Welltower Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

Key Takeaways

  • Senior Housing operations delivered ~10% same-store revenue growth and expanded operating margins to ~25%—driven by 7.3% RevPAR growth and controlled expense increases.
  • Restructured key joint ventures by acquiring full ownership of 29 UK care homes and nine U.S. Sunrise‐built assets, transitioning them to top operators Avery and Oakmont with early occupancy upticks.
  • Built a robust acquisition pipeline with ~$2.3 billion of off-market deals (8,900 units) under contract at 30%–40% below replacement cost and accretive cash flow potential.
  • Strengthened the balance sheet by reducing net debt/EBITDA to 5.62× (pro forma <6×) and securing ~\$7.6 billion of gross liquidity to cover maturities and fund growth.
  • Raised full-year 2023 normalized FFO guidance to \$3.48–\$3.59 per share and lifted same-store NOI growth outlook to 10%–13%, anchored by 20%–25% growth in senior housing operations.
AI Generated. May Contain Errors.
Earnings Conference Call
Welltower Q2 2023
00:00 / 00:00

There are 16 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Welltower Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Followed by the number 1 on your telephone keypad. Thank you. It is now my pleasure to turn today's call over to Matt McQueen, General Counsel. Please go ahead.

Speaker 1

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 Sean for his remarks.

Speaker 2

Thank you, Matt, and good morning, everyone. I'll review our 2nd quarter results and describe high level business trends and our capital allocation activities. John will provide an update on the performance of our senior housing operating and outpatient medical to our shareholders. Tim will walk you through our triple net businesses, balance sheet highlights and revised guidance. Nikhil is also on the call to answer questions.

Speaker 2

We are delighted to report results which exceeded our expectations in both our Senior Housing business as well as Outpatient Medical segment. Let me first dig into the Senior Housing segment. The key drivers of this business, occupancy, rate and expenses, All came in better than expected this quarter, supported by accelerating demand of our product and plummeting new deliveries. From a top line perspective, our senior housing operating portfolio achieved approximately 10% growth on a same store basis and 17.8% growth on on a total portfolio basis driven by another solid quarter of year over year occupancy growth and significant pricing power. Last quarter, I discussed with you how the strong pricing trends along with moderating expenses are resulting in significant margin expansions that we have been all waiting for.

Speaker 2

I'm pleased to report to you that this trend intensified in the Q2 as we saw to revenue per occupied room or RevPAR growth of 7.3% coupled with just 3.5% expense per occupied room or for export growth, resulting in an approximate 25% operating margin, a level not seen since the onset of the pandemic. And while that still leaves significant upside before achieving our pre COVID NOI margin of above 30%, We expect to meaningfully exceed our pre COVID level of profitability over time through John's build out of the operating platform. All regions and product types contributed significantly this quarter, resulting in 24.2% OI growth for our Senior Housing Operating segment. While Assisted Living continues to outperform independent living, driving exceptionally strong results in the U. S.

Speaker 2

And U. K, Canada is also joining the party with 17.2% NOI growth. We firmly believe that our Canadian portfolio is finally in sustainable growth mode. In fact, we're in process of significantly optimizing our Canadian business and have recently allocated a meaningful amount of investment dollars to the region. I'll comment on both in a minute.

Speaker 2

It is also important to mention that our seniors apartment business continued to drive double digit NOI growth despite the broader deceleration in the apartment industry. We have put significant effort in last 6 years to build our wellness housing business, which now nearly totals nearly 17,000 units, and we are pleased to see that our thesis is playing out. All in all, we have finally exceeded $1,000,000,000 of annualized net operating income in our Senior Housing segment for the first time since COVID and believe we have a ton of growth left in the tank. At the risk of sounding like a broken record, I want to reiterate our core belief on how to make risk adjusted return in senior housing. Unlike a lot of to empirical hearsay in the business, which either focuses on the location or the operators, we believe it is a 4 dimensional optimization to the operator's question and answer session.

Speaker 2

And we do this objectively through machine and statistical learning using our data science platform, Alpha. I am delighted to inform you that we made perhaps the most significant impact in this pursuit to a mutually beneficial restructuring of our joint venture with Revera. Through a series of buy sales, we materially simplified our balance sheet and we matched specific products and locations with the right regional operators in order to achieve meaningful density in their local markets. In the U. K, we took 100 percent ownership of 29 Premier Communities, many of which are located in the Greater London to market and consider some of the best care homes in the country.

Speaker 2

We transitioned these care homes from Signature to Avery and believe we have a material upside in this virtually impossible to replicate portfolio, which was 72.8% occupied at the time of transition to Avery at the beginning of June. Though 2 months does not make a trend, I am delighted to inform you that these communities are showing positive trends right off the bat under Lorna's leadership with current occupancy around 73.5%. In the U. S, we took 100% ownership of in 9 extremely well located assets recently built by Sunrise in high barriers to entry submarket in the West Coast, East Coast and South Florida at a favorable basis and sold a minority interest in 12 other assets. We also moved management of 28 incredibly well located California buildings to Oakmont.

Speaker 2

These California communities were 77% occupied when they were transitioned to Oakmont at the end of June. I fully expect this portfolio to be materially additive to our growth in 2024 under Courtney's leadership. As you can see in the case study on the Page 32 of our business update highlighting previous Oakmont transitions in California, Courtney's team has taken occupancy from 64% to 90% in 2 years at these communities. Though this occupancy has far surpassed their previous high occupancy of 86% in 2016, I fully expect these communities will hit Midnight's occupancy in near future. All things being equal, the stabilization path It should be faster for the most recent portfolio of 28 communities that they have assumed the management of.

Speaker 2

If not for the lessons learned previously, it will be for a higher starting point. And just after 4 weeks of operations under Oakmont, to the operator. These properties are on a path to achieve approximately 100 basis points of occupancy growth in 1st month and are showing positive NOI traction in NOI out of the gate. And finally, Canada, perhaps the most exciting part of this years long effort to optimize our portfolio. Through though there is a multidimensional value creation opportunity in this effort, I'm delighted to inform you that we are launching a new platform with our partner, Mathieu De Gea in English speaking Canada.

Speaker 2

As you know, Cogier, under Mathieu's leadership, is one of the best operators in the business, and we cannot be more excited about launching our first operating platform in a post PLR world. We will double down on our investments in these communities, dramatically enhance to the resident experience and materially improved employee experience resulting in exciting long term career growth opportunity. I predict this operating JV will witness rapid growth in very near future. The series of steps, which is known as Project Transformer inside Welltower, is one of the most complex yet value accretive transactions we have ever done. Under Eddie Chung's leadership in Canada and U.

Speaker 2

K. And Russ Simons' leadership in the U. S, this multidimensional project will truly transform our company in the next chapter of its evolution. This transaction marks the conclusion of our 7 year journey of contract modernization as virtually all of our contracts are now in RIDEA 3.0 and RIDEA 4.0 structures. I cannot emphasize enough how important this milestone is for our firm as we have now full alignment with all of our key Senior Housing Operating Partners.

Speaker 2

We think or swim together. To continue this theme of capital allocation, The favorable transaction environment that I described to you last quarter has resulted in an incredibly active summer for us. We currently have approximately $2,300,000,000 of deals under contract in 26 different off market privately negotiated transactions. Opportunities within senior housing segment represents the bulk of these transactions with approximately $2,000,000,000 of deals comprised of 8,900 units across all three regions. We estimate our investment in these deals to be very attractive 30% to 40% discount to today's replacement costs with accretive in place cash flow and significant growth potential.

Speaker 2

While I don't like to get into individual transactions, I would like to highlight our transaction in Canada with our partner, Cogier. We're recapping Cogier's existing institutional investor at PropCo in highly desirable ZAS portfolio and Matt who is investing his equity going forward. This CAD 935 million transaction of both recently built and attractive stable assets are a testament to the power of our relationship in this industry. Eddie and his team has been working tirelessly over the past 2 years on this transaction, and we're to inform you that we signed the definitive documents few weeks ago. Additionally, following the completion of this deal and others under recently under contract, We have achieved another company milestone, having closed or signed over $11,000,000,000 of transactions since our pivot to offense in Q4 of 2020.

Speaker 2

But we are busier than ever with a robust, visible and actionable pipeline of opportunities that we're underwriting right now. Again, heavily senior housing, but we are also seeing some outpatient medical and skilled nursing opportunities up and down the capital stack, all of which we expect to keep us very busy for rest of the year. Our deal teams didn't get much of a summer vacation and looks like they won't get much of a Christmas holiday either as many of these deals will close in Q4. As I described last quarter, both debt and equity capital continue to rapidly evaporate from the commercial real estate space. We're getting hit left, right and center from counterparties who truly appreciate our handshake approach to the business where we can bring both cash and operator to the closing tables.

Speaker 2

We're seeing that the banks are no longer willing to kick the can down the road and in fact are showing willingness to sell their loan books partially or completely. A handful of these transactions have taken place and many more are brewing. The increased capital requirement directed from the regulators last week will only intensify this trend and we are ready to help banks release their capital as they execute their other strategic priorities. Nikhil and Tim's cell phone number has been on full display in our full page ad of the American Banker Magazine since the summer of 2020. Please give them a call.

Speaker 2

I promise you they will respond within hours, not days as it is customarily acceptable standard in senior housing industry. I predict Welltower will play a meaningful role in helping to recapitalize distressed commercial real estate loan portfolios that fall within our circle of confidence. And lastly, At the risk of stealing Tim's thunder, I would like to point out that our meaningful strengthening of our balance sheet over last few quarters. Just in last 1 year, our leverage has fallen from high 6s to mid 5s through a combination of outsized organic growth and prudent capital allocation activity. We're now armed with approximately $7,600,000,000 of near term liquidity to address upcoming debt maturities and fund our various capital deployment opportunities.

Speaker 2

In summary, we have never been more delighted with our operating performance and have never been busier on the deal side and build out of our platform. While no one knows what future may hold, My partners and I remain as optimistic as ever on the future of our business. And with that, I'll hand the call over to Sean.

Speaker 3

Thank you, Shankh. Another great quarter like last quarter, just better. Our total portfolio generated 12 0.7% same store NOI growth over the prior year's quarter led by the senior housing operating portfolio with 24.2% year over year growth. These great results speak for themselves, so I will provide limited color on the quarterly results and focus more on the future, including the 1,000,000,000 of dollars in value that are being unlocked as a result of the management transitions we announced last night. First, on results.

Speaker 3

The medical office portfolio's to the Q2 same store NOI growth was 3.2% over the prior year's quarter. Same store occupancy was 95.1%, while retention remains extremely strong across the portfolio at 92.5%, highlighting the stability of the relationships as well as the quality of the portfolio. The 24.2% 2nd quarter NOI increase in our same store senior housing operating to the financial results. Thank you, Steve. Our first question comes from the line of John.

Speaker 3

Thank you, Steve. Thank you, Steve. Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 3

Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 3

Good morning, everyone.

Speaker 4

Good morning, everyone. Good morning, everyone. Good morning, everyone.

Speaker 3

Good morning, everyone. Good morning, everyone. And 190 basis points of occupancy. As a note, this number excludes the U. K.

Speaker 3

To the communities we recently transitioned to Avery that are originally included in the guidance. These communities grew occupancy at 9% year over year. So including the communities, our total portfolio same store occupancy growth would have been 20 basis points higher at 210 basis points. Though exclusion of these communities has a negative impact on our annual occupancy growth debt, we maintained our guidance given the market strength we are seeing. Additionally, expenses remain in control coming in at 5.8% for the quarter over the comparable prior year's quarter.

Speaker 3

More specifically, the pressure we experienced from a tight labor market over the past 2 years and broad based use of agency has continued to abate. In fact, agency expense as a percentage of total compensation for the quarter declined substantially from nearly 8% in the Q1 of last year. This outstanding revenue growth and expense growth led to substantial margin expansion of 290 basis points. All three regions continue to show strong same store revenue growth, starting with Canada at 8.1% and the U. S.

Speaker 3

In U. K. Growing at 9.9% 13%, respectively. The strong revenue growth in each region combined with the expense controls have led to fantastic NOI growth in Canada, the U. S.

Speaker 3

And U. K. Of 17.2%, 24.8% and 38 0.2%, respectively. On to the management transitions. We're very excited about the value being unlocked as a result of these transitions.

Speaker 3

Having the right manager for an asset is critical, a fact that Shankh has repeatedly stated, these transitions accomplish that objective while improving each operator's concentration of Welltower assets in various markets, a key factor to operational excellence. Concentration brings increased effectiveness and increased efficiency through improving the value proposition for customers in numerous ways, including greater choices and frictionless transfers, improving the value proposition for employees, including improved training and career paths and improving the efficiency of vendors operating at multiple sites, translating into increased NOI growth. The benefits of increased concentration, which show up in margins, have been proven many times over with the multifamily REITs. Welltower is now beginning to harvest those benefits. We continue to make substantial progress on our platform and the related rollout.

Speaker 3

To provide you with one example. 1 of our operators with over 50 properties is fully and rapidly transitioning to our platform over the coming 3 to 12 months. We've been working with them over the past year via our aggressive asset management program, enabling them to increase occupancy over 6 100 basis points in the last year. As I've mentioned in the past, the platform isn't only about technology. It's about people, processes, data and technology.

Speaker 3

After seeing the amazing improvement in occupancy in the 12 months related to our focus on processes, They are fully embracing our entire platform. I'm grateful that they see the opportunity and benefit of pursuing operational excellence and I appreciate their partnership. Additionally, as Shankh mentioned, we are partnering with Cozier, the premier Canadian operator for the management of many of our Canadian transition assets. The best outcomes are achieved by working with the best people and the best operators. I'm very excited about the opportunity to partner with Matthew and Frederic and their team at Cozier on this new venture and the incredible value we will create for our investors.

Speaker 3

More to come in the coming year. I'll now turn the call over to Tim.

Speaker 5

Thank you, John. My comments today will focus on our Q2 2023 results, to the performance of our triple net investment segments in the quarter, our capital activity, our balance sheet liquidity update and finally, our updated full year 2023 outlook. MolTower reported 2nd quarter net income attributable to common stockholders of $0.20 per diluted share and normalized funds from operations of $0.90 per diluted share, representing 4% year over year growth or 16% growth after adjusting for HHS and the year over year impact from a stronger dollar and higher base rates and floating rate debt. We also reported total portfolio same store NOI growth to 12.7% year over year. Now turning to the performance of our triple net properties in the quarter.

Speaker 5

In our senior housing triple net portfolio, Same store NOI increased 3.1 percent year over year and trailing 12 month EBITDAR coverage was 0.88 times in the quarter. Next, same store NOI in our long term post acute portfolio grew 6.1% year over year and trailing 12 month EBITDAR coverage was 1.48 times. Turning to capital activity in the quarter, in May, we issued a $1,035,000,000 convertible note due in 2028. The note bears interest at 2.75 percent rate and is convertible at $95.41 per share. We intend to use the proceeds from the note to address our 2024 unsecured maturities coming due in the Q1 of next year.

Speaker 5

In addition to our convert offerings, we continue to issue through our ATM to fund ongoing investment spend, raising gross proceeds of $1,760,000,000 since the beginning of the second quarter. This capital activity, along with continued growth across our business segments, including the solid post COVID recovery within our senior housing operating business, to help drive net debt to adjusted EBITDA to 5.62x@quarterend, which represents well over a turn of deleveraging versus 1 year ago. As Shankh mentioned, we are seeing ample opportunity to invest our large cash balance. But even so, we expect net debt to adjusted EBITDA to remain below 6 times on a pro form to post deployment and to continue to move lower as the senior housing operating portfolio continues to drive organic cash flow higher. Additionally, filing this intra- and post quarter capital activity, we have a current cash and cash equivalents balance of $2,700,000,000 along with full capacity on our $4,000,000,000 revolving line of credit and $910,000,000 of remaining expected proceeds from near term dispositions and loan paydowns, representing approximately $7,600,000,000 in near term gross available liquidity and $6,300,000,000 of liquidity when netting for the 1,350,000,000 to the 1st 1,000,000,000 of unsecured

Speaker 4

maturities we have in 2024.

Speaker 5

Lastly, moving to our full year guidance. Last night, we updated our previously issued full year 2023

Speaker 4

to look for net income attributable to common

Speaker 5

stockholders to a range of $0.73 to $0.84 per diluted share to normalized FFO of $3.48 to $3.59 per diluted share or $3.535 at the midpoint. Our updated normalized FFO guidance represents a $0.04 increase at the midpoint from our previously issued guidance. This increase in guidance is reflective of a $0.02 increase in expected full year senior housing operating NOI, a $0.02 increase from capital allocation activity, which to see no further investments in the year beyond what has been announced to date and $0.01.5 from HHS and other out of period government grants received in 2Q. And these increases are offset by $0.01 5 percent increase in expected full year G and A and interest expense. Underlying this FFO guidance is an increased estimate of total portfolio year over year same store NOI growth of 10% to 13%, driven by sub segment growth of outpatient medical 2% to 3% long term post acute 3% to 4% Senior Housing Triple Net 1% to 3% and finally, Increased Senior Housing operating growth of 20% to 25% year over year.

Speaker 5

The midpoint of which is driven by continued better than expected expense trends, along with revenue growth of approximately 9.7%. Underlying this revenue growth is an expectation of approximately 230 basis points of year over year average occupancy increase and rent growth of approximately 6.7%. And with that, I will hand the call back over to Shankh.

Speaker 2

Thank you, Tim. We're currently living in an uncertain macroeconomic environment where the outlook is getting markier by the day. One day it is sunny and the next day all people see are dark clouds. The Federal Reserve appears to be resolute in its fight against inflation and seems far less inclined to come to rescue private and public market as most participants like to hope for. Against this backdrop, we continue to take a very balanced approach as we consider both growth opportunities and risk environment.

Speaker 2

On one hand, we remain prudent and continue to continue our deleveraging through rapid organic growth and appropriate capitalization of our external growth opportunities. On the other hand, we're aggressively putting capital to work, Though we're ever more price and return conscious, we cannot predict the macro, but we can predict with a high degree of confidence what is likely to come on a micro basis. And that is while we are seeing Growth rolling over in most asset classes, including most other real estate property types, both the demand and supply outlook are getting better for us as we look into 2024 and 2025. As I mentioned on our Q4 call, I believe we're at the beginning of multi year double digit NY growth cycle for our business resulting from a long runway of occupancy gains, rate growth and operating margin expansions. At Project Transformers, along with a relentless optimization of our operating platform, the impact which will start to show up in next year and the constant reloading of our external growth gun or perhaps

Speaker 4

to the Growth

Speaker 2

Bazooka at this point through a highly targeted deals, you get an ideal setup for accelerating earnings and cash flow growth as we look into next year. With that, we'll open the call up for questions.

Operator

Your first question is from the line of Jonathan Hughes with Raymond James. Your line is open.

Speaker 6

Hi, good morning. Thanks for the time. I wanted to ask about the recent transitions. What's changed between how you're able to implement transitions today that minimize the economic impact versus prior ones in previous years that typically came with some lost income. Are these operators taking over just that much more sophisticated?

Speaker 6

Do they have more support from you? To some of it driven by the very different supply demand backdrop. I'm just trying to better understand how to interpret the term transition because previously that came with some near term negative impact, but now that seems to be a positive. Thanks.

Speaker 3

Yes, that's a really good question. A lot of it really is what I would call relates to leadership and that's because a lot of the transition relates to execution. So having the outstanding partners that we have working together as a team to anticipate opportunities and issues, connecting with people. All these issues, all these items are about people. So connecting with the people, the sites and planning it all out flawlessly and executing flawlessly is What's changing that game.

Speaker 3

There's a lot of details involved. In each of these situations, there's literally transition teams that are 20 fourseven focused 100% on all the details and then there's operating teams that are focused on the operations. So A lot of work, but ultimately it's leadership that changes that game.

Speaker 2

Jonathan, we are not going to give away how we do these things today versus what We have been before, but I have mentioned in previous calls that we have learned finally under John's leadership how to do these transitions, right? But that's our proprietary obviously. You're seeing Webland that's showing up in the results, but we're not going to give away our secrets obviously on this call.

Operator

Your next Question is from the line of Connor Seversky with Wells Fargo. Your line is open.

Speaker 4

Good morning out there. Appreciate the color on the prepared remarks and congratulations on crossing that $1,000,000,000 threshold. It's quite an achievement. Just want to switch gears to Integra. Wondering if you could provide an update on the portfolio transition process, specifically looking for color on how cash flow metrics within the portfolio are trending and perhaps as a bonus some perspective on access and retention of labor within those skilled nursing assets.

Speaker 7

Hey, Conor, it's Mikhail. I'll take this one. So look, we're pretty pleased with the performance that we've seen so far. If you remember, there were a total of 147 buildings that were being transitioned over. Of those, 133 have already been transitioned to the new operators.

Speaker 7

And the results we're seeing are pretty encouraging. So if you look at those 133 buildings for the 3 months prior to the transition, to those buildings on an EBITDA basis were losing roughly $90,000,000 a year. 3 months later, Q1 of this year, to those same buildings are making positive $70,000,000 Still a lot more work to be done, but the rapid turnaround has been really encouraging to see. And on the second part of your question on labor, all the numbers, all the metrics Seem to be following the broader trends we're seeing in our broader business that the labor situation is getting better by the day.

Operator

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

Speaker 4

Thanks. Good morning. Congrats on the results as well. I know it's hard to answer for the whole industry. Your results are obviously incredibly strong in senior housing, There are some pockets from some other players where maybe the occupancy was slowing down a little bit in the quarter.

Speaker 4

Just curious if you have any high level thoughts on maybe why your results were separate from maybe some other players that did see Yes, I can see decelerating a little bit. Is there any signs of price sensitivity in any pockets of the market? Just curious your thoughts around that. Thanks.

Speaker 2

Steve, we're not going to get into what other players might or might not be seeing. We can only tell you what we are seeing. We're seeing a very strong start of the spring selling season, summer selling season. If you think about how this business works, Obviously, the activities pick up very significantly. Sales start to happen in sort of Q2 that translate into 3rd quarter, early 4th quarter occupancy gains.

Speaker 2

That's so seasonally how the business works. And we have seen some significant traction this summer as we're moving into Q3, we're seeing pricing trends getting better, occupancy trends getting better. So I really have no idea what you're referring to, but I can tell you that we're very pleased with 2nd quarter occupancy, right. John just mentioned our reported Same store numbers are impacted by the removal of the U. K.

Speaker 2

Assets, but we're very, very pleased with what we have seen. We don't know what future holds. I'm not going to try to sit here and guess what the future will look like. But the promise we made to you and our owners is very simple. We will get more than what the market gives us, right?

Speaker 2

That's our execution and we're very pleased with what we have seen so far. If you look at the demand supply, Trends are getting better every day. It's not the other way around.

Operator

Your next question is from the line of Michael Griffin with Citi. Your line is open. Michael Griffin, your line is open. Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

Speaker 8

Thanks and good morning everybody. I just want to understand, so with Well no longer having an investment in the Sunrise Management Company for and sort of dissolving the joint venture relationship with Rivera. Are the remaining Sunrise operated assets still revenue based management contracts? If so, I guess, how does that change the owner operator relationship moving forward? And is there more restructuring to do over time with that portfolio specifically?

Speaker 2

The answer is, the Sunrise contracts are not what you described. We restructured our contract with to Sunrise in 2011 2021, sorry, 2021, and Sunrise is fully aligned with us with this principal philosophy that we sink and swim together. So many years ago, I have described that our fundamental philosophy under my team's leadership has changed from owning part of management company's equity to contract. That's what we have described. And as you can see in one of the slides, we have described the to BottomlineFocused Contract where we think and swim together and virtually all of our contracts are there today.

Speaker 2

So That sort of hopefully gives you an answer to your question. We do not believe and we haven't done in sort of having influence on our communities to owning part of management contract part of management companies. We do it through our contracts and that's where you can see the evolution of those contracts.

Operator

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

Speaker 9

Yes, thanks. I wanted

Speaker 10

to touch on the WelltowerCozier, I guess, operating relationship. I mean, how Chip going to work and how should we think about the growth of that platform? I mean, when you're growing into new markets, are you going to be doing that with Who's here or another operator or would you be doing that yourself?

Speaker 3

As far as for how it works, I'll talk about that and we'll let Sean talk about the expansion. But as far as how it works, it's working fantastic right now. I'm partnering up with Frederick, and we're working together really on the vision, the strategy and oversight. Cogier is handling all the execution, all the daily decisions and all that type of stuff. And what you have is a very synergistic team.

Speaker 3

We're both extremely excited about re envisioning the opportunity to reposition these assets. And so we're excited about what we're creating there. But I won't be involved in the daily aspects of it. They're a fantastic operator. There's no value there.

Speaker 3

I'm focused to get on the bigger picture items.

Speaker 2

From an expenses standpoint, my comment that I made that this is this joint venture will have rapid growth. That comment obviously means that You will see that we're expanding what we're very excited about Canada and doing lots of expansions in Canada that will come. We're focused think about in a very simplistic terms, this platform that we're launching will be focused on English speaking Canada. Courjeres has a tremendous brand in the French Canada and we'll watch this together on that. Now what we do in U.

Speaker 2

S. Is a different to the conversation. Just understand that the our PLR is on independent living and majority for exposure in independent living is in Canada. That's why we're starting

Operator

Your next question is from the line of Vikram Malhotra with Mizuho. Your line is open.

Speaker 11

Thanks for taking the question. Maybe Shankh or Tim, you talked a lot about stress in senior housing, referencing obviously the Fannie Mae delinquencies. I'm wondering if you can just and then you outlined the $30,000,000,000 decade opportunity. I'm wondering if you can give us more color on kind of how you think about the funnel in terms of all these distressed opportunities coming, whether it's operational or balance sheet distress. But how you think about the funnel and filtering it down to what is actually actionable for Velcar, whether it is analytics driven or strategic driven?

Speaker 11

And then just combining that actionable pipeline you mentioned with sort of the long term earnings power, you talked about double digit NOI growth, but Are there any tea leaves you can share on kind of the earnings, the underlying AFFO is likely to grow over a longer time period?

Speaker 2

Let me see if I can answer your 5 part question. Likely, I will forget some pieces. So Vikram, frankly speaking, if you just take a Step back and understand what's happening. The stress that we see are not cash flow driven. The stress that we see are balance sheet driven.

Speaker 2

And the balance sheet driven comes in many forms. There's a significant lack of equity and debt capital today. In fact, when we say The debt market is functioning not functioning. Most people assume that sort of the debt market remains and it's not growing, it remains fairly flat. That's not what's happening today.

Speaker 2

The debt market banks are under significant pressure from regulators to show up capital, which means they are actually selling. They're shrinking, Right. Then you add on top of that, a lot of the construction that happened between 2015 2019 timeframe, They're on sulfur based loans. They're on LIBOR based loans. And given how much that base rates have gone up, right, 5 plus basis points just in the last 12 months, It's putting tremendous pressure.

Speaker 2

You think about it where a LIBOR plus 3.50%, 4 100% is today. You are at 8%, 9% rates. And you just cannot these capital structures were not envisioned for that kind of rate environment, so you got massive pressure on that. Then you see even people who put Florida caps, a lot of these Florida caps are coming off second half of this year and next year. So And you add insult to injury, majority of senior housing loans actually come with personal guarantees.

Speaker 2

So I can go on and on and on, but that's not the point. What you're asking is very simply these assets are not stressed. The balance sheet behind the assets are stressed. And we are ready and willing and to do this execution, you just you need 2 things. You need cash because that we're not showing up with subject to financing.

Speaker 2

We're showing up with cash. And the other very important thing is operating partners. You need both to solve people's problems, their balance sheet problems and the go forward problems, and that's why we're doing it. Now we're not going to get into on this call a multiyear sort of an earnings growth projection. As Tim has alluded to, this year's earnings growth is significantly impacted by obviously our floating rate debt as well as strong dollar.

Speaker 2

You know what those numbers are. We have pointed out. Unless you believe rates are going from 5.5 to 11 again, You should not have those kind of impacts going forward, right? So from the NOI growth, with that, you can figure it out what that looks like. But from my to comment.

Speaker 2

You can figure out that we're very excited about an accelerating earnings and cash flow growth trajectory as we look into

Operator

Your next question is from the line of Nick Yulico with Scotiabank. Your line is open.

Speaker 12

Thanks. Good morning. In terms of the $2,300,000,000 of investments post to Q2. I know you talked about the discount to replacement costs and some of the IRR expectations. But can you just give us a feel for what These look like on a 1st year cap rate basis and then stabilized yield potential going out a couple of years.

Speaker 12

And any comments on occupancy or other drivers that are creating some of the NOI upside for the assets?

Speaker 2

Yes. So I'll start with the last. Obviously, these assets have both occupancy and to the next question. Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you. Our next question comes from the line of Profitability in the business is after, call it, 80% occupancy because there's very significant fixed costs. So incremental margin, if you will, after to 80% occupancy is, call it, 70% plus margin.

Speaker 2

And then as you get closer to 90% or 90% above 90% occupancy, you are at kind of 90 your incremental margins approach 90%, right? So majority of the profit was the hockey stick profitability in that kind of 10% plus occupancy range. So that's what's the driver of the growth that we think baked into this. So we like buying low basis, to lower occupancy portfolio. That's sort of what we do.

Speaker 2

We do not like to pay a cash flow on a highly occupied in a high NOI, which drives into obviously results into high basis assets. We just don't do that here. So that sort of gives you the answer to the second question, right? Just talk about the first question, which is a very simple question. You should assume a year 1 in this batch of acquisition, roughly around 6%.

Speaker 2

Going into 7th class, following the math I just described to you.

Operator

Your next question is from the line of Jim Kammert with Evercore. Your line is open.

Speaker 13

Thank you. Good morning. Thinking at the business update on the Rivera transition, Pages 9 and 10, could you just provide what is the reasonable timeline for that NOI capture and what capital you might have to spend to capture that NOI delta. Thank you.

Speaker 2

Yes. So We have never gotten into the timeline of our bridge. This is part of our bridge, obviously. We'll leave you to determine when we think stable occupancy will come. And so that's part of your sort of answer to first part of your question.

Speaker 2

I just want to point out one thing is what we are suggesting here is that $120,000,000 we mentioned is part of the $414,000,000 or so of the bridge. So that's what it is. If we thought that's all we're going to get, we would not have done it. In other words, the bridge, the fundamental tenet of the bridge is we go back to Q4 of 2019 occupancy. If you look at Page 32, which sort of shows one of these transitions we have done, not only The first 6 that we know, we gave it to Oakmont exactly 2 years ago.

Speaker 2

Today is actually exactly 2 years. These occupancies are above 90% where the prior peak was 86% and change in 2016. That gives you and I expect fully expect to believe they'll be in mid-90s in next few months. That gives you a sense of where we think the occupancy will go and what the margin will follow. For example, let me give you another example, the Canadian example.

Speaker 2

The Rivera that we mentioned, I believe one of the pages said, it's like low-70s occupancy. That portfolio is sitting at 23% margin give or take today. I mentioned to you that Cogier runs in their Canadian portfolio 40 plus to the Q1. That sort of gives you a sense of where we think that these properties can go. 120 is part of the bridge that shows before 14.

Speaker 2

But if we thought 120 is all we're going to get, we would not have done it.

Operator

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

Speaker 9

Hi, good morning. Shankh or John, maybe if you could just talk about what you're thinking or seeing or discussing with your operators with regard to the rent bumps either this fall or next year. I'm not sure if it's too early, But just curious on your thoughts on how that could change relative to last year's pretty sizable increases in a different inflationary environment?

Speaker 2

Yes. So, 1, we're not going to sit here and try to predict what will happen 6 months from now, but I expect a very strong rate environment in 2024 as well. What will that be exactly depends on a lot of things, but I have no reason to believe in a better environment of demand and supply will not going to have a strong pricing power, but we'll see when we get there.

Operator

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

Speaker 9

Tim, a question on funding going forward. I know funding secured for the deals you've announced that are under contract. I'm just curious how what you think the optimal funding mix to the next $1,000,000,000 of external growth is?

Speaker 5

Yes, John, I think consistent with how we've been in the past, funding is going to be from the most attractive source Yes, right. And whether that's public equity, debt or disposition proceeds, we'll continue to optimally fund as we move along. So We I would just hesitate to try to provide you forward guidance on that. It will be decisions are made at whatever is optimal time that we're funding.

Operator

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

Speaker 6

Hey, just can we dig into the expenses a little bit, which just seems it's trending better than expected. Historically, it's been on the labor, that surprise. But going forward, maybe can you talk about what are the biggest drivers that you're going to be looking at? And what areas you have conviction in and where could you be surprised up or down? Thanks.

Speaker 2

We have a lot of conviction on both continuing to optimizing the labor side and other expenses. I would rather not get into what driver you might get in next 6 months versus 12 months, but I will point out that the utility side, the energy side last fall was very, very significant hit. So at least as we lap going into 2024, we should get from a year over year perspective and frankly energy prices have come down, we should see some benefit. But We're not going to sit here and just try to predict what might or might not play out wrong, but I will say that you have heard from our prepared remarks that we're feeling very good about continued margin expansion, not just sort of going back to pre COVID, but we do think that John will take these margins much higher over a period of time.

Operator

Your next question is from Mike Mueller with to JPMorgan. Your line is open.

Speaker 3

Yes. Hi. For the loan portfolio, loan assets that you're looking at, Should we be thinking of those as being straight debt deals at discounts or just more specifically targeted toward Portfolio is where you can ultimately get to the real estate.

Speaker 2

So first thing is, I'm going to to elaborate again. I think I've done it before. I'm just going to tell you, we don't lend against asset that we don't want to own at the last dollar basis that we our loan sits at. So that's sort of the fundamental premise that we have. Having said that, Different transactions come in different forms.

Speaker 2

We're here to help people provide sort of we're here to help owners and borrowers with liquidity that they might need or institutions which owns already owns those loans, how different transaction will play out, whether it's an existing loan or we're coming in to provide capital, I don't know that yet. We are our focused investors and simple debt yield will determine where we get to, but just a coupon is less interesting for us. We'll start obviously probably we're thinking about how we can get equity returns if we just go in and $0.50 on the dollar when we are actually loaning into a situation that doesn't have debt. Or if it is existing debt, we're going to have to think about what type of discount gives us the right return assuming we get our money back. And if we don't, we're comfortable owning the asset at that last dollar basis.

Speaker 2

Philosophically, that's how we think about it. Every transaction is different.

Operator

Your next question is from the line of Joshua Dennerlein with Bank of America. Your line is open.

Speaker 14

Yes, good morning everyone. John, last quarter you mentioned You had rolled out a pilot program for drawing in leads to senior a couple of senior housing properties. And I think if I recall correctly, I Yes, the biggest challenge was just the sheer volume of leads. What's the latest on that pilot program? And maybe just how is that impacting pricing power?

Speaker 3

Yes. So the comments, if I remember correctly myself, was the COO called us and It was funny to me that, gee, you've done so much to increase leads. We're struggling getting our hands around that, in that to pilot and they definitely did get their hands around it. It's a staffing opportunity there. We're continuing to roll out We've got moved from pilot to rollout, and so we're pressing forward.

Speaker 3

As I mentioned, we have another operator that's jumping on 100% on board and we'll be pushing forward with our platform up with our venture up in Canada as well. We're seeing terrific results through the marketing efforts that we're applying. And what that does to pricing Howard, in essence, our focus is on maximizing NOI, right? So we're looking at combination between price, between occupancy, recognizing that occupancy comes with a price. So yes, we will push a little bit more on price and find the right point there, but It's what's providing our outstanding results.

Operator

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

Speaker 15

Great, thanks. I know you've talked in the past about redevelopment issues you've undertaken at some properties. I'm just curious if you can give us an update on these redevelopments, kind of what the expectation for growth in this platform is going forward and any commentary there would be helpful.

Speaker 3

Yes. That's really a great question. And I think it's something that is we haven't talked about it that much. And the reality though, I think it's completely underappreciated as as far as the future earnings potential of this portfolio. You look at our portfolio, it's roughly 20 years old in the senior housing to business and that is the sweet spot for renovation.

Speaker 3

It's what I typically call fluff and buff because what you have is your infrastructure, Plumbing, roofing, this kind of stuff is in typically good order. But what isn't in good order is the first impressions, amenities, units and that type of thing. So I have been aggressively building out renovation team, in house team at Welltower experts and we are launching what you'll see is we'll start launching on pretty massive renovation programs West Coast, East Coast, Canada, U. K, all these things are lining up and we're at the beginning stages, but the impact should be very positive on NOIs for certain, obviously increasing occupancy first and occupancy and rate. The value proposition opportunity is significant.

Speaker 3

I've walked numerous The piece that we're bringing to the table will truly change the game in renovation of senior housing.

Operator

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

Speaker 9

Thanks. John, just curious within your U. S. Portfolio, can you give me a sense for how the shortfall in independent living occupancy versus 2019 compares to the GAAP in your assisted living portfolio?

Speaker 2

We have to get back to you on that. But generally speaking, Assisted Living fell farther. So obviously, it has longer to come back. Independent Living didn't fall that far, But it has been coming back slowly, sort of slowly, but for specifically our portfolio has changed materially since 2019 as far as independent living and assisted living is concerned. So we'll have to run those numbers and get back to you.

Speaker 2

But generally speaking, I will tell you The assisted living continued to outperform. We are seeing independent living is starting to come back. And frankly speaking, independent living for us, like 75%, 80% is Canada. And it's just sort of more of a I don't know it's a product comment or it's sort of it's Country comments, right? We're seeing very strong performance finally coming out of Canada, and we expect that will get better as all this sort of optimization that we're talking about around the process will play out.

Speaker 2

But I cannot tell you, John, is it that a product thing by just a country thing because majority of the probably dependent portfolio sits in Canada.

Operator

There are no further questions at this time. Ladies and gentlemen, thank you for participating. This concludes today's call. You may now disconnect.

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