Welltower Inc (WELL) — Q2 2023 Earnings Call Transcript

Thank you, and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although Welltower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. And with that, I'll hand the call over to Shankh for his remarks.

Thank you, Matt, and good morning, everyone. 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 that 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 for 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, resulted in significant margin expansions that we have been all waiting for. I'm pleased to report 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 growth, resulting in an approximate 25% operating margin, a level not seen since the onset of the pandemic. While that still leaves significant upside before achieving our pre-COVID NOI margin of above 30%, we expect to meaningfully exceed our pre-COVID level of profitability over time through John's build-out of the operating platform. All regions and product types contributed significantly this quarter, resulting in 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 the process of significantly optimizing our Canadian business, and have recently allocated a meaningful amount of investment dollars to the region. It is also important to mention that our Seniors Apartment business continues to drive double-digit NOI growth despite the broader deceleration in the apartment industry. We have put significant effort over the last six years to build our Wellness Housing business, which now nearly totals 17,000 units, and we are pleased to see that our thesis is playing out. Overall, 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 returns 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. 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 buy-sells, 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 considered some of the best care homes in the country. We transitioned these care homes from Signature to Avery and believe we have 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. Although 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-barrier-to-entry submarkets 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; these California communities were 77% occupied when they were transitioned to Oakmont at the end of June. I fully expect this portfolio to be materially additive to our growth in 2024 under Courtney's leadership. As you can see in the case study on Page 32 of our business update, highlighting previous Oakmont transitions in California, Courtney's team has taken occupancy from 64% to 90% in two years at these communities. Though this occupancy has far surpassed their previous high occupancy of 86% in 2016, I fully expect these communities will hit mid-90s occupancy in the near future. All things being equal, that stabilization path should be faster for the most recent portfolio of 28 communities that they have assumed management of. If not for the lessons learned previously, it will be for a higher starting point. After just four weeks of operations under Oakmont, these properties are on a path to achieve approximately 100 basis points of occupancy growth in the first month and are showing positive NOI traction. Finally, Canada, perhaps the most exciting part of this yearlong effort to optimize our portfolio. Though there is a multidimensional value creation opportunity in this effort, I am 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 on our investments in these communities, dramatically enhance the resident experience, and materially improve the employee experience, resulting in exciting long-term carrier growth opportunity. I predict this operating JV will witness rapid growth in the 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 seven-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 firm as we now have full alignment with all of our key senior housing operating partners. We think or swim together. To continue this theme of capital allocation, the favorable transaction environment that I described to you last quarter has resulted in an incredibly active summer for us. We currently have approximately $2.3 billion of deals under contract in 26 different off-market, privately negotiated transactions. Opportunities within the 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, at a 30% to 40% discount to 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 a highly desirable SaaS portfolio, and Matthew is investing his equity going forward. This CAD 935 million transaction of both recently built and attractive stable assets is a testament to the power of our relationship in this industry. Eddie and his team have been working tirelessly over the past two years on this transaction, and we're delighted to inform you that we signed definitive documents three weeks ago. Additionally, following the completion of this deal and others recently in contract, we have achieved another company milestone having closed or signed over $11 billion of transactions since our pivot to offense in the fourth quarter of 2020. We are busier than ever with a robust and actionable pipeline of opportunities that we're underwriting right now. Again, heavily focused on senior housing, but we are also seeing some outpatient medical and skilled nursing opportunities up and down the capital stack, all of which we expect to keep us very busy for the rest of the year. Our deal teams didn't get much of a summer vacation and it 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, and 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 a 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 numbers have been on full display in our full-page ad in 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 that is the customarily acceptable standard in the Senior Housing industry. I predict Welltower will play a meaningful role in helping to recapitalize distressed commercial real estate loan portfolios that fall within our circle of competence. Lastly, at the risk of stealing Tim's thunder, I would like to point out the significant strengthening of our balance sheet over the last few quarters. Just in the last year, our leverage has fallen from the high 60s to the mid-5s through a combination of outsized organic growth and prudent capital allocation activity. We're 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 the future may hold, my partners and I remain as optimistic as we were on the future of our business. And with that, I'll hand the call over to John.

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, 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.

Thank you, John. My comments today will focus on our second quarter 2023 results, the 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 post-acute portfolio grew 6.1% year-over-year, and trailing 12-month EBITDA coverage was 1.48x. Turning to capital activity in the quarter, in May, we issued a $1.035 billion convertible note due in 2028. The note bears interest at a 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 convertible 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 one 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, following this intra- and post-quarter capital activity, we have a current cash and cash equivalent balance of $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 reflects 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 Q2. 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 sub-segment growth of outpatient medical, 2% to 3%; long-term post-acute, 3% to 4%; senior housing triple-net, 1% to 3%; and finally, increased Senior Housing Operating growth of 20% to 25% year-over-year. 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%.

Thank you, Tim. We're currently living in an uncertain macroeconomic environment where the outlook is getting darker by the day. One day it is sunny, and the next day, all people see are dark clouds. The Federal Reserve appears to be resolute in its fight against inflation and seems far less inclined to come to the rescue of private and public markets as most participants would like to hope for. Against this backdrop, we continue to take a very balanced approach as we consider both growth opportunities and the 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 wherever more price and return conscious. We cannot predict the macro, but we can predict with a high degree of confidence what is likely to come on a micro basis. And that is while we are seeing growth rolling over in most asset classes, including most other real estate property types, both the demand and supply outlook are getting better for us as we look into 2024 and 2025. As I mentioned on our fourth quarter call, I believe we're at the beginning of a 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 of which will start to show up next year, and the constraint reloading of our external growth opportunities, or perhaps the growth bazooka at this point, through highly targeted deals, set up an ideal scenario for accelerating earnings and cash flow growth as we look into next year. With that, we'll open the call up for questions.

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.

That's a great question. Much of it really ties back to leadership, as successful transitions depend on effective execution. Our exceptional partners work together as a team to identify opportunities and challenges while building connections with people. All of these aspects revolve around individuals, so establishing those connections and executing flawlessly has transformed the situation. Each case involves many details; we have dedicated transition teams available around the clock focusing completely on these specifics, alongside operating teams concentrating on the daily operations. It requires a lot of effort, but ultimately, it is leadership that drives this change.

Jonathan, we are not going to give away how we do these things today versus what we did 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 information. You're seeing the positive results, and that's showing up in the results, but we're not going to give away our secrets on this call.

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

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. 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, in the first quarter of this year, those same buildings are making positive $70 million. There's still a lot more work to be done, but the rapid turnaround has been really encouraging to see. On the second part of your question, regarding labor, all the numbers, all the metrics seem to be following the broader trends we're seeing in our broader business; the labor situation is getting better by the day.

Thanks. Good morning. Congrats on the results as well. 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 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 about your thoughts around that.

Yes, we’re not going to speculate on what other companies may be experiencing. We can only share our observations. We are seeing a very strong beginning to the spring and summer selling season. As is typical for our business, activity noticeably increases, and sales begin to take off in the second quarter, which leads to occupancy improvements in the third and early fourth quarters. This is the seasonal pattern we observe. We’ve experienced substantial progress this summer as we transition into the third quarter, with improving pricing and occupancy trends. Therefore, I’m not sure what you are referencing, but we are extremely satisfied with our second quarter occupancy. John mentioned that our same-store performance is affected by the divestiture of our U.K. assets, but we are very pleased with what we’ve observed. While we cannot predict the future, we are committed to delivering more than what the market offers, and we’re happy with our current results. Analyzing demand and supply, we see improvements happening daily, not the opposite.

I just want to understand. So with Welltower no longer having an investment in the Sunrise management company and dissolving the joint venture relationship with Revera, are the remaining Sunrise-operated assets still revenue-based management contracts? And if so, how does that change the owner-operator relationship moving forward? Is there more restructuring to do over time with that portfolio specifically?

The answer is the Sunrise contracts are not what you described. We restructured a contract with Sunrise in 2021, and Sunrise is fully aligned with us with the principal philosophy that we're seeing ensuing together. Many years ago, I described that our fundamental philosophy under my team's leadership has changed from owning part of management company's equity to contracts. That's what we have described. As you can see in one of the slides, we have described a seven-year-long effort to transform all our contracts from top-line focused contracts to bottom-line focused contracts where we all think and swim together, and virtually all of our contracts are there today. So that should give 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 companies. We do it through our contracts, and that's where you can see the evolution of those contracts.

Yep. Thanks. I wanted to touch on the Welltower Cogier operating relationship. 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?

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. What you have is a very synergistic team. We're both extremely excited about re-envisioning the opportunity to reposition these assets. We're excited about what we're creating there, but I won't be involved in the daily aspects of it. There’s no value there. I'm focused on the bigger picture items.

From an expansion standpoint, my comment that this joint venture will have rapid growth means that you will see us expanding. We are very excited about Canada and doing lots of expansions there that will come. We're focused on English-speaking Canada. Cogier has a tremendous brand in French Canada and we'll watch this together in that regard. What we do in the U.S. is a different conversation. Just understand that our PLR is on independent living, and the majority of our exposure in independent living is in Canada. That's why we're starting this.

Thank you for your question. Shankh or Tim, you mentioned the stress in Senior Housing, particularly related to Fannie Mae delinquencies. Can you elaborate on the $30 billion opportunity you identified? I'm interested in your thoughts on how you assess the influx of distressed opportunities, whether they pertain to operations or balance sheets. How do you filter these opportunities to determine what is actionable for Welltower, considering both analytics and strategic approaches? Additionally, how does this actionable pipeline align with your expectations for long-term earnings power? You noted expectations for double-digit NOI growth; can you provide any insights on the underlying AFFO that is anticipated to grow over a longer timeframe?

Let me try to address your five-part question, although I might miss some points. First, it’s essential to recognize that the current stresses are related to balance sheets rather than cash flow. The balance sheet issues manifest in various ways, particularly the significant shortage of equity and debt capital. Contrary to popular belief, the mid-market is not expanding; instead, it remains stagnant. Currently, banks face substantial pressure from regulators to demonstrate capital, leading them to decrease their lending. Additionally, a lot of the construction financing from 2015 to 2019 relied on SOFR and LIBOR-based loans. With base rates increasing over 500 basis points in the past year, this has created severe strain. Many capital structures did not account for such rate hikes, resulting in immense pressure. Even for those who incorporated float caps, many of these caps will expire in the latter half of this year and into the next. Most Senior Housing loans also come with personal guarantees, adding another layer of complexity. To clarify, the assets themselves aren't stressed; it’s the balance sheets supporting them that are. We are prepared to move forward on these deals, but we require two things: cash—since we are not relying on financing—and operational partners. Both are necessary to address the balance sheet issues and facilitate future growth. We won’t delve into multi-year earnings growth projections during this call. As Tim mentioned, DCR earnings growth will understandably be influenced by our floating rate debt and a strong dollar. Unless you anticipate a rise in rates from 5.5% to 11% again, such impacts shouldn’t persist. You can analyze what NOI growth might look like moving forward. We are optimistic about the positive trajectory of earnings and cash flow growth as we move into 2024.

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 out a couple of years? Any comments on occupancy or other drivers that are creating some of the NOI upside for the assets?

Yes. So I’ll start with the last part of your question. Obviously, these assets have both occupancy and significant margin growth potential. With the occupancy, as you understand the flow-through mechanics of this business, the majority of the profitability comes after reaching about 80% occupancy because there are very significant fixed costs. So, the incremental margin after reaching 80% occupancy is roughly around 70%. As you approach 90% occupancy, the incremental margins approach 90%. So, the majority of profitable growth comes in that 10% occupancy range. This is why we like buying low-basis, lower-occupancy portfolios. We do not favor paying a cash flow on a highly occupied, high NOI asset which drives into high-basis assets. That gives you the answer to the second part of your question. Let's move to your first question, which is a very simple one: you should assume a year one cap rate in this batch of acquisitions is roughly around 6%, moving into a stabilized yield of 7% plus, following the math I just described to you.

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

Yes. So we have never gotten into the timeline of our bridge. This is part of our bridge, obviously. We'll leave you to determine when we think stable occupancy will come. The second part, I just want to point out, is that the $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. The fundamental tenet of the bridge is we go back to fourth quarter of 2019 occupancy. If you look at Page 32, which shows one of these transitions we have done, not only the first six that we gave to Oakmont, exactly two years ago, they are exceeding 90% occupancy, where the prior peak was 86% in 2016. That gives you a sense of where we think the occupancy will go and what the margin will follow. For example, the Canadian example: the Revera properties that we mentioned have low site occupancy. That portfolio is sitting at 23% margin today. I mentioned that Cogier runs its Canadian portfolio at 40%-plus margin. That gives you a sense of where we think these properties can go. The $120 million is part of the bridge that shows you $414 million. If we thought $120 million was all we were going to get, we would not have done it.

Shankh or John, maybe if you could just talk about what you're thinking or seeing or discussing with your operators regarding 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 sizable increases in a different inflationary environment.

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

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

Yes, John, I think consistently with how we've been in the past, funding is going to be from the most attractive source you have, whether that's public equity, debt, or disposition proceeds. We'll continue to fund openly as we move along. I would just hesitate to try to provide you forward guidance on that; it will be determined at the topmost time that we're funding.

Just can we dig into the expenses a little bit, what just seems to be trending better than expected? Historically, it's been on the labor; that's a surprise. Can you talk about 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?

We have a lot of conviction on continuing to optimize labor side and other expenses. I would rather not get into what drivers you might see in the next six months versus twelve months, but I will point out that the utility side, the energy side was a significant hit last fall. As we approach 2024 from a year-over-year perspective, energy prices have come down; we should see some benefit. However, we're not going to try to predict what might or might not play out; we are feeling very good about continued margin expansion, not just sort of going back to pre-COVID levels, but we believe John will take these margins much higher over time.

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

First, I want to elaborate again. We do not lend against assets that we would not want to own at the value of our loan. That is the fundamental principle we adhere to. Different transactions come in various forms. We are here to assist owners and borrowers with the liquidity they may need or institutions that already possess those loans. I am not certain how different transactions will unfold, whether it involves an existing loan or if we are providing new capital. Our main focus is on figuring out how to achieve equity returns. If we are entering a situation where we are lending at full value without any existing debt, we will need to consider what type of discount is necessary to ensure the right return if there is existing debt. We are comfortable owning the asset at the value of our loan; that's the way we approach it, but every transaction is unique.

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

Yes. The comments were that the COO called us and mentioned how much we increased leads. They were struggling to manage that in that pilot, and they definitely did get their hands around it. It's a staffing opportunity. We're continuing to move from pilot to rollout, pressing forward. We have another operator jumping on board, and we'll be pushing forward their platform as well. We're seeing terrific results through the marketing efforts that we're applying. Maximizing NOI is our focus. So, we're looking at a combination between price and occupancy, recognizing that occupancy comes with a price. We will push a little bit more on price and find the right point, but it’s ultimately about maximizing our outstanding results.

I know you’ve talked in the past about redevelopment initiatives you’ve undertaken at some properties. I’m just curious if you can give us an update on these redevelopments and what the expectation for growth in this platform is going forward?

That's a great question. I think it’s something that is completely underappreciated regarding the future earnings potential of this portfolio. Our portfolio is roughly 20 years old in the Senior Housing business, and that's the sweet spot for renovation. What you have is your infrastructure, plumbing, and roofing typically in good order. What isn’t in good order is the first impressions, amenities, and units. I have been aggressively building out a renovation team here at Welltower with experts, and we are launching what you'll see as massive renovation programs across the West Coast, East Coast, Canada, UK. All these things are lining up, and we're at the beginning stages, but the impact should be very positive on NOI, certainly increasing occupancy first. The value proposition opportunity is significant. I've walked through numerous properties in all the regions, and it’s a very big opportunity. Having the expertise on our team will change the game in the renovation of senior housing.

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?

We'll have to get back to you on that. Generally speaking, you have assisted living falling further; it has longer to come back. Independent living didn't fall that far, but it has been coming back slowly. Our portfolio has changed materially since 2019 regarding Independent Living and Assisted Living. We will have to get you those numbers, but clearly speaking, I can tell you that Assisted Living continues to outperform, and we're seeing Independent Living starting to come back. Independent Living for us, about 75%-80% is in Canada, and it’s more of a product comment or a country comment. We are seeing very strong performance finally coming out of Canada, and we expect that to improve as all this optimization plays out. But I cannot tell you if it's a product thing or country thing since the majority of the Independent portfolio is in Canada.