Welltower Inc

NYSE:WELL

Earnings Call Transcript 2021-Q4

[Operator]

Good day and thank you for standing by. Welcome to the Q4 2021 Welltower Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today to Mr. Matt McQueen, General Counsel. Please go ahead.

[Matt McQueen, General Counsel]

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 assurance 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.

[Shankh Mitra, Chief Executive Officer]

Thank you, Matt and good morning everyone. I'll review the quarter, reflect back on 2021 on this year-end call, walk you through high-level business trends, and our capital allocation priorities. John will provide an update on the operational environment for show and MOB portfolios and Tim will walk you through our triple-net businesses, balance sheet highlights, and first quarter guidance. 2021 was a year marked by high conviction capital deployment, partner and talent acquisition, and a powerful inflection in our senior housing business. Our belief in the long-term demand thesis for the senior housing proved out as we witnessed significant occupancy growth starting in the spring of last year which continued through the historically seasonally weak winter season. Just as importantly, in the second half of 2021, we began to see a significant shift in the pricing power. Interestingly, we found these pricing power during a period of relatively low occupancy levels. After all what industry or asset class do you know of that is able to achieve pricing power with occupancy levels in the low 70% range. Low behold that pricing power continued to strengthen in Q4 and in the first quarter of this year despite the impact of Delta and Omicron. Same-store RevPAR grew 3.4% in Q4 falling year-over-year same-store revenue growth of 4.8% one of the strongest quarter in the company's history. And even more encouraging is the revenue growth in US exceeded 6% with the momentum accelerating through fourth quarter. John will walk you through the details in a moment. Though I am not happy with our soft par bottom-line results due to increased expenses mainly from the Omicron induced labor crisis, I continue to believe we will see significant improvement throughout the year given the continued net hiring trends we're seeing from our operating partners. This assumes we don't experience a highly infectious variant. We can offset the higher cost of full-time employees just as we have done during the years prior to COVID, it is a significant presence of contract labor at search pricing level that is a source of the issue. From a demand standpoint, we saw record interest in our product in Q4 that continued through January with inquiries up significantly from December. However, a meaningful number of tours got canceled or postponed as either the prospective resident or their family got COVID or a community that did not have enough employees to conduct the tour as there was a COVID crisis in the communities. However, the tours have picked up meaningfully in recent weeks and we are starting to see strong sales activity, which should translate into higher net move-ins in next three to four weeks. If we are right about this, you may see occupancy growth exceed seasonal trends, while occurring in an environment of strong rate growth. We project this will put us into the double-digit NOI growth range in Q1 only to accelerate further throughout the year. As disappointed as I am about the diminished bottom line flow-through in Q4, due to $30 million of agency costs compared to only $5 million in Q1 of last year, I continue to believe that our 2022 exit run rate and 2023 earnings power of this platform is unchanged. Moving to capital allocation. In 2021, we deployed $5.7 billion across great real estate, with fantastic operator and at even a better price. The most incredible aspect of this story was the granular nature of execution with a median transaction size of $26 million. We're not believers in elephant hunting, as larger transactions usually result in value accruing to the seller. As you know, we manage this company for our long-term shareholders to increase our share value. Q4 was no exception to this consistent trend. We have deployed $1.4 billion of capital in Q4 across 20 separate transactions with a median size of $24 million. I won't bore you with the details of every transaction, but I would be remiss not to mention a couple of them, which I'm particularly proud of, including a handful of trophy buildings in Boston and Florida at a very attractive basis. But perhaps the most exciting investment of the quarter was the formation of our partnership with Andy and Glynn at Quality Senior Living, or QSL. It is hard to overstate how strong of a team, Andy and Glynn have built from conceptualization of the product, to development execution and ultimately their operational excellence. For example, despite all the labor challenges that I've highlighted, QSL have used virtually no agency labor and their buildings are well occupied. Andy who is one of the biggest users of our data analytics platform is embarking on a multi-year effort to expand the Blake brand with the full support of our platform behind him. I hope you are seeing a pattern here with how our data and predictive analytics platform attracts some of the best people in the business, as we offer so much more than capital. This network effect of platform execution across multi-year partnership that were formed over the last few years will fuel our growth for years to come. As Delta and Omicron induce challenges, we had that ugly head in Q4, capital deployment opportunity set only expanded and that continued in Q1, which is seasonally the weakest quarter from a deal activity. With -- after a strong close of 2021, we have already closed an approximately $600 million of the investment over the last six weeks. And I'm pleased to report that our pipeline remains robust, highly visible and actionable. While the capital market backdrops remain volatile of late driven primarily by the Fed headlines, we're well positioned to fund our pipeline with well over $1 billion of equity and availability of liquidity in excess of $4 billion. We're proud of our capital allocation track record both deployment and sourcing. But if capital markets volatility continues, we will access different tools from our toolbox, as we have done before. Lastly, I'm very proud to announce our new partnership with Reuben Brothers, which is buying Avery Healthcare, one of our largest operating partner. Rubin Brothers founded by David and Simon Rubin is one of the largest family offices in the world and is the owner of prime real estate and infrastructure both in UK and globally. There are also a pioneer of investing in alternative real estate and infrastructure as an early investor and owner of Global Switch. Rubin Brothers share our optimism for the exceptional growth trajectory for health care and wellness infrastructure as society ages. We're particularly excited about the prospect of expanding the platform together as Rubin Brothers owns some of the most prime land and real estate in the UK. Tim and I have said on this call many times that temporary degradation of cash flow doesn't necessarily mean the extraction of value, Avery, which constitutes 16% of our same-store triple net NOI will be significantly delevered through this equity infusion from Rubin Brothers. Partnering with highly sophisticated global investors like Rubin Brothers validates our view of the long-term value of this business despite Wall Street's obsession with point-to-time coverage. In conclusion, I'm very proud to -- of our execution in 2021 across operations, capital allocation and partnership. The stage is set for multiyear earnings growth as we find ourselves at the bottom of both secular and cyclical cycles with unparalleled platform built with advanced data analytics 20 or so growth vehicles with different partners and talent to execute on it. The pandemic has been devastating for our entire ecosystem, but we have doubled down during this massive disruption given our high conviction investment thesis. You as our shareholders can rest assured that we'll not be resting on our laurels and that will continue to dig deeper and wider moat. With that, I'll pass it over to John. John?

[John Burkart, Chief Operating Officer]

Thank you, Shankh. My comments today will focus on the performance of our management operating segments in the quarter. Starting with our medical office portfolio. In the fourth quarter, our outpatient medical segment delivered 2.4% same-store NOI growth over the prior year's quarter, despite a 20 basis point decline in occupancy. We continue to see strong retention rates at 86% in the fourth quarter and with increasing construction costs and rising market rates, we will continue to push renewal rates in exchange and accept the reasonable level of increased turnover and related frictional vacancy as we maximize the value of the portfolio. Now turning to our senior housing operating portfolio. The strong demand-based recovery in the senior housing business continues to strengthen. The show portfolio same-store revenue increased 4.8% in the fourth quarter of 2021, representing the first full period of year-over-year same-store revenue growth since the beginning of the pandemic. Occupancy grew 90 basis points over the prior year's quarter. Again, the first year-over-year increase in occupancy since the beginning of the pandemic and the largest year-over-year gain for any quarter since 2016. Sequentially, the show portfolio spot occupancy increased approximately 70 basis points during the fourth quarter to 77.7%. Compounding these strong occupancy trends is a notable shift in pricing power. Over the second half of the year, operators have successfully raised and are again able to charge community raised rates and are again able to charge community fees, both of which were reflected in a 3.4% year-over-year increase in RevPAR during the quarter. And following, an outsized increases on January and February renewals with little to no pushback we expect further acceleration in RevPAR growth over the course of the year. Geographically, each of our markets Canada, the UK, and the US are showing improvement in same-store top line metrics through the quarter. Our Canadian portfolio, which has lagged the recovery, posted a year-over-year revenue decline of 3% in Q4 2021. However, the revenue decline improved intra-quarter moving from a decline of 4.2% in October 2021, to a decline of 1.4% in December 2021, compared to the prior year's respective months. Sequentially, the Canadian same-store portfolio grew at a revenue rate of 1.8% in the fourth quarter. In the UK, our same-store revenue increased 7.8% during the fourth quarter on a year-over-year basis, accelerating from 7.1% growth in October of 2021 to 9% in December of 2021, compared to the prior year's respective months. Finally, in the US, where the majority of our portfolio is located, year-over-year revenue growth in the fourth quarter was 6.3%. The acceleration in revenue growth was particularly pronounced in the US, accelerating from 3.8% in October 2021, versus the prior year's month to 9.1% in December. Despite these encouraging top line trends, expenses increased 8.8% year-over-year driven largely by excessive agency cost. The combination of holiday time off and Omicron disruption led to an increase in agency costs in the quarter, almost 4.5 times agency expense versus the prior year's quarter. Excluding agency costs, expenses increased 5.3%. Stress and Systems highlights opportunities and issues and the extreme stress in the health care system brought on by COVID has identified some opportunities to improve the value proposition for our hard-working health care workers. The agencies have been a temporary crush, which will provide a short-term option for both operators and the health care workers. That said, the excessive use of agencies is truly short term in nature, and the exceptional premiums that they charge as much as six times, the base rate during the recent holiday period do not pass through to the agency employees, who typically do not receive benefits either. The quality of life and their work experience is substantially less desirable than that of a permanent employee. Agency employees lack the connection to their coworkers, and customers that they desire as they travel from site to site, city to city, and state to state on a daily basis, often away from their families. Additionally, agency employees are less efficient, as they do not know the systems nor the processes of the operator or the site, nor the specific customer requirement. Our operators have many workflows underway at this time to improve the value proposition for permanent employees, which were bearing fruit prior to the Omicron. Nonetheless, the results of these outsized expenses was a decline in same-store NOI of 9.3% in the fourth quarter of 2021, but still marked an improvement from Q3 2021, with over 50% of operators delivering positive NOI growth for the period. The recovery continues to strengthen despite recent Omicron disruption and we remain confident in our ability to drive significant NOI growth in 2022. Through January, agency labor expense has declined as staff cases have fallen. Agency labor expense is expected to moderate further through the first half of 2022 and declined substantially in the second half of 2022. The other disruption caused by Omicron was a record cancellation of tourists, which Sean described. However, at this point, weekly staff cases are down 81% from their peak including an 89% drop in the US and we are seeing operations normalize. The disruption of tours and sales caused occupancy to fall about 20 basis points in January. However with the high level of traffic, we expect that the continued occupancy gains will return and that we will regain lost occupancy by the end of the quarter. Here are some quotes from our operators about the strength of traffic and deposits. “Digital inquiries were up 36% over 2019 in the fourth quarter and continued strong in January”. And “our four-week averages for inquiries tours and deposits are the highest they've been since August of 2021, we are seeing week-over-week growth in deposits of 10%, the last four weeks running”. We are experiencing the strongest January for inquiries in several years. And finally “our inquiries from the last week alone have been the highest numbers we've ever experienced”. In closing, I have shifted from full immersion in the business to planning in action. I'm even more excited about the future opportunities across the Welltower platform. We are leveraging our proprietary data analytics platform and operationalizing the data to drive results. This process is occurring right now as we have several workflows underway, which we expect to bear fruit in the immediate future as well as many more workflows that we expect to drive our outperformance in the quarters and years to come. I continue to be appreciative of the warm welcome and excitement expressed by our operators as we leverage our combined real estate operating company and care experience to improve the customer and employee experience and drive financial results. Each operator has a unique expertise and opportunities. We have been working very well together and offering support where needed from implementing best practices to applying data analytics to improve their business. In one case, we identified a software tool over 25 years old. As they say, the '90s called and they want their deeper back. I'm confident there is a substantial opportunity to implement operational excellence across the board and bringing the basic back office and sales operations up to match the high quality of care the operators are delivering, which will drive significant margin growth in the years to come. I'll now turn the call over to Tim.

[Tim McHugh, Chief Financial Officer]

Thank you, John. My comments today will focus on our fourth quarter 2021 results. Performance of our triple-net investment segment in the quarter, our capital activity, our balance sheet and liquidity update and finally our outlook for the first quarter. Welltower reported fourth quarter net income attributable to common stockholders of a $0.13 per diluted share and normalized funds from operations of $0.83 per diluted share, relative to the guidance of $0.78 to $0.83 per share. Our results included approximately $18 million or $0.04 per diluted share of HHS funds and other out-of-period government grants that were not previously budgeted. Turning to our triple-net lease portfolios. As a reminder, our triple-net lease portfolio coverage and occupancy stats reported a quarter in arrears. So these statistics reflect the trailing 12 months at 9/30/2021. In our senior housing triple-net portfolio, same-store NOI increased 4.2% year-over-year, driven by improvements in rent collections, on leases currently on cash recognition and the early impact of rental increases tied to CPI. We expect the impact of both these trends to accelerate in 2022. As rent collections improve given that 20% of our leases are subject to API-based escalators. Trailing 12-month EBITDA coverage was 0.8x. Looking forward we expect coverages to inflect positively in the first half of 2022 as year-over-year improvement in fundamentals followed the positive trends expected in our senior housing operating portfolio. Next, our long-term post-acute portfolio generated negative 0.8% year-over-year same-store NOI growth. However similar to our senior housing triple net portfolio we expect NOI growth to improve in 2022 through greater rent collections on leases currently in cash recognition as well as CPI-based rent escalators. Trailing 12-month EBITDAR coverage was 1.29x. Over the course of 2021 we completed $458 million of long-term post-acute dispositions at a blended cap rate of 8.7%. With an additional $108 million under contract for sale at year-end. As a result, our long-term post-acute portfolio represented just 5.2% of total in-place NOI at year-end versus 10.1% at the end of 2020. A 490 basis point decline driven largely by the exit of our Genesis relationship. And lastly health systems which is comprised of our ProMedica Senior Care joint venture with ProMedica Health System. Had same-store NOI growth of positive 2.75% year-over-year and trailing 12-month EBITDA coverage was 0.39x. The sequential improvement in coverage was driven by the previously announced agreement to sell 25 assets that have been contributing negative EBITDA. As of year-end we completed the sale of 2021 of those assets with the remaining four held for sale. Turning to capital market activity. We continue to enhance our balance sheet strength and position the company to capitalize our robust and highly visible pipeline of capital deployment opportunities by utilizing our ATM program to fund those near-term transactions. Since the beginning of the fourth quarter, we've sold 11.3 million shares via forward sale agreements at an initial weighted average price $85.06 per share for expected gross proceeds of $961 million. We currently have approximately 11.1 million shares remaining unsettled which are expected to generate future proceeds of $949 million. This is in addition to $220 million of expected property disposition and loan payoff proceeds. During the quarter we also issued $500 million of 10-year unsecured debt maturing in 2032 with a coupon of 2.75%. Following similar discipline in their equity funding strategy this is our third unsecured issuance in 2021, bringing full year issuance to $1.75 billion with an average ratio of 9.5 years and a coupon of 2.6%. At year-end when factoring in cash and restricted cash balances our liquidity position exceeded the $4 billion of borrowing capacity on our line of credit. When combined with the previously mentioned $1.2 billion of combined unsettled ATM proceeds and expected disposition proceeds we are in a very strong liquidity position heading into 2022. We ended the fourth quarter with 6.95x net debt to annualized adjusted EBITDA down slightly from last quarter. Leverage is impacted by the timing of $1.5 billion of net investment activity completed later in the quarter. If we run rate the impact of net investment activity completed in the quarter pro forma net debt to adjusted EBITDA decreased to 6.75x. We continue to be pleased with the momentum of our top line recovery in our senior housing operating portfolio with portfolio spot occupancy ending the quarter at 77.7%, 70 basis points higher than the end of the prior quarter, but still 950 basis points below pre-COVID levels. The portfolio also sits 1300 basis points below peak occupancy levels. Setting the stage for a powerful EBITDA recovery as occupancy upside and strong rate growth is coupled with significant margin expansion of a very depressed base. Lastly, moving to our first quarter outlook. Last night we provided an outlook for the first quarter of net income attributable to common stockholders per diluted share of $0.17 to $0.22 per share and normalized FFO per diluted share of $0.79 to $0.84, or $0.815 at the midpoint. This guidance takes into consideration approximately $6 million or $0.015 per share of HHS funds expected to be received in the first quarter. Excluding the HHS funds, the $0.80 per share midpoint of our first quarter guidance represents a $0.015 sequential increase from an as adjusted $0.785 per share number for 4Q, which excludes $18 million of previously recognized HHS and out-of-period U.K. and Canadian subsidies recognized in the quarter. This $0.015 increase is composed of $0.025 from a sequential increase in senior housing operating portfolio NOI and fourth quarter investment activity and an offset of $0.01 increase of sequential G&A and income taxes. Underlying this FFO guidance is estimated first quarter total portfolio year-over-year same-store growth of 7%, driven by subsegment growth of outpatient medical, 1% to 2% growth; long-term post-acute, 1% to 2%; health systems, 2.75%; senior housing triple-net, 5% to 6%; and finally senior housing operating growth of approximately 15%, driven by revenue growth of 10%. Underlying this revenue growth is an expectation of approximately 420 basis points of year-over-year average occupancy increase. And with that, I will hand the call back over to Shankh.

[Shankh Mitra, Chief Executive Officer]

Thanks, Tim. I wanted to conclude this call by addressing something that you -- we usually don't talk about and that is our comprehensive team. We have completed -- completely overhauled and upgraded our team and this was a multi-year effort building out new areas such as predictive analytics to create a truly scalable platform. With extremely low volunteer turnover, we continue to hire the best and the brightest to further deepen our capital allocation expertise. Historically, the majority of the alpha we created have been through astute raising or deployment of capital. Over the last 15 months, though, we have also built out an industry-leading and, frankly, a very significant development team under the leadership of Mike Ferry and Ayesha Menon. The last piece of this puzzle is building out our operational excellence and asset management capabilities. This started with the hiring of John in 2021. John is building out a world-class team that will accelerate value creation for our shareholders for years to come. We have added a net 51 people last year and we're likely to add another 80 new colleagues in 2022. Many of you who follow our company closely understand that our asset platform is like a coil spring today. We spent heavily during the pandemic, but most of these assets are sitting with low occupancy and thus cash flow, which is about to be released and surge forward to realize its full value. Similarly the people side of our business platform is also a coil spring today. You are only seeing them in G&A line, but their full contribution to the revenue line will be seen in 2023 and beyond. With that, operator, please open up the call for questions.

[Operator]

Thank you, sir. [Operator Instructions] Our first question comes from the line of Jonathan Hughes from Raymond James. Please go ahead.

[Jonathan Hughes, Raymond James]

Hey good morning. I wanted to ask about the quality of the operator relationships in the pipeline or maybe generally out there in the seniors housing industry. I'm just wondering what the landscape looks like after a couple of years of pandemic-related headwinds. I know you have a few in progress and you've had success with several over the past few years. But how many high-quality operators remain as an opportunity that you don't already have a relationship with? And what's the size of those individual opportunities? Are they smaller or larger in terms of investment volume than the relationships established over the past few years? Thanks.

[Shankh Mitra, Chief Executive Officer]

Fantastic question Jonathan. As I said right now I can think of two operators that in US particularly -- this is a US-specific comment and they'll probably be the same for UK and Canada, that I can think of two specific operators that we don't have relationship today that I want to have a relationship. One of them we already have had shaken our hands this quarter and likely probably we're going to talk about it next quarter's call. So, what you are likely to see that means is we generally have the operator base the platform that we wanted to build. You would recall that before pandemic we talked about with you that we have a map, right? And in that map we have different ideas of where the different types of acuities of assets should be and what kind of operator should be running those, right? We kind of generally feel out that map. Now, what you're going to see we're going to go deep. Instead of going broad which you have seen over the last, call it 18 to 24 months, you're going to see us go very deep. And that sort of talks about -- we have a slide on our presentation you can see that we talked about give or take this 25 to 30 relationships across all asset classes not just senior housing, senior housing, medical office, and wireless housing. All three platforms that we are growing pretty significantly that we think creates a very significant opportunity of external and growth that we estimate could be an upwards of $2.5 billion, $3 billion a year for a decade to come. But that's sort of how we're thinking about it. It's going deep instead of going broad but we'll talk about hopefully another exceptional operator relationship next quarter.

[Jonathan Hughes, Raymond James]

Thank you.

[Operator]

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

[Nick Joseph, Citi]

Thanks. John you talked about the challenges with the staffing agency model. As you think about coming out of COVID, do you expect the business model or expense load to change to rely less on agency staffing, or is this more of a perfect storm where it's hard to actually change going forward to limit the use in times of crisis?

[John Burkart, Chief Operating Officer]

Yes. No. Thank you, Nick. No, my expectation is that the business will at least get back to historical standards where agency was a small part of the whole picture just was an assistance piece. But frankly, with the workflows going on I think it's a very strong chance that agency diminishes even further because what has changed is the world has gone from a situation where there's an abundance of employees to a scarcity of employees. And so the employers now the good one to have recognized that fundamentally changed how they look at things. Recruiting has become a sales machine with KPIs for the recruiters, et cetera. The value proposition has changed dramatically. People are looking at what the employee experience is words that would never set employee experience you don't hear that. They're looking at that and they're trying to figure out how to optimize. So some changes that are going on are people are realizing like, hey, we should change your hours slightly for some employees, because they have to drop their children off at school. They can't work here, because of when we start not a big deal for us, move it an hour and it works perfectly for them. A lot of things like that are changing. So I think from my perspective, it's great for the hardworking health care employees. It will be great for the operators. And will further diminish the agencies. But it will take time for this to tail off, as I mentioned in my comments, so it won't happen overnight. But I think long run, run rate will be great.

[Operator]

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

[Vikram Malhotra, Mizuho]

Thanks so much for taking the questions. So just a question on rent growth or RevPAR and margins, and just two parts to it. Just one in the strong pricing part, you're seeing can you talk about the mix between the in-place bumps and just the releasing, or the spreads you're seeing today and what your expectations are? And then on margins in your bridge it's – maybe this is not the right way to look at it, but in your bridge, it seems like you're embedding maybe a 60% to 70% incremental margin, it seems like it's reasonable. But how are you thinking about the incremental in the context of pricing power?

[John Burkart, Chief Operating Officer]

Yeah. So I'm going to – on the – you managed to get two questions there and that was good. On the – on the re-leasing versus the market, clearly, net effective markets are up significantly. They were concessions and community fees that – well concessions that were given community fees that were waived that's all reversed itself. And so certainly, at one point if you go back in the industry, market rents were below in place that's now changing. And from an in-place perspective and overall the rents are moving up pretty significantly. Very consistent with the comments that Sean made previously, with the expectations of mid-5%s to 10% in that zone. What we're seeing is a lot of strength in the marketplace and a recognition that cost gap come up and it takes a certain amount of money to provide great care and that's what people want.

[Shankh Mitra, Chief Executive Officer]

Vikram, to answer your second question, we are getting you back to the pre-COVID margin on that slide. I think you're referring to slide 17. There is no question that, if you have pricing power that will improve. But remember, you also have higher labor cost. So to the extent that, you have higher pricing power in excess of higher labor costs, you will see upside to that margin. But it is getting you back to margin Q4 of 2019 margin for the portfolio that was there in Q4 of 2019.

[Operator]

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

[Derek Johnston, Deutsche Bank]

Hi, everyone. Good morning. So in 2021, you had $5.7 billion in gross investments. So off to a solid start here in 2022, so do you believe 2021 number is the high watermark? Is that level of acquisitions repeatable or even beatable this year? And has anything changed in your terms of your ability to source opportunities or even competition for deals since our last call?

[Shankh Mitra, Chief Executive Officer]

Has anything changed? The answer is, yes. So if you think about, what we have been saying that, we are mostly focused on what we have been buying – as you can see the average age of those assets would indicate, they are the children of supply over cycle of 15 to 19, right? What you had is disruption from the revenue side because of all these variants. Then you had a disruption from the cost side because of our employee situation that we talk about. Something changed there, yes something has in the last call it 45 days. And that is what you didn't have is the pressure from financing cost. All construction loans are made on LIBOR, right? Pretty much all construction loans, a variable LIBOR-based loan. And obviously, if you look at the – how the outlook for Fed has changed over the last call it 45 to 60 days, you can imagine that third pressure is just about to come which is higher financing cost. So something has changed. And now going back is this a level of acquisition possible or beatable. The answer to that question is very simple. We're not a volume-driven investor. We're a value-driven investor. If the volume is there to create part share value we will do it. If not, we will not do it. That's just a simple how to allocate capital. The success of a team is not measured at least our team in our opinion is not the growth of the enterprise but part share value creation for existing shareholders. So as long as that opportunity is there we'll absolutely do it.

[Operator]

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

[Steve Sakwa, Evercore ISI]

Yes. Thanks. I guess I just wanted to circle back a little bit on the guidance just to make sure Tim I understood. In the 10%, I think revenue growth that you talked about for show. Again, what was occupancy and what was rent? And then what is included in the expense side from the elevated levels that you saw in Q4? Are you sort of assuming the same level in Q1 as Q4, or did you assume some moderation?

[Shankh Mitra, Chief Executive Officer]

Yes. Thanks, Steve. So on the revenue side we're assuming 420 basis points of occupancy increase on a year-over-year basis driving that 10% revenue growth. So the remainder of that revenue growth is being driven by rate. And on the expense side, I think the best way to look at it is sequentially, we're talking a lot about agency labor. We are assuming a sequential reduction in agency labor about 10% from the fourth quarter to the first quarter in that pool. And that's supported by early trends we've seen in the quarter.

[Operator]

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

[Rich Hill, Morgan Stanley]

Hi, good morning, guys. I recognize you're not giving a full year guide but I think back to 3Q 2021, there were some bread crumbs given on where renewals and maybe street rates are trending. Based upon my notes one of your competitors have talked about 8% renewals. And I think you had talked about 1.5 times to two times faster as the renewals for street rate. Wondering if you could just provide any updates on that as we think through what full year 2022 might look like?

[Shankh Mitra, Chief Executive Officer]

Hey, Rich. John just talked about that. The street rate comments I made is a net effective rent. And you are seeing because obviously, the concessions that were given, the lack of community fees that you had, the effective net street rate is moving up because of that. Not necessarily, the pace is moving but the net effective rent is moving, we continue to see. In fact we have seen some – a couple of our operators have now moved street rate at Well [ph] In-Place rent, a couple of our very large operators have gotten much closer. So it's a pretty encouraging sort of it as we look in the future. Tim just walked you through at our 10% guidance, means, from a rate and occupancy perspective. And that sort of gives you the second answer to that question, right? So we are a shop. We're focused on ultimately optimization of revenue, not necessarily one component of the revenue. And on top of that you have to think about, one component of the revenue comes with higher cost, which is labor, right, if you just occupancy, which obviously rate doesn't. So we're trying to optimize all of those things together and that sort of blends to what we talked about which is a 10-ish percent revenue growth in Q1, 15% NOI growth in Q1, and that NOI growth should continue to accelerate as we get to the year for two reasons, right? One is, as you build occupancy, you will get obviously your marginal margin will expand obviously, right? So that's one point. Second, you will get a continuation of sort of burn-off of the agency labor that you got. So that's sort of two of these things together, you will get an acceleration of NOI growth as we get to the second half of the year.

[Operator]

Thank you. I show our next question comes from the line of Juan Sanabria from BMO Capital Markets. Please go ahead.

[Juan Sanabria, BMO Capital Markets]

Hi. Good morning. Thanks for the time. Recognizing again you're not giving full year guidance to one of the larger operators in the space talked about 500 to 600 basis points of occupancy growth for the year as their target. So curious how you feel excluding any new COVID wave, how that feels to you particularly given seasonality is still apparent in the business. And typically you don't necessarily gain occupancy outside of the third quarter. So, just curious about your general commentary and targets for occupancy growth for the year.

[Shankh Mitra, Chief Executive Officer]

Yes. So, first, you said the magic word, excluding any more new variants, right? So that's a very important what you mentioned there. And despite that I'm not going to venture a guess of what it will look like. I will tell you there are a couple of things to think about. Last year you got a massive disruption in Q1. You've got a significant occupancy loss, you started at a big hole and you had to climb up that hole to get to a point where on an average basis you can build out documents. So you don't have that problem this year, right? John talked about January, our occupancy from point to point is down 20 basis points, which is probably will make this January the best January we ever had seasonality perspective. So, you don't have a hole to climb out. Second, you have better demographics this year. You can see the demographics is building. So we have more demand there and that's sort of playing out for all the leads and other data that John disclosed on his script card, you have a significantly lower number of deliveries this year, right? So -- and then if you -- under your assumption if we don't get hit by four waves like we did last year, and hopefully, that will translate into better occupancy growth. I'm not going to comment on any specific operator or try to sort of venture a guess of what entire year is going to look like. However, the table is set. If all of these things we just discussed lay out, we'll see a better year. But we're long-term investors. We're not focused on how occupancy plays out this quarter versus that quarter, but we're pretty optimistic because of what the underlying trends we see in the marketplace.

[Operator]

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

[Mike Mueller, JPMorgan]

Yeah, hi. Just curious on the Watermark transaction, what was the pricing difference between I guess the entry fee assets versus the rental, just in terms of like a rough cap rate difference?

[Shankh Mitra, Chief Executive Officer]

Mike, we're not going to get into a specific deal, let alone things within the specific deals, right? Obviously as you know how these things play out is that you sign a confidentiality agreement with the seller. We're not going to get into it. We have talked about I believe in the last call that what we like about that transaction is A, the price per unit was very attractive to us; B, some of the underlying land ultimately as you were thinking about real estate investment you have to think about the dart, exceptional dart; and three, we think there is value to be created because of what these assets are and the lands that come with it and what you can do with this only. With all of those three combined we're very excited about the portfolio we got, but we're not going to get into economics of a specific deal, let alone different parts of that deal. That just will put us in a significant violation of a confidential agreement that we have signed.

[Operator]

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

[Connor Siversky, Berenberg]

Good morning out there. Thanks for having me on the call. I just want to keep this simple, focusing on senior housing in particular in consideration of the value-based investment approach. So in this positive environment for pricing, I mean, do you expect to see some cap rate compression this year on increased competition? And then just how does this change the opportunity set for you? Does that mean more granular transactions or perhaps a restriction in activity on your end or expectations on your end?

[Shankh Mitra, Chief Executive Officer]

Yeah. Connor, I answered this question earlier. I'm just going to repeat what I said. What changed is there's a hard stress that's coming. And that's because majority of construction loans are done on a floating rate basis if not all of them are done on a floating rate basis. And you have a very significant potential increase of LIBOR that's coming to the pipe that will put even more stress in the system. And the second point is we're not cap rate buyers. It is hard to cap rate is a stabilized concept. Senior housing is anywhere but stabilized at this point. I do not expect cap rates even if you're talking about in the context of stabilized cap rate, I do not believe there is going to be a significant compression. In fact, I think a lot of institutional investors are looking at all asset classes including many we own and that we talked about historically that underlying growth rate versus inflation at sudden CapEx makes no sense, right? I've talked about for example for quarters after quarters that given the outlook of what the forward curve was telling you inflation breakeven and others. It made no sense to me for what people who are paying for MOBs with 2% growth rate. Finally, it seems like there is a obviously a understanding on the institutional investor side, people are waking up to say what did I buy for this and how do I make return? So I think there has to be a reconciliation of when you look at your IRR, you have to think about what is the real growth versus the nominal growth. And that's going to show up. That's going to show up at your exit. And we're long-term IRR buyers. We think through these things and that's why we refuse to chase the market. You have seen that for years and years we have done and there was not going to be any difference in that discipline going forward.

[Operator]

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

[Rich Anderson, SMBC]

Thanks and good morning. Shankh you have said in the past that you are not likely to be an elephant hunter that you get noise in the system when you go too big and I can appreciate that. But that is a different mentality versus your predecessor. So if you're not willing to be a buyer as an elephant hunter is there anything that you could see from the sales perspective that could be -- I mean if you're a $26 million average deal price on the buy side, what do you think your average deal price would be on the sell side given that mentality towards…

[Shankh Mitra, Chief Executive Officer]

Very good question. It's extremely astute observation. Look at 2020 and look at how many billions we sold. And if you looked at the disposition you will see sales were done on a multiple of the buys, right? I don't know exactly what the number is, but it is likely to be multiple of that $24 million $26 million that we mentioned. We want to buy retail and sell -- buy wholesale and sell retail. That's what we do right? Fundamentally no matter what investment class you are it's something very simple how you make money is buy low, sell high. Right? That ultimately is how you allocate capital to make money. So portfolio when there's a lot of hunger in the market to buy a certain asset class portfolio premiums that we are. So you go sell portfolios but you buy smaller assets I think we mentioned that $5.7 billion we bought median size of the transaction not median-sized of the building median size of the transaction was $26 million. That's how we create real value.

[Operator]

Thank you. So our next question comes from the line of John Pawlowski from Green Street. Please go ahead.

[John Pawlowski, Green Street]

Thanks for the time. John as you picked through the SHOP portfolio either by property type LIL memory care or geography -- are there any signs within the portfolio of structurally higher vacancy rates where maybe move in percentage or just not improving in recent months or occupancy is actually sliding here?

[Shankh Mitra, Chief Executive Officer]

No. Each area is improving across the board. The starting point that we're at right now is of course pretty low. So, the bar is low to build from as we get to an optimal level which would be substantially higher your question is a good question and there may be some things that become more apparent. But at this point in time everything is working across the Board.

[Operator]

Thank you. I show our next question comes from the line of Michael Carroll from RBC Capital Markets. Please go ahead.

[Michael Carroll, RBC Capital Markets]

Thanks. I wanted to transition to the triple-net portfolio for a second. Tim can you quantify how many triple-net tenants are on a cash basis today? And what's the difference between the current cash that's being paid and recognized compared contractual rents on those leases?

[Tim McHugh, Chief Financial Officer]

So in the first quarter -- or sorry the fourth quarter it's about 15% to 20%. It's kind of stayed within that range for most of the last few quarters. So that's the quantum of kind of how much of that in-place rent is being recognized on a cash basis. And I don't have the gap to contractual right now.

[Shankh Mitra, Chief Executive Officer]

But Mike remember, all of our triple-net senior housing portfolio is in US and UK, right? And Syou can see how much that cash flow is sort of inflected or expected to be inflected this year, because they're obviously on cash, the underlying NOI is what we eat and that underlying NOI is going up significantly, which is translating into that same-store triple-net growth expectation that Tim just gave you. In other words, we took the hit by putting it obviously on cash recognition Tim talked about that, on many calls. Now, we're on the other side of that.

[Operator]

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

[Steven Valiquette, Barclays]

Great. Thanks. Good morning. So with all your commentary on the labor expense that was definitely helpful. I guess, I'm curious for the $30 million of the agency labor expense absorbed in the fourth quarter. Is there any further color on whether that was fairly evenly spread geographically across the SHOP portfolio, or did you find it as geographically concentrated maybe in a few markets? And also, since well has more of an urban footprint in SHOP overall. Just any generalization from your view whether labor shortage issues are more or less prevalent in rule versus urban markets just in general? Thanks.

[Shankh Mitra, Chief Executive Officer]

Sure. That's a great question, and we've done an awful lot of studies on that particular issue leveraging our data analytics team. The interesting thing that, we found is it gets back to my comment on stress identifies opportunities and issues. And when looking at it closely, clearly, some markets can have a level of stress specific to that market. But then when you dig deeper in you find out that, tremendous amount of assets have zero labor and selected assets have a lot of agency – selective assets have a lot of agency. The cause of that is a combination of in some cases Omicron came in and had a material impact on a great amount of staff, which is no surprise. In other cases, my belief frankly is a leadership. And that's partly, what gives me great optimism in moving forward and solving this, because the leadership issues are solvable. And the leadership issues, this is one indication, but they also tie to other issues occupancy et cetera. So this frankly helps us identify some situations that will – as we make adjustments, we'll improve things going forward dramatically. So hopefully, that's helpful. Thank you.

[Operator]

Thank you. I show our next question comes from the line of Jordan Sadler from KeyBanc Capital Markets.

[Jordan Sadler, KeyBanc Capital Markets]

Thank you, guys. Good morning.

[Shankh Mitra, Chief Executive Officer]

Good morning.

[Jordan Sadler, KeyBanc Capital Markets]

Good morning. I wanted to – this is sort of a little bit of a two-parter. One I wanted to clarify, the contract labor assumption embedded in 1Q. I think you said down 10%. So $30 million of expense becomes $27 million. Is that the way to think about it? And then separately, just kind of thinking about the cadence of your guidance for the SHOP portfolio in particular, right? Last time, you gave sequential guidance for 4Q, right? We ended up with a surprise variant late in the quarter that ended up providing pretty significant headwinds, especially on the labor front and pressured numbers lower relative to what original expectations were. I'm curious, how much that experience in the fourth quarter impacted sort of your decision surrounding guidance for the first quarter? In other words, this appears kind of conservative relative to the moderation in expenses? And what seems to be a flat occupancy assumption for the first quarter overall, despite the fact that you only lost 20 basis points in January. So I know that's -- I've asked a lot there, but I'm basically asking about the cadence on giving guidance.

[Shankh Mitra, Chief Executive Officer]

Yes. So, Jordan, why don't I start and Tim will finish. First is, I understand Q1 is seasonally a weak period from an occupancy standpoint. So as John talked about, we're down in January about 20 basis points. And we're kind of thinking obviously, the sales activity picked up pretty significantly, tours have picked up. And we're thinking as sales picked up you get some lag, right, call it 20 to 30 days lag from sales to occupancy. So that kind of puts you at sort of towards the end of the quarter. So you don't have a lot of time to pick up that occupancy, right? So that sort of -- I wouldn't call that a conservative, right? I would call that what we think was going to happen. The up and downs and who cares. But just sort of generally speaking, I want you to understand what we're thinking about. You are right, I mean, that will on average, quarter average, Q1, occupancy goes down about 70, 80 basis points. So you get sequentially flat, which will probably put an average of flat significant year-over-year growth. That's a pretty good outcome, because you have to think about what that means for the rest of the year, right? It's not about just Q1 days. The second point is, look, I mean, I am pretty disappointed about the bottom line results in Q4. There's no two ways about it. We did not expect that Omicron will hit us like the way it did. And frankly speaking, there's 45 more days to go in the quarter. And as we have seen, it's highly infectious where it comes and how that can impact you quarter-to-quarter, Jordan, who knows, right? I mean we're focused on what's the real run rate earnings power of the platform. And what we see is pretty exciting, at least, what we see today. But it's hard to get into specifics or when things happen. You have an operating business, right, which is driving the marginal differences, try to get very, very sort of prescriptive about how exactly things are going to play out. It's hard to comment.

[Tim McHugh, Chief Financial Officer]

I would just add to the labor piece of that agency piece, Jordan. So your math is correct on the expectation, kind of the step down. And I don't think what happened in the fourth quarter necessarily changes, certainly, very carefully is anywhere, like, conservative in the way that we're forecasting. But the variance in what we've seen happen over the wave is that, the labor disruption has been much greater than the demand disruption, particularly over the last two waves and Omicron was a significant labor disruption. So, certainly, changes the way you forecast from the inputs and confidence levels around it. So that being conservative, it's more of a -- there's a lot of uncertainty in the short term. It's the labor piece and how it's impacting labor market, it being -- the different variants is probably the biggest reason why we have to make a longer-term forecast right now. So, I think, as I said earlier, I think the early trends we're seeing in January are very supportive of our view on the step down in agency. And we thought that was going to be a little bit more back half of the quarter weighted. But, I think, in general, it still stands a pretty good assumption.

[Operator]

Thank you. And your next question comes from the line of Nick Yulico from Scotiabank. Please go ahead.

[Nick Yulico, Scotiabank]

Hi. Thanks. I just want to follow up here on this agency question. So, it sounds like it's going to be about $27 million for those costs in the first quarter. If you go back to the third quarter, I think, it was $20 million. So still up versus then? And just trying to hear a little bit more about your assumption for why at some point that expense which is about 3% of your expenses goes away and why you're confident that it's a COVID issue and not a tight labor market issue that's driving the use of that agency cost.

[Shankh Mitra, Chief Executive Officer]

Well, it's both. No doubt about it, it's both. And when you look at the fourth quarter some more color on that is you've got some health care workers all of the health care workers who have worked unbelievably, they tirelessly worked and did not take PTO for a long, long period of time. So, you had increased PTOs that occurred around the holiday season and then you add in Omicron and you get the result of agency. So, agency is usually two to three times the rate and it got as high as 6x. It's surge pricing kind of like Uber. So, as that backs away that will lower the expense regardless of the hours. But again going back to my comments the reality is each of the operators have workflows in play to increase hiring and they're all working. So, it was just a unique situation. The combination of the PTO and Omicron that came. So, I am confident that it won't be a long-term item in the industry. But exactly how it abates is it will be over time.

[Nick Yulico, Scotiabank]

Thank you.

[Operator]

Your next question comes from the line of Tayo Okusanya from Credit Suisse. Please go ahead.

[Tayo Okusanya, Credit Suisse]

Yes, hi everyone. I wanted to talk a little bit more about the Rubin Brothers transaction. I'm intrigued by it to kind of given again the high-quality assets that they tend to own over here in the UK. Curious how big that JV could become over time all the idea is you're going to be building stuff like the Sunrise assets at 56th and 2nd right in Central London? Is that the idea there?

[Shankh Mitra, Chief Executive Officer]

The idea is to expand the JV to reflect the fact that UK society is aging just like US society is aging and there is a lack of high-quality product. If you think about Rubin own a lot of extraordinary prime lands and billings obviously around the United Kingdom. And we're looking at a lot of opportunities to grow the platform and that could include trophy assets just like you mentioned that Sunrise at East 56th Street, which by the way opened this quarter and is doing pretty well. If you are in New York, you want to visit the asset let us know. Finally, through all the noise of the COVID and we're seeing some very early demand story there, which is playing out pretty well. But it can be, but doesn't have to be just trophy assets.

[Tayo Okusanya, Credit Suisse]

Got you. Thank you.

[Operator]

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

[Daniel Bernstein, Capital One]

Good morning. I have to ask a question here last second. So you talked about ramping up their development team. And when I was looking at your slide in your supplemental, it pretty noticeable that you only have three MOB properties under development almost everything else is seniors housing. So I was hoping you might be able to talk about on the MOB side, whether the lack of development there is more lack of opportunity versus the lack of value and certainly on the acquisition side, you talked about an inflationary environment you don't want to buy four or five cap assets with 2% growth. But on the development side is there a different story there?

[Shankh Mitra, Chief Executive Officer]

Yes. So, a couple of things. First, is our MOB pipeline is actually pretty meaningful. I don't know then what's in the south versus what's been reported and not reported. I can tell you that the MOB pipeline is very, very significant. It's 1 million plus square feet that's fully leased. So it's probably not been reported yet. What you see is reported as a senior housing is because we don't separate out what senior housing for while it was housing business, it's all reported as one bucket. But a very substantial portion of our development activity is all the wellness side of the house, rather than on the senior side of the house. On the senior side of the house, they're very targeted, but they're very large buildings, right? So think about -- I'll give you an example. I mean, is 56 Street, which is delivered that's a $300 million asset. You think about 1001 Van Ness that's roughly a $300 million asset. Hudson Yards is a $400-plus million asset. Brooklyn is $150 million assets, right? We talked about Kisco, it's $170 million assets talking about too. So, you have very few assets there that is substantial, that does make a difference to the number. But from a number of properties perspective, they're actually not that high. And the reason being, frankly speaking, other than very special situations, right? Think about where 1001 Van Ness, it's going to be the most trophy building in San Francisco period and full stop. I think about Brooklyn, now the fact that we got something entitled in Brooklyn in Middle a Fisher Hill, right next to the Brooklyn Country Club that should have taken probably 15 years to do, right? So just -- so it's a special opportunity. And that's why we're executing. But other than that, senior housing development today in my opinion doesn't make a lot of sense. And the reason, it doesn't make a lot of sense is you don't know where the ultimate labor cost adjusted rent will land. You just don't know that. And there is no reason to go and guess that. And just obviously if you're doing for your own capital if you're a for-fee developer or a fee-only operator, which is mostly the people who are I'm seeing starting that help in these days because they have no money on the line, right? If it works out, it's great. I have a promote if it doesn't, somebody else lost money. So I just don't see how that works particularly in the context of very high cost and higher financing costs, right? So it just goes back to my point that I made earlier on LIBOR based and floating rate base construction loan industry. So we are thinking about giving you additional disclosure sometime this year about what's the wellness side of the house versus the senior side of the house and we'll get to that. But majority of our new activity is on the wellness side of the house where we're a lot more confident on where the margin lands and frankly speaking their cap rates are much, much, much tighter to create value on the acquisition side, so our focus on the development. And you're going to see as I said the pipeline is very strong on the development side and that's just coming through. I said -- I'll finish it by saying what you have said on that question a very important one, I still -- no one has explained me how someone makes money in a significant inflationary environment on a real basis, not on a nominal basis with an asset class that grows 2% with a 40% cap rate when your inflation is much higher. So somebody's yet to explain me that. And unless I believe that will not be active on the acquisition side. You saw we bought a small MOB portfolio, which was a high-quality portfolio in Arbor we bought. We bought it at a 5.5 cap, which I have said for multiple years, it gives you the right level of IRR.

[Operator]

Thank you. That concludes today's Q&A session and today's conference call. Thank you for participating. You may now disconnect.