare to Welltower's current portfolio in terms of asset quality and maybe the private pay percentage? And does that impact the growth outlook of those assets at all? Or is it very similar to the current portfolio?

Yes. On a cumulative basis, it's very, very similar. It's similar quality assets on a blended basis, similar metrics. So yes, really no change there.

And our next question comes from the line of Farrell Granath with Bank of America.

I know in the opening remarks, you outlined a lot of the aspects of the MOB disposition. But I was wondering if you could discuss your decision why for the structure.

Yes. So let me repeat, Farrell, what I said. If you just think about it, we are making an opportunity cost decision of 2 things. First, refocusing and entirely have a singular focus of management's time and attention into this digital transformation of an industry called senior living. That's what we are focusing on. So that's sort of one aspect of a strategic move that's behind this. The second, obviously, is the cost of capital conversation we just had. Now remember, at the end of the day, we have no idea what the future looks like. We don't have a crystal ball. It is entirely possible that the value of these assets tomorrow is significantly higher, right? We obviously have a view that the next 10 years is in a deglobalized world. It is going to look, obviously, relative to the last 10 years when we had 0 inflation, 0 rates, it's going to be different. But we have no idea we're right or not. So the structure reflects that if values go up significantly, right, or value goes up at all, we -- our shareholders will still reap the benefit of that value accretion that we are leaving behind today. That's what the whole structure is about, is how do we sort of do what we are trying to do and focus that capital into high-growth opportunities at the same time. We think very highly of Remedy as an operator. All our colleagues are going there. We think they will continue to create a lot of value. It is entirely possible that cap rates come down, interest rates come down. We're totally wrong about our macro views. And if all of those things happen, you have to sort of think about, okay, did I sell these assets in the wrong time in the cycle, right? So it's just sort of think about an opportunity cost from a strategic standpoint, also an opportunity cost from a capital standpoint, and that's how we came to this conclusion.

And our next question comes from the line of Nick Yulico with Scotiabank.

Just following back up on the outpatient medical sale. Just a few questions there. I mean you guys in the sub give that held-for-sale NOI. I just want to make sure that, that's sort of apples-to-apples to apply that to the sale of the $7.2 billion, and that looks like it's a 6.25% cap rate. And I just want to see if that's right. And then also on the preferred, if you could just talk about what the yield is you're getting on the preferred and then also if you guys are offering any seller financing as part of the transaction?

Sure. So I'll start kind of backwards. On the preferred, the coupon is 8% and it's $1.2 billion, and that's really all we're leaving behind. That's why the $7.2 billion transaction results in net proceeds of $6 billion. So no seller financing. This will be financed through bank financing. Then secondly, to answer your question about the yield, that 6.25% is in the right ballpark. That includes some property management and profitability as well. The real estate yield is a little bit lower. But then obviously, if you think about the net yield once you factor in the reinvestment of the pref, that's closer to 6%.

And our next question comes from the line of Omotayo Okusanya.

More high-level question for you guys. When your numerous press releases hit last night, I couldn't help but go back to Shankh's annual letter where you really kind of doubled down on this idea that you can actually grow faster at a bigger size and that because of various network effects you would get. And you also kind of talked a lot about doubling down on data design because of just kind of improved latency and how it will just kind of help you do business with better operational efficiency. Could you talk a little bit about just again, Welltower 3.0 and everything that's going on, whether it's RIDEA 6.0, all this alignment with management compensation, how do you kind of just see all that fitting together? And exactly what does that set you up for going forward?

Yes. Very, very good question. So tell -- think about -- let's take it simplistically, let's talk about, obviously, we laid out in our -- in my annual letter, how sort of a growth curve for an organization works, right? We sort of talked about first to get a team of people together in close proximity, which is obviously -- I talked about how that works according to Newton's law of gravitation. So you got it, obviously, that force is proportional to the -- inversely proportional to the square of the distance. So it's a very important factor that you bring this team as tight and close as possible. Why? Because the tight team is where you have very, very little latency. But let's think about that a little bit more about how that reflects, right? You think about, okay, let's just take easy example, dumb examples, right? This is a business John talked a lot about like if you call a community, there is a pretty good chance that -- 50% of the chance that you will not hear back. And if you do hear back, there's a pretty good chance that you will hear back in 2 business days. Now think about where Welltower business system has been deployed? Our customers, prospective customers are hearing back in single-digit minutes, which is still not acceptable to me. But at least that's we're hearing back in single-digit minutes instead of 2 days. That's significantly reducing latency. Think about historically, this business room turned happened in 37 days. Now it's happening in 11, still significantly higher than what John did or Jerry did, which was 3 to 5 days, but we're getting there. That's latency. That's you are taking latency out of the system, right? You think about -- we just talked about, right, in our company, I'll give you a third corporate level example. In our company, there is no management layer. It's not like things flow through layers from A to B to C to D and finally, it comes to the executive, and we make decisions. That's not how this organization works. We actually do the work with the bare hands sitting down and make decisions on the spot, right? So you think about that's taking latency out of the system and you make decisions fast, right? That's how you get these kind of results. When latency comes down in the system, that's when network effect kicks into gear, high gear and you get into a world of maximum gain, maximum growth. In otherwise, what is a glacially moving pace of doing business. That's what we are trying to do. We have done that, as I have talked about on my annual letter on the transaction side, deal side of the house, right? Think about how many people have. Think about the comment Nikhil made, we have bought 700 communities. And I'm going to repeat what he said. We have walked every single one of these communities. That is not given. How do we do that, right? Sort of that how do we take the latency out of the system is a lot of technology initiative, a lot of decade of effort. So that's kind of what we do. And on the other hand, if you just think about it, the hiring of Jeff and Tucker and Logan and what is the next step of that is to do that in the operations. I expect someday that no calls will go unanswered. And every call, if it goes, it will be returned immediately. That will be taking latency to 0. And those days of operations are coming.

And our next question comes from the line of Michael Goldsmith with UBS.

Lots of exciting news today, so I'll ask something maybe more holistic in that how do you go about managing the execution risk of everything announced today, including acquisitions, dispositions, new leaders? Where are you focused from an operational perspective to ensure these changes are implemented successfully? And what could go wrong here?

That's a very, very broad question. So look, the fact of the matter is how do we manage risk on -- on the deal side of the house, we have a very, very large team, which obviously has more experience in doing transaction than pretty much any team in this business, right? That doesn't require an asterisk. It does. So you think about it, that's -- obviously that happens. That team has done even during COVID, incredible execution when you couldn't fly, you couldn't do all of those things, so that sort of it. And that team is Tim's and Nikhil's team, deal tax, deal accounting and deal law sort of on the legal side. So there's a very, very strong team combined whether it's U.S., Canada and U.K. On the operations side, the reducing risk and operations is a purely function of what we've talked about building out Welltower Business Systems and trying to put that into high gear. And we are constantly evolving that, right? We're bringing in executives from industries of high standards. We obviously talked about a few. And that process is evolving. Our view of what the opportunity is, we're getting more and more and more excited about it every day. And we're bringing people who are looking at ourselves and say who -- what kind of skills we're missing. And we're bringing in people to complement that and take this thing forward. That's really what it is, and that's what we are doing. Remember, business is all about people. Spreadsheets don't do business with spreadsheets, legal documents don't do business with legal documents, right? It is entirely a people-driven business. Most business, I believe, are people-driven business. And for us, it is all about bringing and attracting the best talent and retaining the best talent. That's all we are trying to do. That's your ultimate risk mitigation through building a real vibrant culture where people, everybody is all in and they behave like owners.

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

Great. Quick 2-parter for me. So on the incentive structure for Welltower 3.0, the presentation mentioned the 5 named executive officers, but far down in the release, it also notes that management is working with the Board on long-term incentive and retention for 2 existing and 5 newly promoted EVPs. So I guess my first question is, was it possible for all 12 to go all in on the incentive structure? And then my quick follow-up is just on competition over the next 10 years, whether it's talent, whether it's technology, as more capital comes to the space, how do you think about protecting Welltower's moat over that time period?

Thank you, Ron. Those 2 questions are actually fairly correlated. So let's start with your first question. As we said, that we are working with our Board to come up with a strategy to retain our colleagues who are actually doing all the work. We're absolutely doing all these things and hopefully, that you guys are pleased with our execution. That's not because of me or Tim or Nikhil, that's our group of team. This is a team game. We're all putting tremendous amount of effort 24/7, and this has been 10 years in a row. So this has been obviously for us that retaining that group of people that you mentioned is extremely important. How we go about it, it's a broad process. As I mentioned in the previous question that our Board has gone through enormous amount of effort with their lawyers and bankers and comp consultants to come up with a process that has been satisfactory for us. And we'll hope that, that same process will unfold, and we'll get to the satisfactory answer for our rest of our colleagues here that you mentioned. But as far as I'm concerned, as you know, I only believe in one way of living, go all in and do it in that manner, right? Do very few things. The only things I'd like to do is to go absolute all in. So that will be my hope. And think about it, the second point of your question, as more capital comes in, there's a structural element to that question. As you think about it, a lot of capital is structured in GP/LP style. Frankly speaking, LPs don't pay GP enough to spend the hundreds of millions of dollars that we spend on technology to get there because there's no way to get that money back, frankly speaking. So we shall see how that happens. It needs to be done by permanent capital. And from a permanent capital standpoint, you need a mindset. It's not a question of money. You just need a mindset to say, how do I transform a business? How do I invest today where I may or may not see the benefits of which for a long time to come. That's the question of long attention span. You guys don't remember, but when we went after this sort of the data science approach where in those days, we did was not called AI or something, we call machine learning, supervised learning, unsupervised learning. We got nothing out of it for 3 years. And we keep investing, right, and kept going around and seeing if we can get there. Ultimately, it's exciting to talk about after 5 years, we got something out of it and what has done to today for latency in our firm. But it requires years of investment and that sort of evolves the needs of the organization, the talent of the organization. We are constantly trying to move the ball forward. And we welcome other people to do, most people so that we want to see what is out of the possible looks like. And if other people come up with good stuff, we have no problem to copy. But unfortunately, in this world, most people don't have long attention span. Instant gratification is how most of the companies work. And as I said, GP/LP structure is actually not very amenable to long-term innovations. It needs to come from forever capital.

And our next question comes from the line of [ Seth Berge with Citi. ]

It's Nick Joseph here for [ Seth. ] Shankh, just one question, obviously, on the strategy change. Curious if you could touch on the balance between going more all in on senior housing versus the earnings volatility as Welltower becomes less diversified going forward.

Very good question. So Nick, I would refer you to sort of understand how we think about this topic starting from our foundational document, which is called the letter to future shareholders. You will see that there's a whole section I wrote about this topic of volatility versus risk. We are not concerned about volatility. We're concerned about risk. And risk is the probability of losing permanent capital. So for your first question, if you just think about how we behave, let's take an example of the last 5 years. What are the 2 periods of volatility? One was COVID, right, and sort of what happened subsequent to that COVID, whether it's labor and other inflation issue all. What did we do? We ran towards it, not ran from it. So we like volatility. What happened 6 months ago, liberation, the exact same thing. So if you think about where we built our organization, we built through the bouts of volatility. We love volatility. But on the other hand, risk mitigation, that's why you are seeing we're running a balance sheet impossibly low leveraged, right? So risk management is not just you have to think through, you can do it from the asset size, asset mix, or you can do it through the liability side. So that sort of thing I sort of -- I would like you to sort of think about that, some kind of belts and suspenders we have built into it. Second is operational. And think about what we are doing in this business from an operational standpoint to reduce -- meaningfully reduce risk to get into to understand how this business works, right? It's -- obviously, it is a business where it's a complex adaptive system. Different people got, obviously -- results are almost always on the tails. I wrote about that [indiscernible] for many years in my annual letters. And so we know how to manage that tail risk, and that's what we are doing. Everything we are doing to build out our operating systems, Welltower Business System is to manage that risk. We like volatility. We're trying to manage risk. And that comes in both forms. One is to managing the risk through balance sheet and managing operational risk throughout our business system, which is where we're putting all the efforts. Hopefully, that answers your question.

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

Just on the investment side, curious on your thoughts on both single-family and manufactured housing and opportunities or lack thereof in that -- in those 2 good groups relative to the seniors and active adults.

Very, very good question. Finally, somebody gave me an easy question to answer. I remain within my circle of competence. I don't comment on things that I don't know anything about. So that's one of our key tenets of our business that we are very much focused on what we know and our cycle of competence, what do I know about manufactured housing and nothing. So we'll remain within our cycle of competence, keep doing what we do.

And our next question comes from the line of Richard Anderson with Cantor Fitzgerald.

So the investments in hard assets is real interesting and headline grabbing and all that. But I think you would agree the most important investments you're making are -- I don't even know, I don't have to guess in people, but also in operating systems and technology. But -- so I want you to reconcile something for me and how you're approaching this. So your incremental tech investment is requiring a requisite return on that investment for it to be a reasonable investment. And so for all the customer experience that you're talking about and happy customers, happy associates and all that sort of stuff, what do you -- do you have concern about fatigue at the rent level? In other words, everyone's happy, but then they see a 10%, 12% increase in their rent every year. At what point are you kind of watching it to make sure it's not happening and to maybe have to sort of scale back some of these internal investments that are really what are going to sustain you for the next 5, 10 years? I'm just curious how you approach that line of sight.

Very, very good question, Rich. So if you just think about the 2 questions inside your question. First is the technology investments, whether it's technology itself or it's people around technology, we almost have an unlimited appetite to do it. And the way we see that returns, it's a significantly higher returns than real estate returns, and you see that returns come through your real estate P&L. I hope you are seeing that. Look at your performance relative to the industry performance or relative to anybody, and you will see that, and this performances are not coming through because we have easy comps. We have very, very hard comps. And despite that, these results are coming through. So you are getting back that ROI, which is significantly higher than, as I said, real estate ROI through the P&L. So that's sort of the first question. Second question is a nuanced question, much more nuanced question. which is if you think about -- I've said this before, we like -- think about how this business works. Obviously, if you have no rooms to sell by nature of demand supply, rents go up. However, we have always kept rents sort of in high single-digit level. We think that's sustainable in that sense, and we have no problem leaving money on the table today for tomorrow, right? Now one of the things that in senior living business, if you think about sort of the how long people stay in the community on average of, say, 20 months, you only get one of those rent increases, right? So from your perspective, I'm thinking people are getting -- first, 10%, 12% is not something we send people. But regardless, if you're thinking, okay, what if somebody gets 10% rent increase for 5 years, that's not really how it works, right? An average duration is, call it, 18 to 24 months, so you usually get one rent increases. So put all of those things together, just know philosophically, if the question is a philosophical question, I've said this that delayed gratification gene is part of this organization's ethos. We will always leave money on the table today for a greater gain tomorrow. That's just how this place works. So we're not in a hurry. We want the duration of that growth and duration of the growth comes from happy customers and happy employees, and that's what we're focused on.

And our next question comes from the line of Jim Kammert with Evercore.

Apologies, a bit of a pedestrian question, but maybe for Tim, how was the $1.1 billion noncash charge for the comp plan calculated? Just trying to understand some of the accounting mechanics here, please.

Yes, Jim. So the plan is as highlighted in our 10-Q, the plan is essentially broken up into 2 pieces. There's an upfront expense piece of it, which is the $1.1 billion that you're alluding to. And then there's another $200 million that will be amortized over the following 10 years of the plan.

And our next question comes from the line of Wes Golladay with Baird.

Do you see similar opportunities for the Welltower business system in the U.K. as you do in the U.S.? Is it pretty much plug and play?

It is nothing but plug and play. But yes, we do enormous opportunity. Just think about, generally speaking, there's a tremendous amount of opportunity overall in this business from an operations and operations sophistication perspective, and that same opportunity exists in U.K. as well and very much so. And our operating partners are welcoming us to bring in new ideas, new technology, new process. Business systems is about business first, systems later. It's about process first, technology later. But still all of those things, we're enormously excited about that opportunity. Nikhil, do you want to add anything to that or John?

No, I think that covers it. It's really the same opportunity.

One of the things I'll just mention from a U.K. standpoint, as you have seen, hopefully, in the quote on our press release that the U.K. government is meaningfully welcoming us to bring that technology, that operational sophistication to the care sector. So that's also very much of a strong angle that we have been working with the government.

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

Can you help frame how NOI is performing on the 2024 vintage of senior housing acquisitions versus expectations at underwriting?

John, generally speaking, we have -- let's just talk about where it's not performed. We were hit obviously very big in holiday, right? Other than holiday, I would say most -- not just as an individual, but also as an aggregate, acquisitions have performed in line to higher than what we underwrote. Nikhil, would you say that?

Yes, absolutely correct, yes.

And our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Just curious what percent of the SHO NOI the 3 operators under RIDEA 6.0 represent? And I guess as you continue to grow, how do you keep a large percentage of the SHO NOI under that new alignment? And just curious if there are hurdles to adding other operators to the structure in the near term?

Yes. So I don't really have that information...

I don't have the number on top of my head.

20%.

So that's the -- Austin, that's the answer 20%. But remember, as I answered in the previous question that this doesn't have to be -- that was the founding class. This doesn't have to be only those 3 operating partners. And what we are trying to do is to run a regional density of a business, bring in our operators, operating partners to focus on what they do. This is a business that has unremoval complexity at the customer level, which our operating partners do an exceptional job of providing their care and handling that complexity. On the other hand, we are only focused on where scalability creates a strategic advantage, right? So that's sort of how the responsibilities are being divided. And we're both, as I know, as I mentioned times -- several times, our interests are aligned, and we're all trying to get to the same place, right? So if that's the case, we don't see a lot of issues to get there. As operational issues come up, we're obviously solving it together. And we'll see where we get to.

And our final question today comes from the line of Mike Mueller with JPMorgan.

Just a quick one on the announced investments. You've talked about IRRs, but can you just give a sense as to the overall initial blended yield on the $14 billion and maybe parameters for how wide the range was between the different components?

Yes, Mike, we never really disclose yields until the transaction is closed and then it shows up in the sub. But in general, the activity is not that dissimilar to our activity in the last couple of years.