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Closing prices for crude oil, gold and other commodities
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
How major US stock indexes fared Friday, 4/19/2024
American Express profits jump 34%, helped by jump in new customers, higher spending
American Express, Fifth Third rise; Netflix, PPG Industries fall, Friday, 4/19/2024
Intuitive Surgical Stock Can Trend Much Higher This Year 
3 Magnificent Seven Stocks Outperforming the Rest
Bargain Hunting: 3 Stocks With RSIs That Scream Oversold
Closing prices for crude oil, gold and other commodities
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
How major US stock indexes fared Friday, 4/19/2024
American Express profits jump 34%, helped by jump in new customers, higher spending
American Express, Fifth Third rise; Netflix, PPG Industries fall, Friday, 4/19/2024
Intuitive Surgical Stock Can Trend Much Higher This Year 
3 Magnificent Seven Stocks Outperforming the Rest
Bargain Hunting: 3 Stocks With RSIs That Scream Oversold
Closing prices for crude oil, gold and other commodities
S&P 500   4,967.23
DOW   37,986.40
QQQ   414.65
How major US stock indexes fared Friday, 4/19/2024
American Express profits jump 34%, helped by jump in new customers, higher spending
American Express, Fifth Third rise; Netflix, PPG Industries fall, Friday, 4/19/2024
Intuitive Surgical Stock Can Trend Much Higher This Year 
3 Magnificent Seven Stocks Outperforming the Rest
Bargain Hunting: 3 Stocks With RSIs That Scream Oversold
Closing prices for crude oil, gold and other commodities

Welltower Q1 2023 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing View Latest SEC 10-Q Filing

Participants

Corporate Executives

  • Matt McQueen
    General Counsel
  • Shankh Mitra
    Chief Executive Operator
  • John Burkart
    Chief Operating Operator
  • Tim McHugh
    Chief Financial Officer
  • Nikhil Chaudhri
    Chief Information Officer

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Welltower First Quarter 2020 Earnings Release Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] And at this time, I'd like to turn the call over to Mr. Matt McQueen, General Counsel. Please go ahead, sir.

Matt McQueen
General Counsel at Welltower

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 cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC. With that. I will turn the call over to Shankh for his remarks.

Shankh Mitra
Chief Executive Operator at Welltower

Thank you, Matt and good morning, everyone. I'll review our first quarter results and describe high-level business trends and our capital allocation priorities. John will provide an update on the performance of our senior housing operating and Outpatient Medical portfolio. Tim will walk you through Triple-net businesses, balance sheet highlights and revised guidance Nikhil is also on the call to answer questions. We're pleased to report another strong quarter with results that exceeded our expectations. Our strong performance was once again driven by outsized growth in our senior housing operating portfolio, which generated 23.4% same-store NOI growth with both revenue and expense trends continuing to move in the right direction. In fact, we produced our fifth consecutive quarter of double digit organic revenue growth on the back of strong pricing power and occupancy build with each coming slightly better than expected. But perhaps equally, if not more encouraging, is the margin expansion story, which is being driven by a significant improvement on the cost side. While we generated strong revenue growth in 2020, these gains were largely offset by pressure across the expense tax, which ultimately resulted in last year in terms of par share growth. We are delighted by the progress made on various expense items, but particularly pleased by the sharp decline in agency labor or temporary staffing across the portfolio.

Over the past few quarters, we have noted the headway our operating partners have made in net hiring as IL employment rates have been weakening. This has ultimately translated into a meaningful reduction of prohibitively expensive temporary staffing with costs declining over 50% versus the first quarter of last year. Though we still have a long way to go to eradicate this problem, which is largely attributed to community leadership challenges, we believe that this trend along with strong pricing power will continue to be a tailwind for further margin expansion.

From a product and geographic standpoint, while assisted living continued to outperform independent living IL pricing is starting to strengthen. This is reflected in our Canadian portfolio, which is finally rebounding after a disappointing couple of years. We are seeing standout performance from our operating partner Cogir, which has returned to almost 40% margin for the first time since COVID. We're grateful to our partner [Indecipherable] to get and his team for their hard work and dedication. Sticking with the international team, our UK portfolio continues to produce strong revenue growth and we're starting to see some green shoots on the cost side.

During our call, I express my enthusiasm around the appointment of Lorna Rose as a CEO of our largest UK operator Avery. Lorna is already making significant impact with a strong commercial acumen and impeccable leadership skills. We expect our UK portfolio to be a strong source of growth as we look at 2024 and beyond. Returning to the U.S., our largest operator Sunrise continues to produce strong top and bottom line results. There is meaningful embedded upside to this incredibly well located and virtually impossible to replicate portfolio, which sits at mid 70s occupancy today.

Also during our last call, I mentioned that we expect meaningful step-function growth from our large regionally concentrated portfolio of StoryPoint. I'm pleased to report that Dan and his team have started the year off with a bang as their no-excuse culture and relentless focus on performance is paying off significantly. And last but not least, Oakmont. A year and a half ago, we [Indecipherable] well-located California properties to Oakmont and at that time, Courtney Siegel, Oakmont's CEO, made me promise that her team would lease up this portfolio in two years. I'm pleased to report that the portfolio today sits at 86% occupancy, while NOI has gone up 13 times since then. Courtney has set a simple performance-driven culture at Oakmont. If you're not 95% occupied, you are not performing. I'm confident that I will be able to soon report to you that this portfolio has reached 90% plus occupancy levels. Pursuit of higher standard is prerequisite of high performance.

Last year, I described to you that we as capital allocators strive to create partial value by compounding over a long period of time. By doing so, but doing what's right in the long term for our continuing shareholders may result in short-term pain. Our proactive portfolio management efforts, which includes transition our properties to our strongest operators is an example of this philosophy. I encourage you to look at the case studies within our business update presentation for more details on Oakmont's success and other key operators including Peace Capital, which has created substantial value for our shareholders following the transition of a portfolio of skilled nursing facilities two years ago.

By operating these facilities more efficiently from an expense perspective while increasing quality mix, Peace has been able to improve EBITDAR by more than 75% relative to the pre-COVID levels. This point is further underscored by our COVID class of acquisitions and our further efforts to transition other assets over the past few years. We're just beginning to capture significant embedded NOI from these properties as they return to their pre-COVID NOI levels and higher, and in fact, we have achieved 20% of that incremental NOI in the past quarter alone.

Shifting to the operating platform and asset management initiatives. As you have come to know, at Welltower, we vehemently reject mediocrity and are in relentless pursuit of high standards. We continue to believe that there is an opportunity to recognize meaningful cash flow from our own portfolio as we optimize location, product, price point and operators using our data analytics platform, Alpha. To further add to this multi-dimensional optimization problem using machine learning, our operating platform initiatives are now becoming more tangible moving from drawing boards to pilots. While a few weeks don't make a trend, we are optimistic that John and his team are on the verge of some real creative breakthrough. More on that in coming quarters.

In terms of recent operating conditions, while don't like to fix them in short-term trends, I want to mention the consistent rise in demand for our Seniors product in Q1, total volumes are up roughly 20% in the quarter, partially attributed to an easier comparison period last year due to Omicron variant, but also because of great organic demand as we enter another year of significant growth of the 80-plus population. Lease [Indecipherable] have picked up father in April. While we remain confident in the prospect of our business, I'd be remiss not to acknowledge the rising macroeconomic uncertainty as we approach the summer and fall leasing season. We're encouraged by what we're seeing so far, which admittedly is also the seasonally slowest point in the year. Therefore, we need to see what market gives us during the all important upcoming leasing season. The need-driven nature of our product gives me hope that we will outperform majority of the asset classes, not just real estate, but it is also important for you to understand that we have no dilution of certainty.

Moving to capital allocation. Since our last call, U.S. banking sector has started to show some significant signs of strength, resulting in material declining trade flow in the economy. While no one is rooting for macroeconomic uncertainty, the current backdrop has certainly created a farther expansion to our already attractive set of capital deployment opportunities. We remain disciplined and will not risk the enterprise that we've built with blood, sweat and tears. But we remain optimistic that we'll be able to grow our portfolio with well-located asset at a highly favorable basis an in-place cash-flow. To illustrate that point further, we acquired $529 million of asset during the first quarter at a great basis and in-place cash flow. The K Street medical office building that we acquired in DC perhaps tells you how favorable the investment in environment has become. We continue to see underwriting standards starting meaningfully, leverage levels decline and banks are now requiring more commercial deposits and more recourse.

As a low leverage buyer, this backdrop is very beneficial for us. Our pipeline today is robust with opportunities to deploy capital across senior housing in all three countries, Outpatient Medical in the U.S. and debt opportunities on the skilled side. Our team remains active and yet highly disciplined and price conscious as always. From a balance sheet standpoint, I wanted to quickly highlight the continued progress we made in terms of leverage and liquidity under Tim's leadership. He will you will get into more details, but I'm very pleased with significant deleveraging that we have achieved in past year with net debt to EBITDA falling almost a turn to 6.3%, with further organic deleveraging going forward. And our ability to source over $1 billion of capital this year in the midst of a very challenging capital market's environment is a testament to the confidence entrusted in us by the banking community, the lenders, our investors and our other partners.

With approximately $700 million of the cash on the books and undrawn line of credit, we're not only positioned to endure further capital market volatility, but also to deploy capital as opportunities arise. To summarize our optimism regarding the long-term growth trajectory of the business remains firmly intact. Topline growth remained strong, expenses are moderating and our external growth opportunities continue to expand, while all the while John and his team are making progress in turning our vision of creating a world-class operating platform into a reality. And with that. I will turn it over to him for an update on the operational elements of the business and build out of the platform. Thank you, Shankh. Another great quarter, 11% same-store NOI growth of the prior year's quarter, led by the senior housing operating portfolio with 23.4% year-over-year growth. These results speak for themselves. They're great. So I'll provide limited color this quarter. Medical office portfolio's first quarter same-store NOI growth was 1.6% over the prior year's quarter. As our guidance outlines, we expect the MOB portfolio to deliver between 2% to 3% same-store NOI growth in 2023 and therefore, we expect the remaining three quarters to be well above the first quarter number. Same-store occupancy was 94.9% while retention remains extremely strong across the portfolio at 91.4%. The 23.4% first quarter NOI increase in our senior housing operating portfolio was a function of the 10% revenue growth and continued expense control for the period. I want to remind everyone that last quarter's revenue growth was driven in part by an operator pulling forward rental increases. Excluding that specific operator, revenue growth in Q1 would have been 10.8%, 130 basis-point increase over the over the growth for Q4 2022 for the comparable portfolio. All three of our regions continue to show strong revenue growth, starting with Canada at 7.7% and the U.S. and UK growing 9.3% and 17.4% respectively. Revenue growth for the quarter was driven by 240 basis-point increase in average occupancy and another quarter of healthy pricing power with RevPOR growth of 6.8%. The 10 basis-point increase in sequential occupancy during the first quarter period that has historically seen an occupancy declined due to seasonal factors, reflects the continued increased demand for senior housing as we move into the all important spring and summer leasing season. Turning to expenses, agency use continues to decline, leading to a 53% expense decreased year-over-year for the same-store portfolio in the first quarter of 2023. Welltower's continued aggressive asset management is keeping expenses in check, enabling margin expansion. During the first quarter, the operating margin expanded 240 basis points over the prior year's quarter. Regarding our operating platform, I'm very pleased with the progress the teams have made. We are executing rapidly as planned. As many of you know, I'm somewhat secretive about the details of our platform for proprietary reasons. However. I will say that one of the challenges our operators in the pilot are having is keeping up with the increased qualified leads. A very good problem to have. We at the very beginning of this process, but all lights are green at this time and I'm very excited about the future. I'm grateful for the diversity of operational experience, engagement and enthusiasm of those operators, who understand how the platform will transform the business, lead to consolidation and great success for the operators who leverage our best-in-class platform to improve the delivery of service to our customers, the quality of life of the employees and returns for our owners. I will now turn the call over to Tim.

John Burkart
Chief Operating Operator at Welltower

Thank you, John. My comments today will focus on our first quarter 2023 results. Performance of our triple-net investment segments in the quarter, our capital activity, our balance sheet and liquidity update and finally, our updated full-year 2023 outlook. Welltower reported first quarter net income attributable to common stockholders of $0.05 per diluted share and normalized funds from operations of $0.85 per diluted share, representing a 4% year-over-year growth and 13% growth after adjusting for the year-over-year impact from a stronger dollar and higher base rate than floating rate debt. We also reported total portfolio same-store NOI growth of 11% year-over-year.

Now turning to the performance of our triple-net properties in the quarter. As a reminder, our triple-net lease portfolio coverage and occupancy stats reported a quarter in arrears. So these statistics reflect the trailing 12 months ending 12/31/2022. In our senior housing triple-net portfolio, same-store NOI increased 0.2% year-over-year and trailing 12-month EBITDAR coverage at 0.86 times the quarter. Next, the same-store NOI on our long-term post-acute portfolio grew 4.2% year-over-year and trailing 12 month EBITDAR coverage was 1.33 times. Turning to capital market activity. In the quarter, we raised $413 million through our ATM program, which helped fund accretive investment activity during the quarter and maintained debt-to-EBITDA at 6.31 times at quarter end, a substantial decrease from 7.1 times at 3/31/2022.

In March, we swapped $350 million of our $1 billion 2027 floating rate term loan to a fixed rate of 5.335% through March of '24, putting floating rate debt to 13.6% of total debt and just 4% of consolidated enterprise value as of quarter end. We ended the quarter with $639 million of cash, full capacity under $4 billion revolving line of credit and $393 million of expected proceeds from near-term dispositions and loan pay-downs, representing $5 billion near-term available liquidity. Over the last 12 months, we've seen leverage meaningfully improve from its post-COVID peak reaching the first quarter of 2022. As our senior housing operating NOI just staring to recover, we've experienced beginning stages of a cash flow growth driven deleveraging and we've amplified this organic leverage reduction with a disciplined approach to capitalization of our external growth pipeline. The result of this approach is a balance sheet that in its current form is poised to be substantially lower levered than it was pre-COVID as we continue to see senior housing operating NOI recover.

Lastly, moving to our full-year guidance. Last night, we updated our previously issued full-year 2023 outlook. The net income attributable to common stockholders to a range of $0.57 to $0.72 per diluted share and normalized FFO of $3.39 to $3.54 per diluted share. We're $3.465 at the midpoint. Our updated normalized FFO guidance represents a $0.025 increase in the midpoint of our previously issued guidance. This increase in guidance is reflective of $0.02 of fundamental outperformance, mainly from our senior housing operating segment, roughly half a penny of which is from subsidies received in Q1 and a $0.05 from investment activity completed in Q1.

Underlying this FFO guidance is an increased estimate of total portfolio year-over-year same-store NOI growth of 9% to 13%, driven by sub-segment growth of outpatient medical 2% to 3%, long-term post-acute 3.4%, senior housing triple-net 1% to 3%, and finally, increased senior housing operating growth of 17% to 24% year-over-year. The midpoint of which is driven by better-than-expected expense trends to start the year along with year-over-year growth expectations of revenue of approximately 9.5%. Underlying this revenue growth, is an expectation of approximately 230 basis points of year-over-year average occupancy increase and rent growth of approximately 6.3%. And with that, I'll hand the call back over to Shankh.

Shankh Mitra
Chief Executive Operator at Welltower

Thank you, Tim. Well, we're very pleased with our quarterly results and our improved outlook. It's a bittersweet moment for us in Toledo as we mourn the passing of George Chapman. George was the former Chairman and CEO of healthcare REIT, Welltower's predecessor company and a gifted person and a visionary in the healthcare real estate space and perhaps above all, an incredibly kind and generous individual. During his many years of healthcare REIT, George not only served as a leader of the company, but was also a mentor and teacher to numerous individuals across the real estate space. He was raised in the Toledo area and always sought opportunities to give back to the community including his high school in Miami and through his service on various boards to strengthen the Northeast Ohio region. We are deeply appreciative of all he has done for us, and he will be missed dearly.

Lastly, before we get into Q&A, I wanted to highlight a document, which we posted on our website last evening, which is also part of our shareholder letter published a couple of weeks ago. This document contains a set of ground rules or shared principles, which form Welltower's philosophical foundation for long-term compounding through capital allocation, risk mitigation and culture amongst other factors and ultimately and most importantly, who we seek as our long-term investor partners as we execute our mission of delivering to them superior absolute and relative total shareholder returns. I will now open up the call for questions.

Questions and Answers

Operator

Thank you very much, ladies and gentlemen. [Operator Instructions] We'll take our first question this morning from Derek Johnston of Deutsche Bank.

Derek Johnston
Analyst at Deutsche Bank Aktiengesellschaft

Hey everybody, good morning. Can you share your thoughts on further transitions and potential consolidation of operators within the portfolio because in your case studies, we were most impressed with Kisco. Are there opportunities to expand this relation on seven or eight communities like you did with the to Kensington? And look we ask given all operators are not operationally equal. So is there a plan or potential for further accretive transitions?

Shankh Mitra
Chief Executive Operator at Welltower

So, Derek, you asked a lot of questions, so I think I'll try to remember and answer the question. Kisco is one of our best operating partner and they are very significant opportunities to grow with Kisco, whether that's through transition, that's through acquisition, that's through development. Obviously, there's no question that they have absolutely hit it out of the park. And we are having all these conversations going on. As I had mentioned on last quarter's call, I believe, that we finally have figured out, hopefully, how to do transition very accretively as you setup your voice, but I think that's a good one. I think I've given some examples in my script and Oakmont. Let me give you another example. Probably last year at this time, we announced a large set of acquisitions with our partner StoryPoint and the first tranche of that acquisition closed in Q3. So let's think about it. So, these properties, the first tranche, these 18 properties that StoryPoint took over from the existing operator.

At that point at end of Q2, it had 74% occupancy, call it circa $6.5 million, $6.4 million of annualized NY and nine months later, they started taking this over in July, you would think that through transition and all of those obviously moving this asset, it'll be a great win if occupancy and NOI helped. Nine months later, end of March, in the quarter end, occupancy was 82%, NOI was $16.2 million. That tells you what a great operator with significant focus can do. So, it is my belief that now you've got obviously John and his team and with our premium operating partners who have done this many times over, during the most difficult time of COVID, has figured out how to do this extremely well and accretively. I gave you a bunch of examples. We obviously provided more case studies and we do think that there is significant opportunities to enhance our portfolio by what I've said, optimizing four things right. It's an optimization problem, which is location, product, price point, and operator. Right. So that's what obviously Swagat and Kevin and their team are trying to constantly do and we're executing that with our premium operating partners.

Operator

Thank you. We go next now to [Indecipherable] at Wells Fargo.

Unidentified Participant
at Welltower

Good morning out there. Thanks for having me on the call. Question on labor for me. Can appreciate that Welltower, the operator base has made a lot of headway on improving labor sourcing methods across the portfolio. And then the positive trends related to agency usage. So I'm curious, what does the training schedule look like for a new hire in a senior housing facility and can you provide any color or a number as to what turnover levels look like currently compared to say this time last year? And then what your expectations or goals are related to that turnover metric looking forward?

John Burkart
Chief Operating Operator at Welltower

Yeah, I'll answer that. So a couple of things there. One is things are going fantastic. We've fundamentally changed how we looked at or how the operators look at personnel and effectively created a hiring funnel to move people through that process. The training, it's dependent upon position, but can take from a few weeks to a couple of months in some jurisdictions as far as certain requirements that are there. One of the things that I want to bring up, it's pretty important, it's a subtle piece, but it's pretty important. We appreciate the agency stepping in when necessary to provide some assistance, but it's obviously both disruptive and not very efficient. So as we move forward, we reduced agency and created a group of steady long-term employees that substantially improves the quality of life for our residents. It improves our effectiveness and our efficiency. So the benefits are not just reduced expense, the benefits will come through via increased occupancy, increased [Indecipherable], etc.

As far as for the turnover, the turnover at this point in time is going down. We have numerous initiatives to improve the quality of life for our employees as well. I've mentioned in the past, we are focused on that. We're looking through the lens of the employees. They are very hard working people and making sure that they have what they need really for the whole aspect of their employment, whether it'd be things as simple as parking to break rooms to time off, etcetera. We've put a lot of effort into that. We continue to put effort into that, so that's a very positive area. Thank you for the question.

Operator

Thank you The next comes from Vikram Malhotra at Mizuho.

Vikram Malhotra
Analyst at Mizuho

Thanks for taking the question. Shankh or Tim, I have a broad two-part question surrounding investments. Just maybe first, one of your peers had some challenges with A debt investment. They had to convert that, so there some headwinds there. If you could maybe give us some color on your loan book and particularly the investment you made with HC-On a couple of years ago, you may correct me, maybe it was over $700 million. I just want to understand the structuring, perhaps kind of the time you underwrote that and just maybe give us an update on the status and as related to investments, Shankh, you have very unique relative cost to capital and in a world where equity and debt is very, very hard to get. Lot of fear in the market. I'm just wondering, can you broadly give us color on where you are greedy in terms of capital structure or type of property? Thank you.

Shankh Mitra
Chief Executive Operator at Welltower

Let me try to address both of those questions and Nikhil will jump in if I miss anything, okay. So let's just start with the second question first. We are always greedy when others are fearful, as you know. Where we are finding opportunities, as I mentioned on my prepared remarks, that we see a substantial -- we have a substantial actionable pipeline in seniors housing in all three countries. This is the first time we're seeing opportunities, not just in U.S. but also in Canada and UK. So we're very optimistic about senior housing opportunities in all three countries and we are seeing substantial opportunities, all small deals. As you know, Vikram, we're very focused on individual buying individual assets, small transactions, outpatient medical in the U.S., right. Across capital structure, we are seeing opportunities on the debt side in the skilled side of the business. So that's sort of where we're seeing opportunities.

First question, debt book. If you think about our debt book, you should think about our debt book in three different buckets. But before I get into it, I'll remind you that majority of these loans, right, just call it 80% of the book was originated after COVID. And we try to as we have discussed in many of these cases. So let's just talk about three buckets and you will understand. The first bucket is HC-One. You have a specific question, I'll get to it. The second bucket is our partnership with Related and as I've mentioned in previous call, these developments are structured as a participating [Indecipherable], right. That's the second bucket. Those are majority of the loans. If you go beyond that, the average size of the loan is like $12 million, right.

So let's just talk one at a time. We are very much focused on not just debt, but also last dollar basis of every debt and possibly as a majority of these cases, an equity feature that attached to that debt. So let's talk about one at a time. We talked about the Related development pipeline and that's obviously structured as a participating, by definition, that's equity-like structure. Second HC-One, if you go back and see what we said when we did that, that is the whole loan that is senior loan, unlike a lot of the things that you see, it is not a mezzanine loan. There is no senior in front of us. We are the senior. The last pound basis of that loan is GBP32,000 per bed, which tells you how low leverage that loan is. But to your question. If we were to take that over, which is we have no intention of, but if we were to take that over there is no senior loan that sits in front of us, right. Understand our last dollar basis. You know what the values are in UK. That sort of gives you a sense of what it is, but more importantly, if you go back and see what I said when we did the loan, we have actually a substantial amount of equity behind that in terms of warrants, right. So, and then you go to the last one. There are some pure debt, that is a lot of participating [Indecipherable]. That's sort of the convention of the loan book. So we don't lend anywhere where we don't think the last dollar is not significantly beneficial to us. We hope that people who borrow from us will do substantially well and from the equity participating nature of many of these loans will participate with them, not just get a return on and off our capital. Hopefully, that was helpful for you.

Tim McHugh
Chief Financial Officer at Welltower

I think I'll just quickly add on the two related products that are delivered, New York and San Francisco. New York senior housing opened in January of this year. And so four months in. Occupancy is beyond where we underwrote at the end of the first year and San Francisco has been open for a lot of year is also ahead of underwriting both performance well.

Shankh Mitra
Chief Executive Operator at Welltower

And some rates are substantially above what we underwrote.

Operator

Thank you. We'll go next now to John Pawlowski at Green Street.

John Pawlowski`
Analyst at Green Street

Thanks for your time. Shankh, you made the comment recently that if John and team are successful with their initiatives that the pace of improvement in expense growth will intensify from here. Just curious if some of the early operating initiatives you're currently working on are flowing through the cost structure of the business in recent quarters, how much lower would expense per occupied room growth have been relative to like the 3.5% reported growth in recent quarters?

Shankh Mitra
Chief Executive Operator at Welltower

So I'm going to take that and answer that question in two parts. First, in asset management initiatives and that asset management initiatives that John has with his team that you are seeing the impact on their agency labor and replacing that agency labor with permanent employees and John mentioned many other sort of initiatives that's going on to attract and retain talent, which would continue to reduce that number.

The the other side of your question is the operating platform question. We are today, John is entirely focused on topline and we are seeing some signs of, as I mentioned on my prepared remarks that we've just moved on few places from drawing board to pilots and we're seeing some significant successes on leads and other situations that, obviously, we're not prepared to talk about it. That you're going to see on top line, not on the expenses yet. He will get to the expenses, but he is focused on the big ball today on the revenue side.

Operator

Thank you. We'll go next now to Michael Griffin at Citi.

Michael Griffin
Analyst at Smith Barney Citigroup

Great, thanks. Maybe turning back to capital allocation. I'd just like to get some color maybe around the MOB acquisitions, seems like it's pretty opportunistic. I believe you all were selling MOBs back in summer 2020 when people were buying. Maybe some color around [Indecipherable] initial yields here. The occupancy at least for the [Indecipherable] seem kind of low, maybe the [Indecipherable] underwriting. Are you assuming maybe a stabilized high 80s, low 90s occupancy and then [Indecipherable] as a capital allocator if we go back to your third quarter prepared remarks about those five sources of capital. Does any one of those, whether it's debt or equity, selling assets, is anyone screening as more attractive right now? Thank you.

Shankh Mitra
Chief Executive Operator at Welltower

Okay. Nikhil will walk you through them will be acquisition that we did in the quarter. But let me just answer some of the other question you asked/ So as you think about it, the five sources of capital, we have accessed three of them this quarter, right. We have done public equity, we have done private equity right, we've sold assets and took capital and very attractive, obviously returns, you can see it as an example, on Slide 12 the case studies that we put together on some of those assets and how we significantly maximize value there. We still have some participation left in that transaction and the other thing was debt, but that was on the secured side. So as you think about menu of capital, don't just think this is public equity and public debt, right, which is obviously the very good source of capital and has been for us, but also think about private source of capital, whether it's joint venture, asset sales and private source of debt.

Senior housing is a housing business and we have substantial portfolio, under-leveraged portfolio in U.S. and in Canada, which has very significant agency support, right. So this quarter in U.S., we have executed one transaction. But as you think about capital, think about menu of options and depending on what that renewal option or how it is priced on a given day, we execute and only think through that use of capital as it relates to what are the returns of that as we deploy that capital back on an unlevered IRR basis and from the perspective of a long-term return. That's just how we invest capital, Nikhil?

Nikhil Chaudhri
Chief Information Officer at Welltower

Yeah, [Indecipherable] to answer your question on the MOBs. If you look at the K Street, that's roughly 20% of the capital we deployed towards medical office this quarter. K Street and we're buying it at less than half of replacement cost with a 6.6% in-place yield at low 80s occupancy and we've underwritten this to be beyond the 8% stabilized yield with occupancy with 9% in front of it and just think about the quality of the real estate, right. I mean it's three blocks from the metro station, it's two blocks from the George Washington University Hospital. You've got public parking. I mean, it's as high quality of an asset as you can get and we're getting it with very healthy in-place yield with a lot of upside. The other two portfolios, they are as core as they get. They've got healthy lease terms, high occupancy above 95% and very good affiliation with great health business.

Operator

Thank you. We'll go next now to Joshua Dennerlein of Bank of America.

Joshua Dennerlein
Analyst at Bank of America

Thanks everyone. Tim, you mentioned there's more delevering ahead. Just curious if you could kind of expand on those comments and how we should think about the trajectory of that deleveraging?

Tim McHugh
Chief Financial Officer at Welltower

Yeah, thanks/ So, we've talked about in the past, there's kind of two prongs which we get balance sheet back to the pre-COVID range, target range of 5.5 to 6 times leverage. And the main one is just seeing NOI recover back to pre-COVID levels. We've been pretty clear in that that shouldn't be taken as a stated goal of NOI on those assets. Just more so a marker in the ground and where NOI actually was in those assets and then what the impact both on earnings and leverage would be just to get it back to that level and then obviously we plan to get well beyond that. So, think about our current leverage profile. Part of our deleveraging from 7.1 last year has been driven by the kind of beginning stages of that NOI recovery. And then as we've capitalized our external growth pipeline, we've continued to be pretty disciplined about the way that we've capitalized the equity. And so we've driven down current leverage much faster than if it had just been purely through organic cash flow recovery. So now sitting at 6.3 times leverage this quarter. If you were to layer on kind of just a recovery of NOI back to pre-COVID levels, you'd get down to around 5 times flat. So that's kind of the comment I'm seeing expectation that if you just take our current capital structure, we do nothing and you continue to see NOI recovery back to pre-COVID levels, you'll see us get to a leverage level that's well below where we would have been where we were pre-COVID.

Operator

Thank you. We'll go next now to Steve Sakwa at Evercore ISI.

Steve Sakwa
Analyst at Evercore ISI

Great, thanks. Shankh, I was wondering if you could maybe just talk about the pricing power trends that you're seeing in senior housing and maybe some of the feedback you're getting from the operators, vis a vis kind of the residents and how you see that pricing maybe trending into the second half of the year and does that continue into 2004?

Shankh Mitra
Chief Executive Operator at Welltower

John, you want to take that.

John Burkart
Chief Operating Operator at Welltower

Yeah, glad to take that. What we're seeing is tremendous strength across the board. The feedback from the operators is very positive. What's going on is people are appreciating that the environment that they have, they appreciate the social environment and the demand is strong and it's quite affordable, obviously, it's an asset play for the assisted and memory care living. And so the expectations as to how this plays out. We have nothing that we're seeing would indicate that it's not going to continue with great strength for the foreseeable future. It's a supply-demand situation at one point and obviously demand is is substantial and supply is very, very, very limited going forward.

Shankh Mitra
Chief Executive Operator at Welltower

I'll just add. One point of color perhaps. First thing is, Steve, as I mentioned, as you think about pricing power. The initial phase of pricing power has been that our cost has been going up and obviously to bring back communities to a profitable level the only way this will actually continue to serve the community if they're profitable, right over a long period of time is to increase pricing. And as I mentioned in the last call that you will see next 12 month, 18 months and over from pricing because costs have gone up, pricing power because we have no [Indecipherable], right and that handle will come and so you know, the second point has been understand that we're not focused on absolute level of pricing, but we are focused on the difference, the delta between [Indecipherable]. That's what drives P&L, right. So keep those two in mind and you will see where our focus has been and continues to will be. As we think, just understand our portfolio, it's roughly speaking half-and-half on an average basis in an average year is January versus throughout the year, right. And so we continue to, as we roll these leases and market rate continues to go up, we expect that pricing will continue to remain strong.

Operator

Thank you. We'll go next now to Mike Mueller of JP Morgan.

Mike Mueller
Analyst at JPMorgan Chase & Co.

The current development pipeline, it looks like it's about 15% outpatient medical office and the balance in senior housing. I guess as you think about anticipated starts over the next few years, do you see that mix shifting dramatically between those buckets?

Shankh Mitra
Chief Executive Operator at Welltower

Actually if you look into that senior housing bucket, you will see the majority of the new capital outlay has been on the wellness side of the house rather than on the senior housing side of the house. And I expect that will absolutely continue. Medical office majority, obviously all of our medical office -- I shouldn't say majority, all of our medical office developments have been 100% pre-leased, yield-on-cost developments so we're not exposed to the cost risks. Some hits in different quarters. So you saw a bunch of them hit this quarter, which we have been working on for many, many years. But we should not expect anything different going forward. And majority of that what is showing up as senior housing development ae actually on the wellness side of the house. Senior housing development as Seniors product is very, very hard to make numbers work today. So we're not that focused on that side of the house unless it is a very special project in a very special location. Such as some of the related project that Nikhil talked about.

Mike Mueller
Analyst at JPMorgan Chase & Co.

Got it, okay. Thank you.

Operator

Thank you. We'll go next now to Michael Carroll of RBC Capital Markets.

Michael Carroll
Analyst at RBC Capital Markets

Yes, thanks. So if a seniors housing operator wants to access Welltower's platform, what do they have to do? I mean, do they need to sign some type of exclusive agreement or will you help any operator that manages your specific assets? And just one last thought, are there different levels of services that you provide operators? So if you have an exclusive agreement, they can kind of fully tap your platform and if they just manage an asset, then you kind of are offering them help, but maybe not allowing them fully accessing your data?

Shankh Mitra
Chief Executive Operator at Welltower

So, we're not going to get on this call about contractual agreements and what kind of different levels of service and situations that might be going. We'll just focus on the fact that we have an aligned interest with our operators. As always said for years and years that the [Indecipherable] other structures are all about thinking and swimming together right. And there is substantial upside to many of these portfolio for us, but also for our operating partners. We have different types of arrangements with different people, we're not going to obviously get into on this call. But understand at the end of the day, the goals are very simple. We're trying to create a very good environment for our residents. We're trying to create an environment for our employees to stay and total turnover, resident satisfaction, employee satisfaction and frankly owner satisfaction. That's the goal. And if we can match those goals, it will be great for us and it will be great for our operating partners.

Operator

Thank you. We'll go next now to Austin Wurschmidt at KeyBanc.

Austin Wurschmidt
Analyst at KeyBanc

Great, thank you. Shankh, you highlighted a robust investment pipeline with opportunities across all your regions. I know your return driven as you consistently highlight, but given the pricing power you are seeing an IL in Canada or the acceleration in growth you highlighted in the UK heading into 2024, are returns more attractive in those regions today and are you considering kind of leaning in I guess more international versus domestically in the senior housing side?

Shankh Mitra
Chief Executive Operator at Welltower

I wish the answer to your question was yes, but the answer is no. Canada is a very tight market with very significant, few handful of owners, handful of banks and very significant CMHC presence. So, returns in Canada usually are pretty tight. We're seeing opportunities to create value through our great operating partners there. UK, we're actually now starting to see very significant returns. We made one investment in new this quarter, like last quarter and we're seeing that. So UK results are good, actually very good, but I will tell you the vast majority of opportunities are in the U.S. And frankly speaking, because it's such a deep and robust pipeline that you can pick your spots and make some significant return. We're seeing, the unlevered IRRs in the senior space today without getting into what return for which country, but roughly speaking, I'll say close to double digits. We're seeing opportunities that are in the double digit. Medical office today, IRR opportunities are 8.5 plus I would say, and obviously we're very focused on participating debt structures in the SNF side where we can create high-teen returns using some debt and some equity-like features that I talked about probably in the high teens. So that's kind of our focus. We're purely return driven, we're purely basis driven and all we're trying to do is we're trying to figure out where can we add value, not through just financial capital, but those four things I talked about, it's an optimization problem, right. It's an optimization problem of location, product, price point and operator. That's how you make money in this business. And that's how we're trying to create value.

Operator

Thank you. We'll go next now to Steven Valiquette at Barclays.

Steven Valiquette
Analyst at Barclays

Thanks, good morning. So just to follow-up on your earlier comments on the senior housing pricing power for the rest of '23 and into '24, I think you kind of suggested for us to maybe not focus as much on the absolute price increases at this stage, we're just more on the spread between RevPOR versus ExpPOR. I guess really the question is without giving any specific guidance, can you just give us maybe just a general sense or range of what you might be targeting for the spread between RevPOR versus ExpPOR over the next few years? Is 200 basis points to 300 basis points a reasonable assumption? The trend is seen over the past several quarters or should we think more conservatively at this stage when thinking beyond '23. Thanks.

Shankh Mitra
Chief Executive Operator at Welltower

Thank you, Steve and good morning. So, I was trying to add value-added color to the question that previously were asked. Tim already gave you our view of RevPOR increase as we sit today, right, 6.3% increase that we talked about, so I was trying to provide more color as we think about long term. Long term, we're focused on the spread between RevPOR and ExpPOR. By no means, I'm trying to say that we are seeing anything in that sort of around that says that pricing power is cooling down in. In fact, it's the opposite, and I think John probably mentioned that. All I was trying to point out that long term without thinking about, is that 6%, is it 12%, is it 3%. The way you're going to get the P&L right, which is ultimately what we're focused on is the spread between that RevPOR and ExpPOR, right. So that's what I was trying to answer. We do think that we'll see significant pricing power continue and as I mentioned, half of our portfolio gets renewed at different points in the anniversary cycle and street rate continues to go up. Hope that's helpful?

Operator

Thank you. We'll go next now to Nick Yulico at Scotiabank.

Nick Yulico
Analyst at Scotiabank

Thanks. Just turning to the guidance, so I want to make sure I'm understanding this right. So in terms of the NAREIT FFO guidance range coming down, there's various normalized items, expenses that are being added back to normalized FFO. Lot of that's transaction costs promotes. I know you guys break this out, but just trying to understand what's driving that, it's pretty regular line item going back to the last year and how we should think about, is it still going to be other transaction costs hitting the P&L for the rest of the year, but it's just not in your NAREIT FFO guidance right now. Thanks.

Tim McHugh
Chief Financial Officer at Welltower

Yes, thanks, Nick. So the transaction costs you're referencing so other expenses, which predominantly transaction costs. If you think about that being described in the footnote, non-capitalizable transaction costs, a lot of that tend to be dead deal cost. So it's tough to predict kind of how that comes through. We are a pretty active from and that's stepped up a bit this quarter just because of, as we've talked about and Shankh has highlighted on a few prior calls. Our underwriting standard picked up a bit and we've seen cost increase. So you think about some developments that we've gotten beyond kind of early-stage development spend and we think in a fairly disciplined manner have walked away from.

So as we kind of look forward similar to the way we don't kind of guide to acquisition costs. We try to have a pretty flexible framework as to how we think about our acquisition volume, flexible framework is how we think about investing dollars and the same goes for as we pursue things with the intent to move forward. If we end up not moving forward, they could end up coming to this line item, but it's not something that we've made decisions on right now, or else it would be coming through this quarter.

Operator

Thank you. We'll go next now to Ronald Kamdem at Morgan Stanley.

Ronald Kamdem
Analyst at Morgan Stanley

Great, thanks. Just the presentation sort of highlighted that the outsize occupancy gains was an AL. And then other parts of the business. Just a little bit more color on sort of the IL versus AL difference would be helpful, because some of the NIC data suggest IL is accelerating and I think you mentioned that as well, would be helpful. And then the follow-up was post the PLR ruling, just what are the updated thoughts and vision in terms of having an in-house sort of operating platform? And any color on timing, cost would be helpful.

Shankh Mitra
Chief Executive Operator at Welltower

Thank you. Let me try to take the first one, John, why don't you take the second one. As I mentioned on my prepared remarks, assisted living continued to significantly outperform independent living. The only thing I was trying to highlight that after underperformance, independent living is starting to pick up, particularly in Canada and that's what we are seeing starting to come through our Canadian numbers, right. But if you just look at an absolute performance between the two, there is no question that assisted living has been outperforming and if economy continues to weaken

On a given rolling 12 month to 18 month periodm, my guess that it will continue to outperform very significantly given the need driven nature of the business.

John Burkart
Chief Operating Operator at Welltower

Yeah, regarding the self-management of the PLR. I want everyone to keep in mind, our focus is and always has been on driving results. That is the number one most important things whether we are managing directly or whether we're asset managing and our partners are managing is less the point and it's more about getting the results. So with that said, I think it's probable that we end up in some form of stealth management this year. And I would say as far as the costs go, what's happening right now is we're working very quickly on the technology aspect and data analytics aspect of the operating platform. And that really is just swapping out. So our operators have modules, they're paying for those modules and now we're switching them to our modules. So that is close to a net zero on the cost side. There are a few other costs as we improve things, which will provide some more clarity going forward, but none of these are really big numbers. So, I won't worry about that in a sense of very big surprises, just really changing out and getting improved modules going forward. Hopefully that's helpful.

Operator

Thank you. We'll go next now to Michael Griffin at Citi.

Michael Griffin
Analyst at Smith Barney Citigroup

Great. I appreciate the follow-up, just a quick one, I noticed in your investor presentation, I think it's Slide 7 last quarter to the comp 4 growth decelerated to 2.6. I know it's kind of nitpicky and I didn't see anything on the slide in the current deck so on maybe McQueen or someone, could you just clarify if there is that number available. That would be helpful.

Tim McHugh
Chief Financial Officer at Welltower

Yeah, Michael. So what we provided is the pool change, one thing you're noting is that we've seen kind of export pick up in the fourth quarter, the first quarter. And we gave the number on what first quarter would have been based on the fourth quarter pool as you noted in the footnote. And then just on the pickup in general from the reported same-store number in 4Q, 1Q, it's actually because we continuing to expand the same-store pool. So you've got 95% of our operational properties that we've owned for more than four quarters in our same-store pool now in light of the transitions that came in were from the UK and UK we've just seen expense growth run higher than the rest of the portfolio, largely driven by utilities, which we've talked about a lot in this call. So some of the increase you're seeing just in 1Q is from that mix-shift and inconclusion of more UK properties.

Shankh Mitra
Chief Executive Operator at Welltower

Also sort of the earlier stages of normalizing labor cost. So is the addition of UK that it makes it look like the compo has gone up, but if you look at on a same-store basis of -- not a same-store basis, but the same pool of fourth quarter, you will see was relatively same.

Operator

Thank you. We'll go next now to Juan Sanabria BMO Capital Markets.

Juan Sanabria
Analyst at BMO Capital Markets

Hi, just a big-picture question. Curious if you'd asked to comment on overall seniors housing penetration, talking to some of the privates and just reading some of the trade recs, it seems like acuity levels have gone up and maybe seniors are waiting to come in. Just I guess are you seeing that? What does that mean for the business and what are your thoughts about overall penetration rates and the ability to effectuate that through marketing or what have you as part of this new data-driven platform and efforts?

Shankh Mitra
Chief Executive Operator at Welltower

So I'll try to I'll try to address first part of your question. So acuity actually went up I would say in 2020, right. Didn't absolutely need it. You would avoid the product prevaccine. So we obviously have seen acuity gone up in 2020, but since then we have seen acuity sort of normalized. So I'm not sure that I subscribe to this idea that acuity across the board for the industry has been going up. In fact, someone just asked earlier in the question pool about Kisco. I was with the Kisco team last week and Kisco CEO was talking to me about acuity, they have seen acuity actually gone down, right. So probably gone down for some, gone up for some, but I do believe that acuity has normalized from that 2020 peak levels as we have seen vaccine come into play. You want answer the second.

John Burkart
Chief Operating Operator at Welltower

Yeah, I'll just add a little bit. So obviously, as I said, supply-demand incredibly favorable. We've said it many times. Then you get to the next piece, which is penetration, which you're talking about and I actually see penetration increasing, and what we're seeing is the the seniors desire the loneliness and the desire for social safe active location as well as the cost of care. The cost of care has continually gone up, we all know that. The labor for care has been a challenge and where you see that the most is in homecare. And so we've had people move into our properties because they can't afford or cannot get the level of care and so their cost actually net go down, which is a benefit. So I see that playing itself out over the next couple of years. So we get the benefit of supply-demand. Additionally, we get the benefit of penetration. And then finally, the platform will drive greater market share. And we will get that benefit as well. So I see very, very favorable future going forward.

Operator

Thank you. We'll take our final question this morning from Vikram Malhotra at Mizuho.

Vikram Malhotra
Analyst at Mizuho

Thanks for taking the follow-up. Just two clarifications, Tim. I guess, in your last call, you had mentioned in the guide, you are keeping the the temp usage as a percent of total impact of flat through the year in your guidance. With what you've seen in 1Q, are you changing that in terms of it being lower? And then second, in the medical office side. I think the opex went up maybe 7% or 8%, I'm just wondering was there anything one time in that number?

Tim McHugh
Chief Financial Officer at Welltower

Wwell, I'll start with your first question on senior housing and John can add any color on the MOB side. So for senior housing, yes, you're correct. We came in, our first quarter results were better than expected as far as how agency came down. For some of that benefit, it's netted out with full-time employees coming on, but net-net we ended-up in a more favorable spot for compensation and as I kind of noted in my guidance outlook, that's largely what's moving our outlook for the year. It's just a better trend coming out of Q1 on expenses with that being the main piece and the assumption revenue kind of holds given that we're moving into the revenue building months as we speak.

John Burkart
Chief Operating Operator at Welltower

And then on the MOB as I mentioned in my prepared remarks, we're expecting our guidances between 2% and 3% and so that is a timing issue for Q1 and it will reverse as we go through Q2, Q3 and Q4.

Operator

[Operator Closing Remarks]

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