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Welltower Q2 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Matthew Mcqueen
    Executive Vice President, General Counsel and Corporate Secretary
  • Shankh S. Mitra
    Chief Executive Officer
  • John F. Burkart
    Chief Operating Officer and Executive Vice President
  • Timothy G. Mchugh
    Chief Financial Officer and Executive Vice President
  • Nikhil Chaudhri
    Executive Vice President and Chief Investment Officer

Presentation

Operator

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

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

Matthew Mcqueen
Executive Vice President, General Counsel and Corporate Secretary 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 the reasonable assumptions, the company can give no assurances that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with the SEC.

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

Shankh S. Mitra
Chief Executive Officer at Welltower

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're delighted to report results, which exceeded our expectations in both our senior housing business, as well as Outpatient Medical segment. Let me first dig into the senior housing segment. The key drivers of this business occupancy, rate, and expenses, all came in better than expected this quarter, supported by accelerating demand of our product, and plummeting new deliveries. From a top line perspective, our senior housing operating portfolio achieved approximately 10% growth on a same-store basis and 17.8% growth on a total portfolio basis, driven by another solid quarter of year-over-year occupancy growth and significant pricing power.

Last quarter, I discussed with you how the strong pricing trends, along with moderating expenses, are resulting in significant margin expansions that we've been all waiting for. I'm pleased to report to you that this trend intensified in the second quarter, as we saw revenue per occupied room or RevPOR growth of 7.3%, coupled with just 3.5% expense per occupied room or ExpPOR growth, resulting in an approximate 25% operating margin, a level not seen since the onset of the pandemic.

And while that still leaves significant upside before achieving our pre-COVID NOI margin of above 30%, we expect to meaningfully exceed our pre-COVID level of profitability over time through John's build-out of the operating platform. All regions and product types contributed significantly this quarter resulting a 24.2% NOI growth for our senior housing operating segment, while assisted living continues to outperform independent living, driving exceptionally strong results in the US and UK. Canada is also joining the party with 17.2% NOI growth.

We firmly believe that our Canadian portfolio is finally in sustainable growth mode. In fact, we're in process of significantly optimizing our Canadian business and have recently allocated a meaningful amount of investment dollars to the region. I'll comment on both in a minute. It is also important to mention that our senior -- Seniors Apartment business continued to drive double-digit NOI growth despite the broader deceleration in the apartment industry. We have put significant effort in last six years to build our wellness housing business, which now nearly -- totals nearly 17,000 units and we're pleased to see that our thesis is playing out.

All in all, we've finally exceeded $1 billion of annualized net operating income in our senior housing segment for the first time since COVID and believe we have a ton of growth left in the tank. At the risk of sounding like a broken record, I want to reiterate our core belief on how to make risk-adjusted return in senior housing. Unlike a lot of empirical -- empirical August -- empirical years in the business, which either focuses on the location or the operators, we believe it is a four-dimensional optimization problem of location, product, price point and operators. And we do this objectively through machine and statistical learning using our data science platform, Alpha.

I am 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/sales, we materially simplified our balance sheet and we matched specific products and locations with the right regional operators in order to achieve meaningful density in their local markets.

In the UK, we took 100% ownership of 29 premier communities, many of which are located in the Greater London markets and considered some of the best care homes in the country. We transitioned these care homes from signature to Avery and believe we have a material upside in this virtually impossible-to-replicate portfolio, which was 72.8% occupied at the time of transition to Avery at the beginning of June. Though two months does not make a trend, I am delighted to inform you that this communities are showing positive trends right off the bat under loan as leadership, with current occupancy around 73.5%.

In the US, we took 100% ownership of -- in nine extremely well-located assets recently built by Sunrise in high barriers to entry submarket in the West Coast, East Coast and South Florida at a favorable bases and sold the minority interest in 12 other assets. We also moved management up 28 incredibly well-located California billings to Oakmont. This California communities were 77% occupied when they transitioned to Oakmont at the end of June. I fully expect this portfolio to be materially additive to our growth in 2024 under Courtney's leadership.

As you can see in the case study on the page 32 of our business update, highlighting previous Oakmont transitions in California. Courtney's team has taken occupancy from 64% to 90% in two years at these communities. Though these occupancy as far surpassed their previous high occupancy up 86% in 2016, I fully expect these communities will hit mid-90s occupancy in near future. All things being equal, that stabilization path should be faster for the most -- most recent portfolio of 28 communities. That they have assumed the management off. If not for the lessons learned previously, it will be for a higher starting point. And just after four weeks of operations under Oakmont, these properties are on a path to achieve approximately 100 basis points of occupancy growth in first month and are showing positive NOI traction in NOI out of the gate.

And finally, Canada. Perhaps, the most exciting part of this year's long effort to optimize our portfolio. Through -- though there is a multi-dimensional value-creation opportunity in this effort. I am delighted to inform you that we're launching a new platform with our partner Mathieu Duguay in English-speaking Canada. As you know, Cogir under Mathieu's leadership is one of the best operators in the business and we cannot be more excited about launching our first operating platform in a post-PLR Ward. We will double down on our -- we'll double down on our investments in these communities, dramatically enhance resident experience and materially improve employee experience, resulting in exciting long-term career growth opportunity. I predict this operating JV will witness rapid growth in very near future.

This series of steps, which is known as project transformer inside Welltower is one of the most complex, yet value-accretive transactions we've ever done. Under Eddie Cheung's leadership in Canada and UK and Russ Simon's leadership in the US, this multi-dimensional 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 3.0 and RIDEA 4.0 structures. I cannot emphasize enough how important this milestone is for our firm, as we have now full alignment with all of our key senior housing operating partners. We think all swim together.

To continue this team of capital allocation, the favorable transaction environment that I described to you last quarter has resulted in an incredibly active summer for us. We currently have approximately $2.3 billion of deals under contract in 26 different off-market privately negotiated transactions. Opportunities within senior housing segment represents the bulk of these transactions, with approximately $2 billion of deals comprised of 8,900 units across all three regions. We estimate our investment in these deals to be very attractive 30% to 40% discount to today's replacement costs, 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 our transaction in Canada with part -- with our partner, Cogir. We're recapping Cogir's existing institutional investor at Propco in highly desirable ZAS portfolio and Mathieu is investing his equity going forward. This CAD935 million transaction of both recently built an attractive stable assets are a testament to the power of our relationship in this industry. Eddie and his team has been working tirelessly over the past two years on this transaction and we're delighted to inform you that we signed a definitive documents few weeks ago.

Additionally, following the completion of this deal and others under recently under contract, we've achieved another company milestone having closed or signed over a $11 billion of transaction, since our pivot to offense in fourth quarter of 2020, but we are busier than ever with a robust, visible and actionable pipeline of opportunities that we're underwriting right now. Again heavily senior housing but we're also seeing some outpatient medical and skilled nursing opportunities up and down the capital stack. All of which, we expect -- all of which we expect to keep us very busy for rest of the year. Our deal teams didn't get much of the summer vacation and looks like they won't get much of the Christmas holiday either as many of these deal will close in Q4.

As I described last quarter, both debt and equity capital continued to rapidly evaporate from the commercial real estate space. We're getting hit, left, right and center from counterparties, who truly appreciate our handshake approach to the business, where we can bring both cash and operator to the closing tables. We're seeing that the banks are no longer willing to kick the can down the road, and in fact, are showing willingness to sell the loan book, partially or completely. A handful of these transactions have taken place and many more are growing. The increased capital requirement directly from the regulators last week will only intensify this trend and we're ready to help banks, release the capital as they execute their other strategic priorities.

Nikhil and Tim cell phone number has been on full display in our full page ad of the American Banker Magazine since the summer of 2020. Please give them a call, I promise you, they will respond within hours, not days, as it is customary acceptable standard in senior housing industry. I predict Welltower will play a meaningful role in helping to recapitalize distressed commercial risks and loan portfolios that fall within our circle of confidence.

And lastly, at the risk of stealing Tim's thunder, I would like to point out that our meaningful spending of our balance sheet over the last few quarter. Just in last one year, our leverage has fallen from high-6s to mid-5s, through a combination of outsized organic growth and prudent capital allocation activity. We're now armed with approximately $7.6 billion of near-term liquidity to address upcoming debt maturities and fund our various capital deployment opportunities.

In summary, we have never been more delighted with our operating performance and have never been busier on the deal side and build out of our platform. While no one knows what future may hold, my partners and I remain as optimistic as ever on the future of our business.

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

John F. Burkart
Chief Operating Officer and Executive Vice President at Welltower

Thank you Shankh. Another great quarter like last quarter, just better. Our total portfolio generated 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'd be unlocked as a result of the management transitions 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 a 190 basis-points of occupancy. As a note, this number excludes the UK 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. No exclusion of these communities have a negative impact on our annual occupancy gross debt, we maintained our guidance given the market strength we're 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 continued to show strong same-store revenue growth, starting with Canada at 8.1% and the US and UK 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 US and UK of 17.2%, 24.8% and 38.2%, respectively. Onto the management transitions, we're very excited about the value being unlocked as a result of these transitions. Having the right manager for an asset is critical. The fact that Shankh has repeatedly stated, these transitions accomplish that objective, while improving each operators concentration of Welltower assets in various markets, a key factor to operational excellence.

Concentration brings increased effectiveness and increased efficiency through Improving the value proposition for customers in numerous ways including greater choices and frictionless transfers, improving the value proposition for employees, including improved training and career paths and improving the efficiency of vendors operating at multiple sites, translating into increased NOI growth. The benefits of increased concentration, which show up in margins have been proven, many times over with the multifamily REITs. Welltower is now beginning to harvest those benefits.

We continued to make substantial progress on our platform and the related rollout. To provide you with one example, one of our operators with over 50 properties is fully and rapidly transitioning to our platform over the coming three months to 12 months. We've been working with them over the past year via our aggressive asset management program, enabling them to increase occupancy over 600 basis points in the last year.

As I've mentioned in the past, the platform isn't only about technology, it's about people, processes, data and technology. After seeing the amazing improvement in occupancy in the 12 months related to our focus on processes, they're fully embracing our entire platform. I'm grateful that they see the opportunity and benefit of pursuing operational excellence and I appreciate their partnership.

Additionally as Shankh mentioned, we're partnering with Cogir, the premier Canadian operator for the management of many of our Canadian transition assets. The best outcomes are achieved by working with the best people and the best operators. I'm very excited about the opportunity to partner with Mathieu and Frederic and their team at Cogir on this new venture and the incredible value we will create for our investors. More to come in the coming year.

I'll now turn the call over to Tim.

Timothy G. Mchugh
Chief Financial Officer and Executive Vice President at Welltower

Thank you, John. My comments today will focus on our second quarter 2023 results. Performance of our triple-net investment segments in the corner, our capital activity, our 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 EBITDAR coverage was 0.88 times in the quarter. Next, same-store NOI on our long-term post-acute portfolio grew 6.1% year-over-year and trailing 12-month EBITDAR coverage was 1.48 times.

Turning to capital activity in the quarter. In May, we issued a $1.035 billion convertible note due in 2028. The note bears interest at 2.75% rate and is convertible at $95.41 per share. We intend to use the proceeds from the note to address our 2024 unsecured maturities coming due in the first quarter of next year. In addition to our convert offerings, we continued to issue through our ATM to fund ongoing investment spend, raising gross proceeds of $1.76 billion at 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 5.62 times at quarter-end, which represents well over a turn of deleveraging versus one year ago.

As Shankh mentioned, we're seeing ample opportunity to invest our large cash balance. But even so, we expect net debt to adjusted EBITDA to remain below 6 times on a pro-forma basis post-deployment and 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 equivalents balance, $2.7 billion, along with full capacity on our $4 billion revolving line of credit, and $910 million of remaining expected proceeds from near-term dispositions and loan pay-downs, 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 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 cents at the midpoint. Our updated normalized FFO guidance represents a $0.04 increase at the midpoint of our previously issued guidance. This increase in guidance is reflective of a $0.02 increase in expected full year senior housing operating NOI, a $0.02 increase in capital allocation activity, which assumes no further investments in the year beyond what has been announced to-date and a $0.015 from HHS and other out-of-period government grants received in 2Q. And then -- and these increases are offset by a $0.015 increase expected full year G&A and interest expense.

Underlying this FFO guidance is an increased estimate of total portfolio year-over-year, same-store NOI growth of 10% to 13%, driven by subsegment growth of outpatient medical 2% to 3%, long-term post-acute 3% to 4%, senior housing triple-net 1% to 3%, and finally increased senior housing operating growth of 20% to 25% year-over-year. The midpoint of which is driven by continued better-than-expected expense trends, along with revenue growth of approximately 9.7%. Underlying this revenue growth is an expectation of approximately 230 basis points of year-over-year average occupancy increase and rent growth of approximately 6.7%.

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

Shankh S. Mitra
Chief Executive Officer at Welltower

Thank you, Tim. We're currently living in an uncertain macroeconomic environment, where the outlook is getting marked here by the day. One day it is sunny and the next day all people see our dark clouds. The Federal Reserve appears to be resolute in its fight against the inflation and seems far less inclined to come to rescue private and public market, as most participants like to hope for. Against this backdrop, we continued to take a very balanced approach as we consider both growth opportunities and risk environment. On one hand, we remain prudent and continue to -- continue our deleveraging through rapid organic growth and appropriate capitalization of our external growth opportunities.

On the other hand, we're aggressively putting capital to work, though we're ever more priced and return conscious. We cannot predict the macro, but we can't predict with a high degree of confidence, what is likely to come on a micro basis. And that is while we're 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 multiyear double-digit NOI growth cycle for our business, resulting from a long runway of occupancy gains, rate growth and operating margin expansions. At project transformers, along with a relentless optimization of our operating platform, the impact which will start to show-up in next year and the constant reloading of our external growth gun or perhaps the growth bazooka at this point through a highly targeted deals you get an ideal setup for accelerating earnings and cash flow growth, as we look into next year.

With that, we'll open the up -- call up for questions.

Questions and Answers

Operator

[Operator Instructions] In the interest of time, please limit yourself to one question. Should you have a follow up, please feel free to requeue. Your first question is from the line of Jonathan Hughes with Raymond James. Your line is open.

Jonathan Hughes
Analyst at Raymond James

Hi, good morning and thanks for the time. I wanted to ask about the recent transitions and 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? Or are these operators taking over just to add 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 that the term transition, because previously that came with some near-term negative impact, but now that seems to be a positive. Thanks.

John F. Burkart
Chief Operating Officer and Executive Vice President at Welltower

Yeah, that's a -- that's a really good question. A lot of it really is what I would call relates to leadership. And that's because a lot of transition relates to execution. So having the outstanding partners that we have working together as a team to anticipate opportunities and issues connecting with people, all these issues, all these items are about people. So connecting with the people, the sites and planning it all out flawlessly and executing flawlessly is what's -- what's changing that gain. And there's a lot of details involved these each of these -- in each of these situations, there is literally transition teams that are 24/7 focused 100% on all the details and then there's operating teams that are focused on the operations. So a lot of work, but ultimately, it's leadership that changes that game.

Shankh S. Mitra
Chief Executive Officer at Welltower

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

Operator

Your next question is from the line of Connor Siversky with Wells Fargo. Your line is open.

Connor Siversky
Analyst at Wells Fargo & Company

Good morning out there. I appreciate the color on the prepared remarks, and congratulations on crossing the $1 billion threshold, quite an achievement. I 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 the skilled nursing assets.

Nikhil Chaudhri
Executive Vice President and Chief Investment Officer at Welltower

Hey, Connor. it's Nikhil. I'll take this one. So we're pretty pleased with the performance that we've seen so far. If you remember, there were a total of 147 buildings that were being transitioned over. Of those, a 133 have already been transitioned to new operators. And the results we're seeing are pretty encouraging. So if you look at those 133 buildings for the three months prior to the transition, those building on EBITDAR basis for losing roughly $90 million a year. Three months later, first quarter of this year and 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.

And on the second part -- second part of your question, on labor, where all the numbers, all the metrics seem to be following the broader trends we're seeing in our broader business that the labor situation is getting better by the day.

Operator

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

Steven Valiquette
Analyst at Barclays

Thanks and good morning. Congrats on the results as well. Yeah, I know it's hard to answer for the whole industry. Your results are obviously incredibly strong in senior housing. But there are some pockets from some other players, where maybe the occupancy was slowing down a little bit in the quarter. Just curious if you have any high-level thoughts on maybe why your results were separate from maybe some other players that did see occupancy, decelerating a little bit? Is there any signs of price sensitivity in any pockets of the market. Just curious, your thoughts around that? Thanks.

Shankh S. Mitra
Chief Executive Officer at Welltower

Yeah. Steve, we're not going to get into what other players might or might not be seeing. We can only tell you what we are seeing. We're seeing a very strong start of the spring selling season and summer selling season. If you think about how this business works, obviously, the activities pick up very significantly, sales start to happen. It's our second quarter that translate into third quarter, early fourth quarter occupancy gains. That's seasonally how the business works. And we have seen some significant traction this summer as we're moving into third quarter. We're seeing pricing trends getting better, occupancy trends getting better.

So, I really have no idea what you're referring to, but I can tell you that we're very pleased with second quarter occupancy, right, John just mentioned, our reported same store numbers are impacted by the removal of the UK assets. But we're very, very pleased with what we've seen. We don't know what future holds. I'm not going to try to sit here and guess what the future will look like, but the promise we made to you and our owners is very simple. We will get more than what the market gives us, right. That's our execution and we're very pleased with what we've seen so far. If you look at the demand/supply trends are getting better every day. It's not the other way around.

Operator

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

Austin Wurschmidt
Analyst at KeyBanc Capital Markets

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

Shankh S. Mitra
Chief Executive Officer at Welltower

The answer is -- these Sunrise contracts are not what you described, we restructured our contract with Sunrise in 2011-- 2021, sorry 2021. And Sunrise is fully aligned with us, with this philosophy that we think and swimming together. So many years ago, I have described that our fundamental philosophy under my team's leadership has changed from owning part of management companies equity to contract. That's what we have described.

And as you can see one -- in one of the slides we have described the seven-year long effort to transform all our contracts from sort of top line focused contracts to bottom line focused contract, where we think and swim together, and virtually all of our contracts are debt today. So that's sort of hopefully gives you an answer to your question. We do not believe and we haven't done in sort of having influence on our communities through owning part of management contract, part of management companies. We do it through our contracts and that's what you can see in the evolution of those contracts.

Operator

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

Michael Carroll
Analyst at RBC Capital Markets

Yeah. Thanks. I wanted to touch on the Welltower-Cogir, I guess, operating relationship. I mean, how is that relationship going to work and how should we think about the growth of that platform. I mean, when you're growing into new markets are you going to be doing that with Cogir or another operator or would you be doing that -- that yourself?

John F. Burkart
Chief Operating Officer and Executive Vice President at Welltower

The -- as far as for how it works, I'll talk about that and I'll let talk -- Shankh talk about the expansion, but as far as how it works, it's working fantastic, right now. I'm partnering up with Frederic and we're working together really on the vision, the strategy and oversight. Cogir is handling all the execution on a daily decisions at all of that type of stuff. And what you have is a very synergistic team. We're both extremely excited about re-envisioning the opportunity to reposition these assets. And so, we're excited about what we're creating there, but I won't be involved in the daily aspects of it. I -- they're a fantastic operator. There is no value there. I'm focused to get on the bigger picture items.

Shankh S. Mitra
Chief Executive Officer at Welltower

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

Operator

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

Vikram Malhotra
Analyst at Mizuho

Thanks for taking the question. Maybe, Shankh or Tim, you know, you talked a lot about stress in senior housing referencing obviously the Fannie Mae delinquencies. I'm wondering if you can just and then you outlined $30 billion decade opportunity. I'm wondering if you can give us more color on kind of how you think about the funnel in terms of all these distressed opportunities coming, whether it's operational or balance sheet distress. But how you think about the funnel and filtering it down to what is actually actionable for Welltower, whether it is analytics driven or strategic driven? And then just combining that actionable pipeline, you mentioned with sort of the long-term earnings power, you talked about double-digit NOI growth. But are there any tea leaves you can share on kind of the earnings, the underlying AFFO is likely to grow over a -- over a longer time period?

Shankh S. Mitra
Chief Executive Officer at Welltower

Let me see if I can answer your five-part question. Likely, I will forget some pieces. So Vikram, frankly speaking, if you just take a step back and understand what's happening, the stress that we see are not cash flow driven, the stress that we see are balance sheet driven. And the balance sheet driven comes in many forms. There is a significant lack of equity and debt capital today. In fact, when we say the debt market is functioning, not functioning, most people assume that sort of the debt market remains and is not growing, it remains fairly flat. That's not what's happening today. The debt market, banks are under significant pressure from regulators to shore up capital, which means they are actually selling. They're shrinking, right.

Then you add on top of that, a lot of the construction that happened between 2015 and 2019 time frame. They're on SOFR-based loans, they're on LIBOR-based loans and given how much that base rates have gone up, right, 500-plus basis points just in the last 12 months is putting tremendous pressure. You think about it where a LIBOR-plus 350 basis points and 400 basis points is today, you were at 8%, 9% rates. And you just cannot, you know, these capital structures were not envision for that kind of rate environment. So you've got massive pressure on that, then you see even people who put Florida caps, a lot of these Florida caps are coming off second-half of this year and next year.

So and you add insult to injury majority of senior housing loans actually come with personal guarantees. So I can go on and on and on, but that's not the point what you're asking is -- is very simply these assets are not stressed, the balance sheet behind the assets are stressed. And we are ready and willing and to do this execution, you just -- you need two things. You need cash because that we're not showing up with subject to financing we're showing up with cash and the other very important thing is operating partners. You need both to solve people's problems, their balance sheet problems and their go-forward problems and that's why we're doing it.

Now, we're not going to get into on this call, a multiyear sort of earnings growth projection as Tim has alluded to this year's earnings growth is significantly impacted by obviously our floating rate debt as well as strong dollar. You know what those numbers are, we appointed out unless you believe, rates are going from 5.5% to 11%, again, you should not have those kind of impacts going forward, right. So from that NOI growth with that, you can figure it out, what that looks like. But from my comments, you can figure out that we're very excited about and accelerating earnings and cash flow growth trajectory as we look into 2024.

Operator

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

Nick Yulico
Analyst at Scotiabank

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 a stabilized yield potential going out a couple of years. And any comments on occupancy or other drivers that are creating some of the NOI upside for the assets?

Shankh S. Mitra
Chief Executive Officer at Welltower

Yeah, so, I'll start with the last. Obviously, these assets have both occupancy and significant margin growth potential with the occupancy. Obviously, as you understand, Nick sort of the flow through mechanics of this business, majority of the profitability in the business is after, call it, 80% occupancy because it's very significant fixed costs. So incremental margin, if you will, after 80% occupancy is, call it, 70-plus percent margin. And then as you get closer to 90% or 90% -- above 90% occupancy, you are at kind of 90%, your incremental margins approach 90%, right. So majority of the profit was the hockey-stick profitability in that kind of 10%-plus occupancy range.

So that's what's the driver of the growth that we think baked into this. So we like buying low-basis lower occupancy in a portfolio that's sort of what we do. We do not like to pay cash flow on a highly occupied -- high NOI, which drives into obviously results into high basis assets we just don't do that here. So that's sort of gives you the answer to the second question, right, let's just talk about the first question, which is a very simple question. You should assume a year one in this batch of acquisition, roughly around 6%. Going into 7%-plus following the math. I just described to you.

Operator

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

James Kammert
Analyst at Evercore ISI

Thank you, good morning. I'm thinking of the business update on the Rivara transition pages 9 and 10. Could you just provide what is the reasonable timeline for that NOI capture and what capital you might have to spend capture that NOI Delta? Thank you.

Shankh S. Mitra
Chief Executive Officer at Welltower

Yeah. So we have -- we have never gotten into the timeline of our bridge. This is part of our bridge, obviously. We'll leave you to determine when we think stable occupancy will come. And so that's part of your sort of answer to first part of your question. The second part, I just want to point out one thing is what we're suggesting here is that $120 million we mentioned is part of the $414 million or so of the bridge. So that's what it is. If we thought that's all we're going to get, we would not have done it. In other words, the bridge, the fundamental tenant of the bridge is we go back to fourth quarter of 2019 occupancy.

If you look at page 32, which sort of shows one of the transitions we have done, not only the first six that we gave it to Oakmont exactly two years ago. Today is actually exactly two years. These occupancies are above 90%, while the prior peak was 86% and change in 2016. That gives you and I expect fully expect to believe there'll be mid-90s in next few months. That gives you a sense of what we think the occupancy will go and where the margin will follow. For example, let me give you another example, the Canadian example. The Revera properties that we mentioned I believe one of the pages said it's like low-70s occupancy. That portfolio is sitting at 23% margin, give or take, today. I mentioned to you that Cogir runs in their Canadian portfolio of 40-plus percent margin, that's sort of gives you a sense of where we think that these properties can go. 120 is part of the bridge that shows before 14, but if we talk 120 is all we're going to get, we wouldn't have done it.

Operator

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

Juan Sanabria
Analyst at BMO Capital Markets

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

Shankh S. Mitra
Chief Executive Officer at Welltower

Yeah, so Juan, 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, it depends on a lot of things, but I have no reason to believe in a better environment of demand and supply, we're not going to have a strong pricing power, but we'll see when we get there.

Operator

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

John Pawlowski
Analyst at Green Street

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

Timothy G. Mchugh
Chief Financial Officer and Executive Vice President at Welltower

Yeah, John, I think, consistent with how we've been in the past, you know, funding is going to be from the most attractive source we have, all right, whether that's public equity debt or disposition proceeds will continue to optimally fund as we move along. So we -- or just hesitate. We try to provide to you forward guidance on that. It'll be I think they're made whatever last month time of the funding.

Operator

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

Ronald Kamdem
Analyst at Morgan Stanley

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

Shankh S. Mitra
Chief Executive Officer at Welltower

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

Operator

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

Mike Mueller
Analyst at JPMorgan Chase & Co.

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

Shankh S. Mitra
Chief Executive Officer at Welltower

So the first thing is, I'm going to elaborate again, I think I've done it before I'm just going to tell you we don't lend against assets that we don't want to own at the last dollar basis that we - our loan side. So that's sort of the fundamental premise that we have. Having said that, different transactions come in different forms. We're here to help people provide sort of -- we here to help owners and borrowers with liquidity that they might need or institutions, which owns already owns the those loans, how different transaction will play out, whether it's an existing loan or were coming into provide capital. I don't know that yet. We're -- our focused investors and simple debt yield will determine where we get to, but just the coupon is less interesting for us.

We'll start obviously probably we're thinking about how we can get equity returns. If we just go in a $1 on a dollar, when are actually learning into a situation that doesn't have debt or if it is existing debt we're going to have to think about what type of discount, gives us the right return, assuming we get our money back and if we don't, we're comfortable owning the asset at the last dollar basis. Philosophically, that's we think about it, every transaction is different.

Operator

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

Joshua Dennerlein
Analyst at Bank of America

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

John F. Burkart
Chief Operating Officer and Executive Vice President at Welltower

Yeah, so the -- the comments, if I remember correctly myself was the COO call that's in -- it was funny to meet that you've done so much to increase leads. We're struggling getting our hands around that and that pilot and they definitely did get their hands around it and it's staffing -- staffing opportunity there. We're continuing to rollout, you know, it moves from pilot to rollout and so we're pressing forward as I mentioned, we have another operator that's jumping on 100% on board. And we'll be pushing forward on our platform up with our venture up in Canada as well. We're seeing terrific results through the marketing efforts that we're applying. And what that does to pricing power in essence. Our focus is on maximizing NOI, right. So we're looking at combination between price, between occupancy, recognizing occupancy comes with a price. So yes, we will push a little bit more on price and find the right point there, but it's what's provided our outstanding results.

Operator

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

Michael Griffin
Analyst at Smith Barney Citigroup

Great, thanks. And 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, kind of what the expectation for growth in this platform is going forward? And any commentary there would be helpful.

Shankh S. Mitra
Chief Executive Officer at Welltower

Yes. That's really a great question and I think it's something that is a -- we haven't talked about it that much, and the reality I think is completely under-appreciated as far as the future earnings potential of this portfolio. You look at our portfolio, its roughly 20 years old in the senior housing business and that is the sweet spot for renovation. It's what I typically call fluff and bluff because what you have is your infrastructure. I plumbing roofing this kind of stuff is in typically good order. But what is in good order is the first impressions, amenities, units and that type of thing.

So I have been aggressively building out renovation team in housing at Welltower. Experts and we are launching, what you'll see is we'll start launching on pretty massive renovation programs, West Coast, East Coast, Canada, the UK, all of these things are lining up and we're at the beginning stages, but the impact should be very positive on NOIs for certain, obviously increasing occupancy first and increasing occupancy and rate. The value proposition opportunity is significant and what numerous properties in all the regions and it's clearly very big opportunity and having the expertise that we're bringing to the table will truly change the game in renovation of senior housing.

Operator

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

John Pawlowski
Analyst at Green Street

Thanks. John, just curious within your US portfolio, can you give me a sense for how the shortfall or an independent living occupancy versus 2019 compares to the GAAP and your assisted living portfolio?

John F. Burkart
Chief Operating Officer and Executive Vice President at Welltower

We have to get back to you on that. But generally speaking, you have assisted living failed further. So obviously, it has longer to come back, independent living didn't fall that far, but it has been coming back slowly sort of slowly, but first Specifically, our portfolio has changed materially since 2019 as far as the independent living and assisted-living is concerned. So we'll have to on those numbers and get back to you. But generally speaking, I will tell you your assisted-living continued to outperform. We are seeing independent living is starting to come back, and frankly speaking, independent living for us like 75%, 80% is Canada and is just sort of a more of a Canada -- I don't know, it's a product comment or sort of a it's country commentary, right. We're seeing very strong performance finally coming out of Canada and we expect that will get better as all this sort of optimization that we're talking about, you know, on these assets will play out. But I cannot tell you, John, if that is a product thing or is just a country thing, because majority of our independent living portfolio sits in Canada.

Operator

[Operator Closing Remarks]

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