Welltower Inc

NYSE:WELL

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2021 Welltower Inc. Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce General Counsel, Matt McQueen.

[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 assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC.

And with that, I'll hand the call over to Shankh for his remarks. Shankh?

[Shankh Mitra, CEO and CIO]

Thank you, Matt, and good morning, everyone. I hope that all of you and your families are safe and healthy during these extraordinary times.

I'll make some introductory comments on the state of senior housing business, our ongoing alignment efforts with our operating partners, and we will also provide a detailed perspective on our current thoughts related to capital allocation. Tim will then get into detailed operating and financial results.

We are cautiously optimistic on the senior housing business with greenshoots emerging in U.S. and U.K. While it is too early to raise an all fear flag as another COVID resurgence can never be ruled out, we're delighted to report an occupancy increase of 120 bps in U.K. and 90 bps in U.S. over the past six weeks.

Despite growing optimism in U.S. and U.K., performance in Canada has remained somewhat weak due to increased COVID cases across many regions. While most residents within our Canadian senior housing properties have been vaccinated, the rollout to the broader population has lagged meaningfully due to lockdown in certain areas within Ontario and Quebec, move in stores and visitation have been highly restricted, which has ultimately led to an occupancy loss of 50 basis points since mid-March.

This trend has improved in April. Despite the drag from Canada, the move in activity in March is higher than the last non-COVID impacted month of February of 2020. In addition, as I have described in past quarters, rates continue to hold. As adjusted for 2020 leap year, AL rates are up 1.6%, IL rates are up 0.7%, mostly dragged down by the Canadian business.

Senior apartments and wellness housing rates are up 6.3%. Our operators across the board are seeing broad momentum that continued to build, irrespective type, geography, activity, this is the most optimistic tone I've heard from our operating partners in a long time.

We're even seeing the lifestyle-driven customers are starting to come back, which frankly surprised me in a positive way. Fundamental results have exceeded our expectations in Q1, and we're anticipating strong momentum in Q2.

While we continue to avoid speculation on what the arc of the recovery may look like, we have provided additional disclosure on the additional LOI and earnings power of our portfolio assuming a return to 2019 level of NOI for our stable portfolio and adding incremental NOI from our filler portfolio.

We believe this results in additional $480 million of NOI. And remember, this assumes a return to 2019 level of occupancy and margin, and it does not assume a return to frictional vacancy or any rate growth since Q4 of 2019. We're seeing something similar happening in the private market.

While current cash flow multiples of what we are buying might be high as compared to what we're willing to pay two to three years ago, this is a moot point. We're paying a much lower multiple and a stabilized cash flow as evidenced by a much lower price per unit.

While in most other asset classes, this could be a matter of opinion, I believe in real estate it is a simple business where you can obtain a very granular view of price per unit and how this compares to replacement cost. While we can sit here and debate how different assets and portfolio prices compared to prices per unit two to three years ago, replacement costs are shooting upwards with a white-hot housing market driving construction costs exponentially higher in recent quarters.

This phenomena is now spilling into other material costs due to a $2 trillion infrastructure plan announced by the Biden administration. As costs continue to rise, the market-clearing rent to achieve minimum acceptable return is also ratcheting up. However, those returns are not going to be easy to achieve. Today, as much of the senior housing industry effectively remains a lease-up mode, given the impact of COVID on occupancy.

If this was not enough, now the interest rate curve is backing up, creating further pressure on developers pro forma. This backdrop clearly is unique to the current cycle, which we believe will result in meaningfully lower new starts in near to medium term.

The supply outlook, along with already rising demographic growth in the first half of the decade gives us confidence that we'll achieve the level of asset performance that we provided. Although I have nothing to add in terms of the timing and/or the trajectory of the recovery, our analysis was done one asset at a time, and I hope you will find this new disclosure useful.

During the first quarter, we continued our effort to create greater alignment of interest with our operating partners by restructuring several relationship constructs. And as we mentioned on our last call, we have made structural changes to several senior housing agreements. I would also like to highlight some recently announced strategic transactions with Genesis and ProMedica, with elements of both deals reflects our approach to value creation for our shareholders. First, Genesis.

As we announced last month, after 10 years, we have substantially exited our Genesis real estate relationship through a series of transactions, which meaningfully derisked our cash flow stream going forward. Effectuating this nearly $900 million a transaction wasn't easy.

It involved a skilled nursing operator deeply impacted by COVID-19 pandemic, the transitional access to local and regional operators working through our outstanding loans to Genesis, at the same time, creating opportunity for Welltower to participate in the post-COVID recovery in post acute fundamentals. Ultimately, we executed a mutually beneficial transaction for Genesis and Welltower shareholders.

For Genesis, the transaction resulted in a meaningful deleveraging of its balance sheet, which will help you to reposition the company post-COVID-19. And for Welltower, we're able to execute the transaction at a par bid value of $144,000 and generated an 8.5% unlevered return over the full term of Genesis relationship.

And upon the repayment of the outstanding debt, that return will rise to 9% with even further upside potential from participating preferred and the equity position. We believe that this represents a very favorable outcome for the shareholders, Welltower shareholders, particularly in light of the challenging environment that we have faced in the post-acute sector and then COVID-related pandemic-induced downside we have seen.

While transactions will result in some near-term earnings dilution for Welltower, we expect to create significant value for our shareholders following the deployment of the $745 million of anticipated proceeds over a range of high-quality opportunity that I'll discuss shortly. Since our announcement last month, Genesis has received an infusion of equity capital and named a specialist in Harry Wilson as CEO. We wish the team of Genesis much success in the future as we have substantially exited a challenging legacy structure with Genesis, I hope our shareholders appreciate the favorable ultimate outcome.

As we have done with several operating relationship over the last few years and discussed on various calls, our team embraced complexity, fixed creative solutions, doesn't run away from their problems and situations where the choices may be imperfect and ultimately work tirelessly to fulfill our commitment to our owners, operating partners, and employees.

Second, ProMedica. We announced two transactions to strengthen and expand our relationship with ProMedica, which will enhance the quality of our joint venture position and continued growth. The first transaction involved $265 million sale of 25 skilled nursing assets with an average age of 41 years, which will result in an immediate improvement to the quality of the portfolio. At the same time, we also crystallized a 22% unlevered IRR over two and a half years of ownership of the asset, which is a true reflection of the power of our value-oriented investment philosophy.

We at Welltower firmly believe that basis not yield or cap rates determine investment success. Through a separate transaction, we are pleased to maintain an 80% stake in our state-of-the-art assets which has been contributed to our 80/20 joint venture with ProMedica. ProMedica has already assumed the operations of these assets, which have been rebranded as ProMedica Senior Care. This successful transaction is yet another example of our focus on improving quality and growth profile of our portfolio while doing so at favorable economic terms to all stakeholders.

ProMedica team is making progress in developing new relationship with other health systems as a provider of choice as Promedica represents the premium not-for-profit provider at the leading age of healthcare evolution. We're hopeful that we'll be able to deploy far-direct creative capital with this innovative partner of ours.

Speaking of accretive capital deployment, we are pleased to share with you that we have closed in excess of $1.3 billion of acquisitions year to date with very attractive unlevered IRR, in particular, extremely happy to announce that we have partnered with a Safanad led investment group to recapitalize HC-One, the largest and most reputable operator of care homes communities in U.K. Our investment in excess of $800 million comes in form of first mortgage debt on HC-One's real estate and equity in recapitalization.

We also received significant warrants that would further allow us to participate in the post-COVID upside that we are confident that management in process of executing. HC-One will add a value option to our high-end focused U.K. platform. There is significant opportunity to upgrade the asset base, operating platform and people in this portfolio, and we have tremendous confidence in James and David to fulfill their mission to deliver the highest quality care, along with the residents and employee satisfaction.

In recent weeks, HC-One has experienced the same positive occupancy momentum as our broader U.K. portfolio, gaining 90 bps of occupancy from the March 2021 trough. Our debt investment represents the last found exposure of just $40,000 far unit and important statistic given our unrelenting focus on basis. This basis also represents a significant discount to replacement costs, in addition to the upside from equity and warrants.

We think this is an extraordinary risk-adjusted return story. We believe we'll be able to generate low to mid-teens on IRR from this transaction while adding a highly strategic partner to fill a gap that we have in our portfolio in the U.K. With acquisitions, patience is a virtue and so is occasional boldness. Since we mentioned in our October call, the moment of boldness is here, we have closed in excess of $1.8 billion of acquisitions.

The initial yield of this whole tranche is 6.8%, but we expect it will stabilize at a significantly higher number. When while the environment was very uncertain then, and we didn't give into institutional imperative about headline pressures, and we relied on independent thinking and resilience of our team.

We remain very bullish on acquisition opportunities and have several attractive deals under contract currently and a highly visible pipeline, which we think we'll be able to execute through year end. While our focus continues to be on the right asset with the right basis and with the right operator, I'm hopeful that our 2021 class of acquisition will be immediately accretive to 2022 earnings and will be significantly accretive to 2023 and beyond.

Lastly, I will address a very interesting question I have received from an investor post our last call. I was asked why we have such an emphasis on partner selection and whether it would be better off vertically integrating. We think this is an excellent question that deserves some reflecting for a moment. Notwithstanding the RIDEA law in senior housing, we believe we're better off in the ecosystem of partners and implementing an industrial view of vertical integration.

That view is rooted in our belief that the combination of centralized capital allocation and decentralized execution creates the best long-term return. We believe this strategy of decentralized execution relates to energy and keeps politics and costs at bay. This is especially important in real estate, which is profoundly a local business. However, overall, we are happy with our execution so far in the year to create partial value for our shareholders, but by no means we are satisfied.

We are cautiously optimistic about the fundamental environment and excited about our opportunity to acquire assets, create new relationships, and attract quality challenges. With that, I'll pass it over to Tim. Tim?

[Timothy McHugh, EVP and CFO]

Thank you, Shank.

My comments today will focus on our first-quarter 2021 results, the performance of our investment segments in the quarter, our capital activity, and finally, a balance sheet and liquidity update, in addition to an outlook for the second quarter. After a year defined by infection protocols, move-in restrictions, and incredible operating challenges for our partners, we started 2021 in arguably the most challenging environment yet. With case counts hitting new highs across all three of our geographies and operating restrictions moving up in lockstep.

Towards the end of February, the vaccine rollout hit its stride and nearly 80% of our facilities had their second vaccine finished. Case counts across the portfolio dropped precipitously, and we started to see the early signs of stabilization. The effectiveness and rapid deployment of vaccines within our communities are just starting to be felt across our resident population.

And while we are encouraged by the last 6 weeks of recovery in the U.S. and U.K., significant uncertainty remains with respect to the prevalence of the virus among the general population, the timing of the reopening of the economy, and the timing of further rollbacks of operating restrictions, especially with respect to our Canadian portfolio. The result is a near-term operating environment that, although notably improved, remains highly unpredictable in the short term.

As a result of this uncertainty, like last quarter, we provided a one-quarter outlook with our results last night. As we have done over the past 14-plus months, we will continue to disclose and update information on a frequent basis with the intention of providing a more complete outlook as soon as the virus-related variables moderate to a level that allows for more reliable forecasting.

Now turning to the quarter. Welltower reported net income attributable to common stockholders of $0.17 per diluted share and normalized funds from operations of $0.80 per diluted share versus guidance of $0.71 to $0.76 per share. When providing guidance last quarter, we also provided expectations for $31 million of HHS provider relief funds we received in the quarter. We ended up recognizing approximately $34.7 million of HHS funds, along with $2.5 million of out-of-period payments for similar programs in Canada.

Removing the impact of these funds, along with the $3.5 million termination fee that was received in one of our senior housing management company investments, which was not contemplating guidance, our normalized FFO moves to $0.70 per share. Therefore, on an apples-to-apples basis, we came out $0.01 above the top end of our HHS adjusted prior guidance of $0.64 to $0.69 per share. Now turning to our individual portfolio components. First, our triple-net lease portfolios.

As a reminder, our triple-net lease portfolio coverage and occupancy stats reported one quarter in years. So these statistics reflect the trailing 12 months ending 12/31/2020. Importantly, our collection rate for rent remained high in the first quarter, having collected 96% of triple net contractual rent due in the period. Starting with our senior housing triple-net portfolio.

Same-store decline 2% year over year as leases that we moved the cash recognition in prior quarters continue to comp against the prior year full contractual rent received. EBITDAR coverage decreased 0.01 times on a sequential basis in the portfolio to 1.00.

During the quarter, we transitioned the remaining five capital senior assets, moving one to triple-net structure under a new operator and the other four to various structure with CSU until transition. We also completed the transition of four properties leased by Hearth management to Storypoint under a new lease agreement.

These transitions had a net positive impact of 0.02 times in total portfolio coverage. Next, our long-term post-new portfolio generated positive 0.2% year-over-year same-store growth, and EBITDAR coverage increased 0.37 times sequentially to 1.37 times. As 51 of the 79 Genesis assets began operator transitions. 23 assets have already transitioned as of this call, including nine former Powerback properties, which moved to ProMedica Senior Care.

Pro forma for the already-completed ProMedica JV, Genesis Healthcare represents less than 90 basis points of our total in-place NOI. And long-term post-acute will be reduced to 6% of total NOI. And lastly, health systems, which is comprised by ProMedica Senior care joint venture with the ProMedica Health System. We had same-store NOI growth of positive 2.8% year over year and trailing 12 EBITDAR coverage was 1.9 times.

Before turning to outpatient medical, I want to highlight a disclosure change we made to our presentation of occupancy in our supplemental disclosure. Historically, we reported occupancy to 100% ownership. But going forward, we will present both at Welltower's pro-rata share to better reflect Welltower's ownership economics. This has no impact on NOI, which has always been presented at Welltower share.

We have footnoted the occupancy levels if presented a 100% ownership in both the senior housing operating and medical office portion of our supplement. Now turning to our outpatient medical portfolio, which delivered positive 3.1% year-over-year same-store growth, as cash rent growth and higher platform profitability combined to producing acceleration in NOI growth.

Tenant retention continued to be strong at 87.7% in the quarter, as we executed renewals on more than 540,000 square feet of space in the quarter, our highest amount ever reported. Additionally, we've also seen the length of term on executed renewal increases compared to last year.

Also in the quarter, we completed our second joint venture with Invesco Real Estate for a portfolio of outpatient medical assets and completed our first with Wafra. Our ability to form joint ventures with best-in-class capital partners over the last two years has allowed us to maintain scale and more importantly, the tenant relationships generated from our in-house asset management platform. At the same time, we diversified our access to capital during a period of significant capital market turbulence. We look forward to growing these relationships further going forward.

Now turning to our senior housing operating portfolio. Before getting into this quarter's results, I want to point out that we received approximately $35 million from our Department of Health and Human Services Cares Act provider relief fund. As we've done in the past quarters, the funds are recognized on a cash basis, and as such, will flow through financials in the quarter they are received.

We're normalizing these HHS funds out of same-store metrics, however, along with any other government funds received they're not matched expenses occur in the period they received.

In the first quarter, there were approximately $33.8 million of reimbursement normalized out of our same-store senior housing operating results, mainly tied to the HHS program in the U.S. Now turning to results for the quarter. Same-store NOI decreased 44% as compared to first-quarter 2020 and decreased 15.6% sequentially from the fourth quarter. Sequential same-store revenue was down 3.6% in Q1, driven primarily by a 310 basis point drop in average occupancy versus our guidance midpoint of 325 basis points.

Turning to REVPOR in the quarter. Show portfolio REVPOR was down 1.5% year over year, but mix shift and an extra day of rent in the comparable leap-year quarter are distorting the true picture of rent growth metrics as over 40% of our revenue is derived on a per name basis. When adjusting for the leap year, total portfolio REVPOR growth moves to negative 1%. And breaking out our individual segments, our active adult independent living and assisted living segments reported year-over-year growth of positive 6.3%, positive 0.7%, and positive 1.6%, respectively.

As I mentioned in the past few quarters, the combined total portfolio metric is being impacted by a considerable change in the composition of occupied units in the year-over-year portfolio. Our lower acuity properties comprised of independent living and senior departments held up considerably better on the occupancy front since the start of COVID, which has the mathematical impact of having a higher portion of our total portfolio occupied units being lower acuity and therefore, lower rent-paying units. Rental rates are proving resilient, more resilient across our portfolio than would appear in our aggregate reported statistics. Lastly, expenses.

Total same-store expenses declined 2.6% year over year and decreased 20 basis points sequentially. I'll focus on sequential since the changes are more relevant to trends in the current operating environment.

The 20-basis-point sequential decline in operating costs was driven mainly by lower COVID cover cost as case counts dropped dramatically in March. The meaningful decline in our top line, combined with these expense pressures had a significant impact to our operating margins, which declined 280 basis points sequentially to 19.4%.

As I noted earlier in the call, we did not include government reimbursement that was not tied to parity expenses. And therefore, COVID expenses negatively impacted same-store by $14.8 million. We are not factoring any HHS funds into our second-quarter outlook. Looking forward to the second quarter, and starting with the April quarter-to-date data we've already observed, we've experienced 20 basis points through April 23, with the U.S., U.K. up 40 and 90 basis points, respectively, while Canada is down 20 basis points.

While we are encouraged by the recovery in the U.S. and U.K. and are hopeful that the effectiveness of the vaccines has put a floor underneath operating results, we remain cautious on projecting an acceleration in recent trends, given the lack of historical precedents and uncertainty of reopening trend, particularly in Canada.

On a spot basis, we are currently projecting a 130-basis-point increase in occupancy from March 31 through June 30. We expect monthly REVPOR to be plus 1.2% sequentially, although adjusting for the extra day in 2Q versus 1Q reduced to plus 70 basis points sequentially. Lastly, we expect total expenses to be effectively flat. As increases in operating costs from higher occupancy should be offset by a reduction in COVID-related expenses.

Turning to capital market activity. We continue to execute on our strategy of maximizing balance sheet stability. We're maintaining flexibility to position us to take advantage of attractive capital deployment opportunities. In March, we issued $750 million of senior unsecured notes due June 2031, bearing an interest rate of 2.8%, and used these proceeds to redeem all remaining senior unsecured notes due 2023.

As a result, we were able to extend all senior unsecured debt maturities to 2024 and beyond, extend our weighted average maturity profile for nearly eight years. We also extinguished $42 million of secured debt at a blended average interest rate of 7.6% in the quarter. In February, we highlighted a robust pipeline of capital deployment opportunities. As these transactions materialize, and the pipeline has grown, we've utilized our forward ATM program, selling 3.7 million shares of common stock to date at an initial average weighted price of $73.43 per share.

These shares will generate future gross proceeds of approximately $272 million, and along with $1 billion of cash from our balance sheet, will enable us to officially capitalize our highly visible pipeline of capital deployment opportunities. Moving on to leverage. We ended the quarter at 6.59 times net debt to adjusted EBITDA, a 31 basis point increase over the previous quarter as underlying cash flows continue to be pressured by the impact of COVID.

While transactions closed in the second quarter will result in a slight increase in leverage, after adjusting for expected proceeds from assets held for sale and $272 million proceeds from the forward sale of common stock, we expect leverage to settle in the high sixes before the ramp in senior housing cash flows begin to naturally drive leverage lower in the coming quarters.

Speaking of recovery, Shankh spoke earlier about the magnitude of potential cash flow growth from just returning to pre-COVID levels of margins and occupancy in our senior housing operating portfolio. This will have a significantly positive impact on cash flow-based leverage metrics.

And although the duration of this recovery remains highly uncertain, the inflection point this quarterly is optimistic that it has begun. And our demonstrated ability to access significant equity proceeds through asset sales, even in the most difficult times, along with our return the equity market since last quarter, leaves us confident that we'll be able to keep the balance sheet in a position of strength as a natural deleveraging when the senior housing recovery returns us to well within our historical target levels in the not-too-distant future.

Lastly, moving to our second-quarter outlook. Last night, we provided an outlook for the second quarter of net income attributable to common stockholders per diluted share of $0.31 to $0.36. And normalized FFO per diluted share of $0.72 to $0.77 per share. As I noted earlier, this guidance does not take into consideration any further HHS funds or similar government programs in the U.K. and Canada.

So when comparing sequentially to our first quarter normalized FFO per share, use a $0.70 per share number I mentioned earlier in my comments, which excludes the benefits of these programs as well. On this comparison, the midpoint of our second-quarter guidance of $0.745 per share represents a $0.045 sequential increase from 1Q.

The $0.045 increase is composed of a $0.02 increase per share increase from our senior housing operating portfolio, driven by an increase in sequential average occupancy and expected reduction in COVID costs, a $0.025 per share increase in net investment activity as strong post quarter investments is offsetting the initial dilution from loan reductions and operator transitions related to Genesis.

A $0.01 increase in NOI from triple-net and outpatient medical segments, and this is offset by the expected $0.01 increase in sequential G&A, driven mainly by new hires. And with that, I'll turn the call back over to Shankh.

[Shankh Mitra, CEO and CIO]

Thank you, Tim.

Despite the challenges posed by the pandemic on our business, we have remained resolute in our commitment to ESG initiatives. In fact, our efforts on this front have only grown over the past year, and we are pleased to report significant progress, not just in terms of numerous awards and accolades we have received, but also by our action to strengthen and expand our ESG platform, which we believe will bear fruit in many years to come. We have recently received the Energy Star Partner of the Year award for the third consecutive year and elevated to the level of sustained excellence, the EPA's highest recognition within the Energy Star program.

We have also been honored that our social initiatives we are recognized with the quality score of one by IFF, the highest ranking in the social category. And last but not least, we continue to receive an A rating from MSCI, one of the most widely, well-respected global organization for our broader ESG practices and disclosures. I'm extremely proud to be working with our Board of Directors, one of the most diverse in Corporate America in this commitment to create long-term and sustainable shareholder value per share through our ESG initiatives.

With that, operator, we can open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Rich Anderson with SMBC.

[Rich Anderson, SMBC]

I got up at six this morning to be first in line. So the disclosure on the recovery is great. And I appreciate that you can't comment or know what the trajectory is going to be, but it is question number-one in every one of my conversations because right now, we have to deal with an elevated multiple because of trough earnings. And so people want to know what the snapback is going to look like.

My estimates are down 30% versus pre-COVID because of all this noise. And so I guess the way I would ask the question is, if you can't give trajectory, what would disappoint you in terms of getting back to square one. Would you say, "Boy, if we're not there in two years, that would be quite a disappointment." Can you kind of triangulate at least a range of expectations as opposed to committing to one?

[Shankh Mitra, CEO and CIO]

Yes. Thank you very much, Rich. I hope you don't have to wake up at 6 a.m. to be first in the line. But I'll just address the question, is any definitive answer for our end is as much of a guess from us as it is from you, right? So just understand there's no historical precedence to what's going on.

We're simply telling you, if we go back asset by asset to where the NOI of these assets were, it's an important exercise because we have sold a lot of assets, bought a lot of assets, so it's very hard for you to figure out from our supplement what the number looks like. So we try to answer that question that if we just went back for the stabilized pool of assets to Q4 of '19, what will the NOI look like? And we add the filler portfolio and stabilize that, what does that combined look like.

Now I cannot answer the question, whether it's two years or four years or it's - you've got to really put that in the context and your expectation. However, I will say this, and it's a very important point. It is to a Q4 2019 rent level a.k.a. that if you assume that this we expanded out, let's just say it will take four years from today to get to that stabilized level of NOI. So it's going to stabilize in 2026. You have to assume the rent of the business remains flat to achieve that NOI, right, which we don't think obviously is happening. We have continued to say that we expect that rent growth will hold up, right? So you might get it later, but you will get x number of years of rent growth to get added to that. Obviously, that rent growth has a contribution margin that's very high and it falls to the bottom line.

On the other hand, if we say, okay, we're going to get that earlier, you are not going to get as much rent growth. You will only get, just say that you decide that you're going to get there in two years, right, I'm making this up. And two years up, so you will only get the rent growth from '19 to '23 instead of '19 to '26.

So I'm pointing out that there are many levers here that you have to think through. The longer gestation period will bring you ultimately a higher number because of the rent growth aspect that I'm talking about versus the shorter. And that's all I'm willing to say right now.

I can guess, but it is a guess. We're underwriting assets in a way that, frankly speaking, we don't need to know. That's why we're so focused on basis. If you look at our stock, it's a real estate company. You can look at what the basis looks like on a price per unit basis, and then go and think about what it takes to build that portfolio. You will see that portfolio trade had a significant discount to what it takes to build it today. Thank you.

[Operator]

And our next question comes from the line of Jordan Sadler with KeyBanc.

[JordanSadler]

Wanted to hone in on a little bit of a different question, which is really the pacing of move-ins and move outs. It's something, Tim, that you addressed on the last call. And I couldn't help but notice that indexed move-ins are now above what seemed to be pre-pandemic levels or at least in March, they were 1031 on Slide 14 of your deck. And so that's pretty interesting. And I know it's probably - and you just addressed Shankh, you don't really want to speak to the potential trajectory of move in. So I totally get that.

Can you just maybe talk to us about move outs? They're at negative one-one in March. So the indexes - they're below. Why would they remain sort of below pre-pandemic levels going forward? How would you be able to keep them? Or how would your operators be able to keep them below pre-pandemic levels for a sustained period that would sort of maintain or improve even this net absorption pace that we've recently seen?

[Timothy McHugh, EVP and CFO]

Yes. Good question, Jordan. It's mainly due to just lower occupancy in the building. So right now, we're seeing 140 basis points below - we were 1,400 basis points below where we were pre-COVID on occupancy front. So you've just got substantially lower number of residents in the building.

So if you run a kind of historical churn levels, it obviously changes occupancy builds and then move outs start to kind of match historical levels. But as historical churn levels, you should be running at around 80% of kind of indexed historical levels of move outs. If that gets elevated a bit, we've talked about this from a higher acuity resident moving in during COVID. That probably moves to mid to upper 80s. But that can stay, I think, pretty consistent through the recovery.

It is tough looking at the last, kind of, six months ticking through what has been natural move-outs and what's been really - certainly a spike we've seen from COVID in the December, January, February period. I think what you're starting to see in March is a return to that kind of 80% level that we would expect, again, giving historical type of churn. But it's certainly something we're watching pretty closely. But from just a level of kind of the comment I made last quarter was from a level of occupancy in the buildings, that move out percentage, getting back to historical levels of 2019 levels of move-ins, you can drive 80, 90 basis points a month in occupancy by just getting back there because the move-outs are going to be lower, purely mathematically based off the occupancy level.

[Operator]

And our next question comes from the line of Nick Joseph with Citi.

[Nick Joseph, Citi]

I was hoping to get a few more details on the HC-One transaction in terms of the rate on the loan and then the strike price and amount of the warrants? And then what happened to the previous MEZ investment with them?

[Shankh Mitra, CEO and CIO]

Thank you, Nick. The previous MEZ investments was paid off at par. And we are seeing in Q1 as a three-part investment. One is a combination of first mortgage, equity and warrant. And we think that combination will generate low to mid-double-digit type IRR. We also give you the basis which we invested a majority of that capital, the equity basis is slightly higher, but it's a substantial discount to replacement cost as well. So to hit those IRRS, you don't really need much of a expansion of multiple. What you need is the EBITDA to come back, which we think the management is already executing. And we've noted that the occupancy is already moving in the right direction.

I'm not going to break out the specific part. You know that we do not believe in yields and cap rates determining investment success. We believe basis and IRRs get to the investment success and are consistent with that, and that's what we are willing to provide.

[Operator]

And our next question comes from the line of Vikram Malhotra with Morgan Stanley.

[Vikram Malhotra, Morgan Stanley]

Shankh and Tim, maybe you can - if you can describe just the acquisition opportunity set as it's evolved over the last three or four months since your last call, you talked about potentially a $10 billion opportunity over time. HC-One obviously expands your opportunity set in the U.K. But if you could just talk about the opportunity set in terms of assets, returns?

And also just in terms of underwriting, I think you referenced your underwriting, if I'm correct, differently or not to a set time and you don't need it because of the basis. But I just asked that because your math that you described here, obviously, talks about pre-COVID levels. We all know, obviously, before pre-COVID, we still had a five-year period of occupancy loss because of supply. So theoretically, there's even more upside. But if you can talk about the opportunity set and underwriting from that perspective, it would be helpful.

[Shankh Mitra, CEO and CIO]

Yes. Okay. Thank you, Vikram. First is the $10 billion number I mentioned, obviously, is a multiyear opportunity, not a one-year opportunity, right? So I just want to clarify that. But you're right in that expansion with obviously expanding with HC-One, this transaction expands that opportunity.

I want you to understand, as I've said in my prepared remarks, that this investment is not just a financial investment, it's a strategic investment. And we looked at the company, its footprint, its management, and we see an opportunity that fills a big hole in our portfolio. Our portfolio in U.K. is very focused on high end, and we didn't have the value option. And there is a tremendous opportunity to grow in that value option, which we think we'll be able to execute through the HC-One platform. We structured the investment in the three tranches that we talked about.

We don't go into an investment thinking we'll do debt, we'll do equity, we'll do MEZ or participating equity or. That's not how we think about it. We just look at an opportunity first. Think about what is the first asset opportunity and strategic opportunities, then think about how we get to invest capital so that we can be aligned with our partners.

That's a very different approach than it's an asset, and we've got to buy it, are we going to lend to it. That's just not how we take. And it is the right risk-adjusted return. You look at an asset or a collection of assets or portfolio and you think about where in the capital structure even the best risk of return for your investors.

Remember, there are different investors in the, obviously, the spectrum of this transaction. There is $235 million of equity on top of us, which obviously Safanad led investment group that includes Spanning and others, they're obviously bringing in, and they think there's an extraordinary opportunity to create value for their capital. Right? So that's a very important point. Now going back to sort of the pipeline, the pipeline is primarily today is senior housing, and the pipeline is very much what we talked about.

It's significant. It's very robust. It's large. And it reflects a very significant discount to replacement cost.

We're not going to sit here and tell you that we believe that every deal we'll do, we'll have this kind of return that we have described in HC-One, but as said before, that we think we can hit high single-digit to low double-digit IRR, and that environment is still here. We don't necessarily, given our cost of capital, need to hit that. But we're still seeing many, many, many opportunities that we have under contract today, that will get to you to that kind of return, which is in the high single-digit, low double-digit type of IRR. Hope that helps.

[Operator]

And our next question is from the line of Derek Johnston with Deutsche Bank.

[Derek Johnston, Deutsche Bank]

On leading demand indicators and community details. It's certainly encouraging to see visitation and communal dining almost back to historic levels. One missing component is the current quarantine requirement for new residents. It is still the two weeks quarantine or perhaps longer, if not vaccinated. Then secondly, the lower level of in-person toward, is that being negatively impacted by restrictions in Canada versus other markets? Any geographic context is welcome.

[Timothy McHugh, EVP and CFO]

Yes. Thanks, Derek. So I'll start with the question on quarantine. So this is a state-by-state process, part of my comments in my opening comments, part of the uncertainty around this is that it's local from a lot of the regulations around scaling back COVID regulations from last year, restrictions from last year.

So we're seeing it kind of unfold state to state. But largely, the U.S. now quarantining restrictions are gone, if you come in vaccinated. If you don't come in vaccinated, then you do have quarantining.

But you've seen through the success of the vaccination of the over 65 population in the U.S. and largely majority of move-ins now that we're seeing come in vaccinated and you're eliminating that quarantine period. And then the second question on tours, you're correct. Canada is dragging down statistics.

So you've seen a vast improvement in the U.K., the U.S. is a little different state to state, but now largely, all states are allowing in-person tours. And Canada is still in a bit more of a restricted state.

[Operator]

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

[Michael Carroll, RBC Capital Markets]

I wanted to jump on the HC-One transaction. I think, Shankh, you kind of already answered this a little bit. But when you think about that deal, should we think of it as more of a strategic type investment, an ability for you to continue to grow in the U.K. with that operator? Or was it more of an opportunistic type? I mean, since this is a debt investment, I guess, it's a little confusing on the strategic nature of it.

[Shankh Mitra, CEO and CIO]

Yes. So, Mike, it's a great question. It is not a debt investment. It is a debt, it's structured as a lot of kind of capital deployed is debt investment, but it also comes with a very significant equity ownership through a warrant or future ownership through a warrant and kind ownership through the equity stakes.

So that's how we thought about it. This is not an opportunistic investment. This is a strategic investment. If you look at our portfolio, you will see majority of our U.K. portfolio is kind of in that GBP 1,400 - GBP 1,350, GBP 1,400 per week to GBP 1,600 plus per week kind of. That's our sweet spot. And we think there is a real value option needed in U.K. on the private pay side, you can - there's a tremendous amount of business, tremendous depth of need in, let's call it, the GBP 900 to GBP 1,000 per week.

So this fills a true strategic hole that we have in our portfolio, which we have been looking for a long time, not just the last 12 months, to fill that hole. And we think this will be our platform. And as we have talked to our partners here Safanad, we have always seen it as a strategic investment. That's what we have talked to James and David, who run HC-One, and we think you will see further capital deployment activity coming through it in that segment.

We're not going to go - I don't want to speak for the management. I do not believe if suddenly they're pivoting the business going from GBP 1,000 a week to GBP 1,600 per week. That's not the vision of the company is. The vision is to grab that demand in that segment, and there's not a lot of quality and a lot of deep providers in that segment. So that's what we see here.

[Operator]

And our next question comes from the line of Jonathan Hughes with Raymond James.

[Jonathan Hughes, Raymond James]

I understand the potential for your show operator, senior housing operating partners to raise rents going forward. But when I look at costs, of which 60% labor do your operators have an expectation of increases to staff these properties? Labor costs were up 6% to 7% over the past couple of quarters. And given wage increases across the country, it seems like labor costs could inflate just as fast or even faster than rates. So any color on labor cost expectations and how you incorporated that on Slide 13 would be great.

[Shankh Mitra, CEO and CIO]

Yes, Jonathan. There's no question that you will have labor cost inflation. I do not believe that problem will be as acute as you have seen last five years when all the - frankly speaking, all of our portfolios, given where the locations are, regardless of local regulations have sort of moved at or above that $15 type of numbers. So you have seen a very significant increase of labor cost.

Will you see labor cost inflation? Absolutely. But I think you will also see margin expansion from, as Tim talked about previously, we believe that you will see the margin expansion going back to the historic margins level. So it's a win at the end. I will tell you one thing, though.

I would highly encourage you not to look at one quarter or one month of labor costs and projecting there. This is a lot of noise and volatility around the fact that a lot of people have received the stimulus check, and that has impacted short term. We do not believe that will be sustained as the sort of this dries up. However, you are right that labor cost inflation will remain, but it will not be what you see in other sectors, because what you are seeing in other sectors, such as lodging and all the sectors, they have laid off all their employees, they shutdown.

Right? That was the case. For us, our communities have never shut down. They continue to employ our - obviously, because to take care of our residents, and that continues. Is there no issue? Absolutely not, will remain so.

I would also encourage you to think about the potential immigration changes that is - we're hearing about. Obviously, I know it less - probably less than you do, but that also has an offsetting impact. So it's a long-term problem, but just understanding the demand-supply of labor as it relates to demand-supply of people and also how that impacts people's other choices at home, this will all come into place. We'll talk about it as we go through it.

[Operator]

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

[Mike Mueller, JPMorgan]

Just wondering how are the occupancy trends trending at the new development, say, filler properties compared to the more established properties that you have?

[Timothy McHugh, EVP and CFO]

Right now, there's not much of a difference. I'd say we're seeing pretty uniform recovery across the board. So likely, we'll start to see that start to change as you see some of the filler properties accelerate just purely by their current occupancy level. But right now, we're seeing pretty uniform recovery across the board.

[Operator]

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

[Juan Sanabria, BMO Capital Markets]

Just hoping to spend a little time on the triple-net seniors housing business that hasn't had the same amount of focus. But if you could just try to help us understand kind of what has been done to date to rectify some of the low coverage, presumably some of the 2% decrease in same-store NOI in the first quarter was driven by some restructurings or adjustments.

And you had - I think it looks like some straight-line rent write-offs in the quarter as per some of your supplemental slides. If you could just help us think through what you've done to date and maybe what's left to do because I think that's a big piece of the recovery once that bottoms about what the portfolio could look like going forward with more clarity on the shop side?

[Timothy McHugh, EVP and CFO]

Yes, Juan. So I think the right way to think about it is, it has been the main focus win for us. And it seems to be for investors as well. But I think in the triple-net senior housing portfolio, around 20% of that in-place rent is now cash.

So it pretty much reflects the underlying economics in those buildings. We have been pretty quick to move the cash when we have tenants that are not paying rent. So I think looking at our in-place, looking at our coverage metrics, those are tenants that are current on rent paying us and very much are doing so because of their long-term belief in their business. And if anything, I think what we've seen in the first quarter from the start of a recovery, enhances that belief that there will be - there won't be much impairment here.

I think the other thing here is, I think, the difference between cash flow and value. And the underlying assets, I think you're seeing this across the board, are holding value. So the impairment to cash flow, I think, is short term. That speaks to the view there's a recovery. And so I don't think about this being a value prop to Welltower, and if anything, kind of a short-term liquidity problem with the operators.

[Shankh Mitra, CEO and CIO]

I'll just add, as I've said, probably every call we discussed it. So I'm not sure, Juan, why you think there's not been a focus. A majority of these leases that we have, and we're seeing - you should see that in our RIDEA portfolio as well. Usually, the assets are owned and the propco is jointly owned by the operator and us.

And those - the operator's propco interest backed our lease, a.k.a, what you see as just from the rent does not reflect the collateral behind the lease. As you will see, these things get restructured, you will notice that value of operators that they own the real estate, their propco interest will really back this rent and will create substantial protection of downside for our shareholders.

So I don't want to get into too much of details before everything is done. As I've said before, that you will continue to be surprised how much rent we continue to get from this portfolio? Will there be dilution of short-term cash flow? Absolutely will.

And you're seeing that flowing through. Do we think there will be diminution of value? Absolutely not. So that's a general average statement. But that's what we continue to believe, and that's what you have seen through a hundred-year slide, once in a hundred-year slide, which is this pandemic, that held up, will continue to hold up.

[Operator]

And our next question comes from the line of Connor Siversky with Berenberg.

[Connor Siversky, Berenberg]

Thanks for having me on the call. Just to follow-up on Juan's question. I'm wondering if this straight-line writedown was at all related to some of the movement we've seen in the top tenants? And if so, could you maybe provide some color on what we can know or what we could expect going forward?

[Shankh Mitra, CEO and CIO]

No. We will not, Connor. We do not talk about specific operators on this call. And that's not relevant. As I said, that this lease that we restructured, you're only seeing one side of that. You haven't seen the other side. And the operator has a substantial amount of ownership in the propco. And that ownership backed the rent, and this operator is an extraordinarily highly respected operator, and we think we'll get to a point that works for our shareholders and their ownership and you are only seeing one part of it.

Just give us time, and you will see it will result into a mutually beneficial arrangement, where we will be able to protect all of our value.

[Operator]

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

[Steven Valiquette, Barclays]

So one other debate point to add into the mix on the $480 million of embedded NOI. And that's really the Slide 10 as far as the construction versus inventory. As we look at your NOI margins in your SHO portfolio, it went from 32% to 30%, let's call it, from, I don't know, 2015, 2016 to 2019. A lot of that was that big increase in construction. Now that slide shows that's coming way down, which should alleviate some of the pressure as well. So I wanted to just talk about that on the plus side.

And to the extent that you have some visibility, maybe just in your just overall strategic review of the industry, do you think that the number goes lower from here on that chart on the bottom of Slide 10 as far as construction versus?

[Shankh Mitra, CEO and CIO]

So, Steve, that's an extremely important portion. I tried to address that in my prepared remarks. Look, we're all guessing. Right? And we have to assume that people will do things that is economically beneficial to them.

If you look at how much the costs have changed, let's just say - let's just talk about cost in the last three years. You have places in the coast, costs are probably up 20-plus percent, low 20%. And if you look at some of the locations in Dallas, Charlotte, Nashville, cost is up between 30% and 35%. The housing market is very significantly impacting not just the cost of lumber, which is everybody is talking about, but the cost and availability of labor.

Right? So if you - that's sort of one big impact and a development model is a highly leveraged model. Right? So if you thought you're going to make 7% yield on cost and suddenly now looks like 5%, you are in trouble. But on the other hand, if you see what's going on, interest rate is backing up in a highly leveraged model. But definition development is a high leveraged model, with construction loans, etc.

What you have is now interest rates backing up. So it's farther eating into your pro forma. And those two combinations, assuming people don't develop for fun, they want to develop to make money, that proposition is increasingly becoming very difficult. This is an industrywide comment.

This is not - I'm not suggesting, see if you can go and develop a building in a given location and can't make money. That's not the point. As an industry wide, it is becoming much more difficult. And assuming people who want to develop to make money, that proposition is getting much, much harder.

I'm not even talking about availability of debt capital, etc. The attractiveness of the model has been meaningfully hit in last, call it, three years, particularly last 12 months, as housing has just gone parabolic. So in that context, we think there will be, obviously, a lot less supply than it has been in the, call it, between '15 to '19. Also the '15 to '19, sort of the supply boom was, frankly, was created by a lot of the players, including our company, was paid $1.20, $1.5 on the dollar on the basis.

I do not see those participants in the industry anymore. People are very, very - people who're involved in buying assets today, they're very focused on the right basis. And a lot of the sort of the take-out premium is meaningfully gone from the industry as well. So if we put all of those things together, we think that it is reasonable to expect.

You can never accurately forecast what the future will look like. It is reasonable to expect that supply in the next five years will be a lot less than last five years, but it is yes, nonetheless. And we do think that will impact the rent growth, which is the point I was trying to make on the 480, is that is the beauty of basis. I highly encourage all of you to look at what is the in-flight per basis value of Welltower.

And if you have to make at that basis a number, what rent do you need, versus what it takes to build and to make some minimum acceptable return, call it, 7%, whatever you think is the development yield should be and what is the rent. And you will see what it takes to build on our - today in our company, there's a huge gap between the potential rent, what's potential to bring new supply versus what you can get? That's not just to work our problem. I'm saying existing industry versus the new industry, and that will give you much more insight into what the rental may or may not be.

[Operator]

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

[Omotayo Okusanya, Mizuho]

I just wanted to go back to Juan and Connor's question about some of the restructured leases. And, Shankh, you made a point that you're working on structures to help you kind of recover some of the kind of initial rent breaks or whatever benefits you've kind of given these lease tenants in the short term.

Could you just talk a little bit about what some of those kinds of lease terms would be to kind of make sure, again, you kind of get those benefits back in when ultimately this tenant starts to recover?

[Shankh Mitra, CEO and CIO]

Yes. That's a very good question. So there are many ways you can do this. If you keep the assets under lease, you can give obviously short-term rate and - but you can create two years out, three years out, depending on the level of EBITDA. You can do all bells and vessels to recoup that rent as cash flow comes back. And that's the point we're trying to make. Remember this is - cash flow is now starting to come back. Right? So that's sort of if you retain it, obviously, in the lease.

Remember, these leases are not - there's nothing behind the leases. There's a propco interest sits behind the leases. So you have a value protection. If you go to RIDEA, right, we are not afraid just to get - take a rent stance, and if that is what, what is the sustainable level of rent from the sustainable level of production.

Right? You saw that we bought a new - we bought a bunch of new assets in the reported quarter where we did a triple net. It was a highly respected operator. In that particular case, you would say, why didn't they do a RIDEA? Because if you look at in that portfolio, what we bought, the rent before us was substantially higher, right, 50% higher, that you are paying to the previous landlord. Our rent is much lower.

We set it in a way. But then we have some sort of a catch-up. Our rent goes up, not by 3%, but as the EBITDA comes back significantly, and the EBITDA is already moving in that direction. We have a provision to get some more rent.

It is also for the operator, at some point, they were paying 50% higher rent. And they will end up probably paying from the current rent level, 10% more, 15% more, but they will keep rest of the cash flow. Right? So it works out on both sides. Why does it works out on both sides.

Because the basis is lower. The issue is not - a lease is fundamentally a form of a leverage and if you put a basis in the assets so much higher, and then you put a high LTV loan or high LTV credit for the lease, you are kind of creating problems from two ends. In this case, it's a very low basis that helps both parties, the owner as well as the operators to make money going forward. Going back to your specific question, there's a lot of collateral that sits behind these leases from this specific issue that Juan and Connor, and now you're asking about.

This particular operator, which is one of the most respected operators in our space, has a substantial amount of propco interest that they have created through a very significant development machine through '90s. And that propco interest sits behind that lease. So let's just say, you can do it from a lease. This is just a statement or you can go to a RIDEA.

Right? If you go to a RIDEA. Right? If you go to a RIDEA the ownership will change and will reflect the fact that their future liability is lower, aka we lost an asset. And we have acted that, backed lease, and we have an opportunity in that restructuring to own more of the real estate, not the same amount. That's the way to think about it.

[Operator]

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

[Nick Yulico, Scotiabank]

So looking at a couple of different slides you guys have and just trying to put this all together. So you had this slide that's showing the future NOI potential getting back to pre-COVID occupancy. And yet at the same time, you're not providing full-year guidance for this year.

So on one hand, you're implying a lot of optimism about getting back to an occupancy number, which is much higher than where you are right now. Yet you're not really willing to commit to an occupancy range on the year. And I guess I'm just wondering what is giving you confidence that you're going to get back to a higher occupancy level. I mean, the 20 basis points of April occupancy benefit seem like it's a smaller number than what you were talking about with your weekly benefit when you put out a presentation earlier this month.

So I'm just trying to - I'm just wondering if there's something that you can point to, you have a backlog of pent-up demand that you're learning from prospective residents that going to increase move-ins as you get into the third quarter and beyond? I mean, what else can we sort of point to here that you think should give us confidence that you're going to get back to pre-COVID occupancy?

[Shankh Mitra, CEO and CIO]

Yes. So nowhere on that slide, if you go back and see that we said we will. We just said, if we do go back to that occupancy, this is what the numbers looks like under this assumption of no rent cost and at the margin that it was at that point in time. You will decide whether we will go back or not go back, that's a matter of opinion.

What we have stated on that slide is a matter of fact. So that's sort of the number one point. Number two point, we are nowhere implying that you will get to that number within a specific time frame. Full-year guidance that you have raised, that is a specific time frame.

We're not committing to a specific time frame on that 480, which is on Slide 13 of the presentation because, frankly, we have no clue. Right? Third, I mentioned on my presentation or prepared remarks, that we are - this is probably the most optimistic I've heard, all of our operating partners from an industry momentum perspective were yet to see it on sort of in our occupancy. Hopefully, we'll see it. We're not baking.

We're not sort of counting on it. We're not giving you an occupancy guidance per se. We're giving you an FFO guidance, and we're simply telling you what underlies that FFO guidance, which is basically straight-lining what we have seen so far. Hopefully, that answers your question.

[Operator]

Our next question comes from the line of Lukas Hartwich with Green Street.

[Lukas Hartwich, Green Street]

You said bottom-on shop occupancy. And it kind of looks steady based on some of the numbers you put in your release, but I'm just hoping you can talk a little bit more about the cadence of the increase in occupancy over the past six weeks? Is it steady, or is it bumpier? Just kind of curious what that looks like.

[Shankh Mitra, CEO and CIO]

Six weeks is not a long enough time frame, Lukas, to give you a trend. But if you insist, I can tell you if it is 60 basis points over six weeks, the weeks that are closer to us today have seen higher than the two and the weeks that are farther from us have seen lower than the 10. But six weeks is not a good enough time frame for you to project. At least we don't have confidence to project that.

I can tell you the tone of our operating partners is a lot more positive than what you're seeing. I want to see first in the numbers and then talk about it. This is a highly uncertain environment. We're just not going to sit here and try to guess what things - how things might or might not play out.

Remember, there is a possibility things can get much worse. If we have significant resurgence of COVID, it can get worse us. Right? So we're just telling you what we are seeing, we're telling you things, obviously, seasonally, we're seeing things improving. But we just were not ready to go out and tell you that things will successively get better every week, and we have some sort of a secret sauce to see that. It's just a highly uncertain environment.

[Operator]

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

[Daniel Bernstein, Capital One]

I just wanted to go back to the idea of pricing power within senior housing. And I haven't fully run the numbers, but my guess is with home prices rising significantly, rent prices rising significantly, senior housing is probably about as portable as it's been in the last 20 years. So I don't know if you've had discussions or thought about it with your operators, but maybe how - does that change the equation of what occupancy need to be for the industry to have pricing power? Traditionally, you think about 85% or better occupancy for pricing power, but maybe the equation has changed some. So just --

[Shankh Mitra, CEO and CIO]

Yes. I am happy to - Dan, very good question. I'm happy to start sort of the - engage in a guesswork with you. But it is a guesswork nonetheless. I can tell you, historically speaking, HPA or house price appreciation index has a very strong correlation with, obviously, rent growth. But this is a very interesting market. Right? It's unprecedented in many, many ways. You haven't seen this kind of housing shortage combined with demand.

You haven't seen this kind of escalation of rent - I mean, cost that makes it very, very difficult to build something. Reasonably speaking, I would say, if all of those are together, you should see rent growth. At the same time, you have to acknowledge the fact that entire industry is in lease-up. Right? So I am not comfortable underwriting a lot of rent growth, but I also believe that you will see modest rent growth like you are seeing.

Now do I think that three years from now, the rent growth will be better than what we are seeing today. That's reasonable to expect. Do I know for sure? No. But I think that's reasonable to expect.

[Operator]

And we have a follow-up question from Lukas Hartwich with Green Street.

[Lukas Hartwich, Green Street]

Thanks. On the HC-One loan, I'm just curious if you could provide the debt service coverage, what that looks like on free NOI from that portfolio or that company?

[Shankh Mitra, CEO and CIO]

Lukas, can I get back to you on that? I don't have that on top of my mind. I'll get back to you on that. I can tell you, on an LTV basis, if you ascribe no value to the actual business, which backs the loan, not just the real estate, the overall V in that LTV is extremely low. And it's a substantial, substantial discount to replacement cost.

But I don't have the service coverage ratio pre-COVID basis in my head. I will call you off-line and give you that number.

[Operator]

And we have a follow-up question from the line of Omotayo Okusanya with Mizuho.

[Omotayo Okusanya, Mizuho]

Yes. Just a quick one for Tim. Tim, I noticed that there was a little bit of an equity issuance this quarter, about $270 million. Just talk a little bit about why that decision was made when, again, you guys have so much cash on the balance sheet.

[Timothy McHugh, EVP and CFO]

Yes. It's a great question, and it really has to do with confidence in our pipeline. So we've got between our development spend and the external opportunities we're seeing, it's got less to do, and that's why you're seeing it done in a forward structure is it will fund activity when it occurs, but it's a highly visible activity.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.