Welltower Inc

NYSE:WELL

Earnings Call Transcript 2023-Q2

[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. [Operator Instructions]. It is now my pleasure to turn today's call over to Matt McQueen, General Counsel. Please go ahead.

[Matthew 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 Mitra, CEO]

Thank you, Matt, and good morning, everyone. I'll review our second 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 Portfolios. Tim will walk you through our triple-net businesses, balance sheet highlights and revised guidance. Nikhil is also on the call to answer questions. 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 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, resulting in significant margin expansions that we have been all waiting for. I'm pleased to report to you that this trend intensified in the second quarter as we saw revenue per occupied room or RevPOR growth of 7.3%, coupled with just 3.5% expense per occupied room or 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 a 24.2% NOI growth for our senior housing operating segment. While Assisted Living continues to outperform independent living driving exceptionally strong results in the U.S. 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. It is also important to mention that our Seniors Apartment business continue to drive double-digit NOI growth despite the broader deceleration in the apartment industry. We have put significant effort in the 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 billion 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 empirical years in the business, which either focuses on the location or the operators we believe it is a four-dimensional optimization problem of location, product, price point and operators. And we do this objectively through machine and statistical learning using our data science platform alpha.

I'm delighted to inform you that we made perhaps the most significant impact in this pursuit through a mutually beneficial restructuring of our joint venture with Revera. Through a series of by 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% ownership of 29 premier communities, many of which are located in the Greater London market and consider some of the best care homes in the country. We transitioned this 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 two 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 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, the California communities were 77% occupied when they are 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 committees. Though this occupancy has far surpassed their previous high occupancy of 86% in 2016, I fully expect these communities will hit mid-90s occupancy in near future. All things being equal, that stabilization path should be faster for the most recent portfolio of 28 communities that they have assumed the management of. If not for the lessons learned previously, it will be for a higher starting point. And just after four weeks of operations under Oakmont, these properties are on a path to achieve approximately 100 basis points of occupancy growth in first month and are showing positive NOI traction in NOI out of the gate.

And finally, Canada, perhaps the most exciting part of this yearlong 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, Matthew Deguet in English-speaking Canada. As you know, Cogier, under Matthew'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 -- we'll double down on our investments in these communities, dramatically enhanced resident experience and materially improve employee experience, resulting in exciting long-term carrier 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 Eric Chung's leadership in Canada and U.K. and Ras Simon's 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 30 and RIDEA 40 structure. I cannot emphasize enough how important this milestone is for our farm as we have now full alignment with all of our key senior housing operating partners. We think or swim together.

To continue this team 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 $2.3 billion 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 billion 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 of today's replacement cost, with accretive in-place cash flow and significant growth potential.

While I don't like to get into individual transactions, I would like to highlight a transaction in Canada with our partner, Cogier. We're recapping Cogier's existing institutional investor at Propco in highly desirable SaaS portfolio, and Matthew is investing is 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 two years on this transaction, and we're delighted to inform you that we signed a definite documents three weeks ago.

Additionally, following the completion of this deal and others under recently in a contract, we have achieved another company milestone having closed or signed over $11 billion of transactions since our pivot to offense in fourth quarter of 2020. But we are busier than ever with a robust feasible 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 -- all of which we expect to keep us very busy for the rest of the year. Our deal teams didn't get much of 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 hits 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 table.

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 directive 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. 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 rest loan portfolios that fall within our circle of competence.

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 the last few quarters. Just in the last 1 year, our leverage has fallen from high 60s to mid-5s through a combination of outsized organic growth and prudent capital allocation activity. Were now armed with approximately $7.6 billion of near-term liquidity to address upcoming debt maturities and fund our various capital deployment opportunities. 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 they were on the future of our business.

And with that, I'll hand the call over to John.

[John Burkart, COO]

Thank you, Shankh. Another great quarter like last quarter, just better. Our total portfolio generated a 12.7% 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 billions of dollars in value that are being unlocked as a result of the management transition we announced last night.

First, on results. The medical office portfolio's second quarter 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% second quarter NOI increase in our same-store Senior Housing Operating portfolio was a function of 9.9% revenue growth driven by the combination of 7.3% RevPOR growth and 190 basis points of occupancy.

As a note, this number excludes the U.K. communities, we recently transitioned to Avery that were 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. More specifically, the pressure we experienced from a tight labor market over the past two 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 first quarter 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 in the U.S. and U.K. growing at 9.9% and 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. and U.K. of 17.2%, 24.8% and 38.2%, respectively. On to the management transition. We're very excited about the value being unlocked as a result of these transitions. Having the right manager for an asset is critical.

The 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. To provide you with one example, one of our operators with over 50 properties is fully and rapidly transitioning to our platform over the coming three 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 600 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. 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 Cogier, 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 Cogier on this new venture and the incredible value we will create for our investors. More to come in the coming year.

I'll now turn the call over to Tim.

[Tim McHugh, CFO]

Thank you, John. My comments today will focus on our second quarter 2023 results. performance of our triple net investment segments in the quarter, our capital activity, a balance sheet liquidity update, and finally, our updated full year 2023 outlook. Welltower reported second 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 on floating rate debt. We also reported total portfolio same-store NOI growth of 12.7% year-over-year.

Now turning to the performance of our triple-net properties in the quarter, in our Senior Housing triple-net portfolio, same-store NOI increased 3.1% year-over-year and trailing 12-month EBITDA coverage was 0.88x in the quarter. Next, Same-store NOI and long-term postcute portfolio grew 6.1% year-over-year and trailing 12-month EBITDA coverage was 1.48x.

Turning capital activity in the quarter. In May, we issued a $1.035 billion convertible note due in 2028. The note bears interest at 2.75% 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 first quarter of next year.

In addition to our convert offering, we continue to issue through our ATM to fund ongoing investment spend, raising gross proceeds of $1.76 billion 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 helped drive net debt to adjusted EBITDA to 5.62x at quarter end, 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 6x on a pro forma basis 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 equivalent balance $2.7 billion. Along with full capacity on our $4 billion revolving line of credit and $910 million of remaining expected proceeds from near-term dispositions and loan paydowns, representing approximately $7.6 billion in near-term gross available liquidity and $6.3 billion of liquidity when netting for the $1.35 billion of unsecured maturities we have in 2024.

Lastly, moving to our full year guidance. Last night, we updated our previously issued full year 2023 outlook for net income attributable to common stockholders to a range of $0.73 to $0.84 per diluted share and 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 assumes no further investments in the year beyond what has been announced to date and $0.01 from HHS and other out-of-period government grants received in 2Q. And these increases are offset by a $0.01 increase in expected full year G&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 subsegment 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. 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.

[Shankh Mitra, CEO]

Thank you, Tim. We're currently living in an uncertain macroeconomic environment where the outlook is getting marked here by the day. One day it is sunny and the next day, all people see our 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 markets 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.

On one hand, we remain prudent and 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 where 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 '24 and '25. As I mentioned on our fourth quarter call, I believe we're at the beginning of multiyear double-digit NOI growth cycle for our business, resulting from a long runway of occupancy gains rate growth and operating margin expansion.

At Project Transformers, along with the relentless optimization of our operating platform, the impact which will start to show up in next year and the constraint reloading of our external growth and or perhaps the growth 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]

[Operator Instructions] Your first question is from the line of Jonathan Hughes with Raymond James. Your line is open.

[Jonathan Hughes, Raymond James]

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. Do they have more support from you? Is 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.

[John Burkart, COO]

It'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 a 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 finding it all out flawlessly and executing flawless is what's changing that game. There's a lot of details involved each of these -- in each of these situations, there's literally transition teams that are 24/7 focus 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.

[Shankh Mitra, CEO]

Jonathan, we are not going to give away how we do these things today versus what we happened 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 [indiscernible] 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 Siversky with Wells Fargo. Your line is open.

[Connor Siversky, Wells Fargo]

Good morning out there. I appreciate the color on the prepared remarks and congratulations on crossing that $1 billion 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?

[Nikhil Chaudhri, CIO]

Connor, it's Nikhil. 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 about 147 buildings that were being transitioned over of those 133 have already been transitioned to the new operators. And the results we're seeing are very encouraging. So if you look at those 133 buildings for the three months prior to the transition, those buildings on an EBITDA basis were losing roughly $90 million a year. three months later, first quarter of this year, and those same buildings that are making positive $70 million. 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.

[Steven Valiquette, Barclays]

Thanks. Good morning. Congrats on the results as well. Yes. No, it's hard to answer for the whole industry. Your results are obviously incredibly strong in Senior Housing, but there are some pockets from some other players where maybe the occupancy was slowing down a little bit in the quarter. Just curious if you have any high-level thoughts on maybe why your results were separate from maybe some other players that did see occupancy decelerating a little bit? Is there any signs of price sensitivity in any pockets of the market? Just curious of your thoughts around that.

[Shankh Mitra, CEO]

Yes. Steven, 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 -- 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 second quarter. That translated into third quarter, early fourth quarter occupancy gains. That's seasonally how the business works. And we have seen some significant traction this summer as we're moving into third quarter. 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 second quarter occupancy, right? John just mentioned, our reported same-store numbers are impacted by the removal of the U.K. 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? 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. Michael Griffin, your line is open. [technical error]

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

[Austin Wurschmidt, KeyBank Capital Markets]

I just want to understand. So with will no longer having an investment in the Sunrise management company and sort of dissolving the joint venture relationship with Revera are the remaining Sunrise-operated assets still revenue-based management contracts? And 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?

[Shankh Mitra, CEO]

The answer is the Sunrise contracts are not what you described. We restructured a contract with Sunrise in 2011 -- 2021, sorry 2021 and Sunrise is fully aligned with us with the principal philosophy that we're seeing ensuing 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 a 7-year long effort to transform all our contracts from sort of top line focused contracts to bottom line focus contract where we think and swim together and virtually all of our contracts are there today. 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 through owning part of management contract part of management companies. We do it through our contracts, and that's where you can see in the evolution of those contracts.

[Operator]

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

[Michael Carroll, RBC Capital Markets]

Yep. Thanks. I wanted to touch on the Welltower Cogier, I guess, operating relationship. I mean how is that relationship 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 Cogier or another operator? Or would you be doing that yourself?

[John Burkart, COO]

The -- as far as for how it works, I'll talk about that and I'll let Shankh talk about the expansion. But as far as how it works, it's working fantastic right now. I'm partnering up with Frederic and we're working together really on the vision, the strategy and oversight. Cogier is handling all the execution on the daily decisions and all that type of stuff. And what you have is a very synergistic team, 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. I -- there a fantastic operator. There's no value there. I'm focused to get on the bigger picture items.

[Shankh Mitra, CEO]

From an expansion standpoint, my comment that I made that this joint venture will have rapid growth. That comment obviously means that you will see that we're expanding where we're very excited about Canada and doing lots of expansions in Canada that will come. We're focused -- you think about it in a very simplistic terms, this platform that we're launching, we'll be focused on English-speaking Canada. Cogier has a tremendous brand in the French Canada and we'll watch this together from that. Now what we do in U.S. is a different conversation. Just understand that our PLR is on independent living and majority of our exposure in independent living is in Canada. That's why we're starting this.

[Operator]

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

[Vikram Malhotra, Mizuho]

Thanks for the question. Maybe Shankh or Tim, you talked a lot about stress in Senior Housing referencing obviously, Fannie Mae delinquencies. I'm wondering if you can just -- and then you outlined the $30 billion 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 do you think about the funnel and filtering it down to what is actually actionable for Welltower, whether it is analytics-driven or strategic driven. 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 [indiscernible] leaves you can share on kind of the earnings, the underlying AFFO is likely to grow over a longer time period?

[Shankh Mitra, CEO]

Let me see if I can answer your 5-part question. Likely, I will forget some pieces. So be -- frankly speaking, if we 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. 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 mid market remains, and it's not growing, it remains fairly flat. That's not what's happening today. 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 '15 and '19 time frame, they're on SOFR based loans, they're on LIBOR-based loans. And given how much that base rates have gone up, right, 500-plus basis points just in the last 12 months, is putting tremendous pressure. You think about it where a LIBOR plus 350, 400 it today, you are at 8%, 9% rate. And you just cannot -- these capital structures were not envisioned for that kind of rate environment. So you've got massive pressure on that. Then you see even people who put float caps, a lot of these floater caps are coming off second half of this year and next year.

So and you add insert injury, majority of Senior Housing loans actually come with personal guarantees. So I can go on and on and on, but that's not the point. What you're asking is, is very simply, these assets are not stressed, the balance sheet behind assets are stressed. And we are ready and willing. And to do these executions, you just -- you need two things. You need cash because that we're not showing up with subject to financing, 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 a earnings growth projection.

As Tim has alluded to, DCR's earnings growth is significantly impacted by, obviously, our floating rate debt as well as strong dollar. 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 comment, you can figure out that we're very excited about an accelerating earnings and cash flow growth trajectory as we look into '24.

[Operator]

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

[Nicholas Yulico]

Thanks. Good morning. In terms of the $2.3 billion of investments post second quarter. 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 first year cap rate basis and then stabilized yield potential going on a couple of years. And any comments on occupancy or other drivers that are creating some of the NOI upside for the assets?

[Shankh Mitra, CEO]

Yes. So I'll start with the last. Obviously, these assets have both occupancy and significant margin growth potential. With the occupancy, obviously, as you understand sort of the flow-through mechanics of this business. Majority of the profitability in the business is after, call it, 80% occupancy because there's very significant fixed costs. So incremental margin, if you will, after 80% occupancy is, call it, 70-plus margin. And then as you get closer to 90% or 90% -- about 90% occupancy we're at kind of 90 -- your incremental margins approach 90%, right?

So majority of the profitable 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, lower occupancy portfolio. That's sort of what we do. We do not like to pay a cash flow on a highly occupied high NOI, which drives into obviously results into high-basis assets. We just don't do that here. That sort of gives you the answer to the second question, right? Let's just talk about the first question, which is a very simple question. You should assume a year 1 in this batch of acquisitions, roughly around 6%, going into 7 plus, 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.

[Jim Kammert, Evercore]

Thinking at the business update on the Revera transition Pages 9 and 10, could you just provide what is a reasonable time line for that NOI capture and what capital you might have to spend to capture that NOI delta?

[Shankh Mitra, CEO]

Yes. So we have never gotten into the time line 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 the first part of your question. The second part, I just want to point out one thing is what we are suggesting here is that $120 million we mentioned is part of the $414 million 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 fourth quarter of '19 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 gave it to Oakmont, exactly two years ago, today is actually exactly two 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 will be in mid-90s in the 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. The Revera properties that we mentioned, I believe one of the pages said is like low sites occupancy. That portfolio is sitting at 23% margin, give or take today. I mentioned to you that Cogier runs in their Canadian portfolio of 40-plus person margin, that sort of gives you a sense of where we think that these properties can go. 120 is part of the bridge that shows you 414. 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.

[Juan Sanabria, BMO Capital Markets]

Shankh or John, maybe if you could just talk about what you're thinking or seeing or you're 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?

[Shankh Mitra, CEO]

Yes. So one, 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, we're 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.

[John Pawlowski, Green Street]

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, the next $1 billion of external growth is?

[Tim McHugh, CFO]

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

[Operator]

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

[Ronald Kamdem, Morgan Stanley]

Just can we dig into the expenses a little bit, what just seems is trending better than expected. Historically, it's been on the labor, that's a 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 do you have conviction in and where could you be surprised up or down?

[Shankh Mitra, CEO]

We have a lot of conviction on both continue to optimizing the labor side and other expenses. I would rather not get into what drivers you might get in the 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 '24, 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 not might play out on, 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 JPMorgan. Your line is open.

[Michael Mueller]

For the loan portfolio, loan assets that you're looking at, should we be thinking of those as being straight debt deal at discounts or just more specifically targeted toward portfolios where you can ultimately get to the real estate?

[Shankh Mitra, CEO]

So first thing is, I'm going to elaborate again. I think I've done it before. I'm just going to tell you, we don't lend against assets 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, were here to help people provide -- were 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 focus 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're just going in and 100 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, philosophically, that's what we think about it. Every transaction is different.

[Operator]

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

[Joshua Dennerlein, Bank of America]

John, last quarter, you mentioned you had rolled out a pilot program for drawing in leads to a couple of senior housing properties. And I think if I recall correctly, I guess 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?

[John Burkart, COO]

Yes. So the comments, if I remember correctly myself, was the COO called us and it was funny to me said, gee, you've done so much to increase leads. We're struggling in getting our hands around that in that pilot, and they definitely did get their hands around it. It's a staffing opportunity there. We're continuing to roll out -- move from pilot to rollout, and so we're pressing forward. And as I mentioned, we have another operator that's jumping on 100% on board and we'll be pushing forward their 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 power, 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.

[Michael Griffin, Citi]

I know you've talked in the past about redevelopment industries 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.

[John Burkart, COO]

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 that I think it's completely underappreciated as far as the future earnings potential of this portfolio. You look at our portfolio is roughly 20 years old in the Senior Housing business, and that is the sweet spot for renovation. It's one I typically call fluff and buff because what you have is your infrastructure plumbing and 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 a 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 NOI for certain, obviously, increasing occupancy first and occupancy and rate. The value proposition opportunity is significant. I've walked numerous properties in all the regions. And it's clearly a very big opportunity and having the expertise 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.

[John Pawlowski, Green Street]

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 gap in your assisted living portfolio?

[Shankh Mitra, CEO]

We'll have to get back to you on that. But generally speaking, you have assisted living fail further. 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 specifically, our portfolio has changed materially since '19 as far as Independent Living and Assisted Living is concerned. So we will have to those numbers and get back to you. But clearly speaking, I will tell you, the Assisted Living continue 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 a country comment, 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 [indiscernible] will play out but I cannot tell you, John, is it that if a product thing or just a country thing because majority of Independent 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.