Welltower Inc. (WELL) Q1 2023 Earnings Call Transcript

Welltower Inc. (NYSE:WELL) Q1 2023 Results Conference Call May 3, 2023 9:00 AM ET

Company Participants

Matt McQueen - General Counsel

Shankh Mitra - CEO

John Burkart - COO

Tim McHugh - CFO

Nikhil Chaudhri - CIO

Conference Call Participants

Derek Johnston - Deutsche Bank

Connor Siversky - Wells Fargo

Vikram Malhotra - Mizuho

John Pawlowski - Green Street

Michael Griffin - Citi

Joshua Dennerlein - Bank of America

Steve Sakwa - Evercore ISI

Mike Mueller - JPMorgan

Michael Carroll - RBC Capital Markets

Steven Valiquette - Barclays

Nick Yulico - Deutsche Bank

Ronald Kamdem - Morgan Stanley

Michael Griffin - Citi

Juan Sanabria - BMO Capital Markets

Operator

Good morning, ladies and gentlemen. Welcome to the Welltower First Quarter 2023 Earnings Release Conference Call and Webcast. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. [Operator Instructions]

And at this time, I would like to turn the call over to Matt McQueen, General Counsel. Please go ahead, sir.

Matt McQueen

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

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

Shankh Mitra

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 a 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. We generated 23.4% same-store NOI growth, with both revenue and expense trends continue 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 has been 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 a lost year in terms of partial 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 JL employment rates have been weakening. This has ultimately translated into a meaningful reduction of prohibitively expensive temporary staffing, which -- with cost declining over 50% versus the first quarter of last year. Though we still have a long way to go to eradicate this problem which we largely attribute to committee 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 have seen 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 Mathieu Duguay and his team for their hard work and dedication.

Sticking with that 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 expressed my enthusiasm around the appointment of Lorna Rose as a CEO of a 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 a large regionally concentrated portfolio of StoryPoint. I'm pleased to report that Dan and his team has 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 moved six well-located California properties to Oakmont and at that time, Courtney Siegel, Oakmont’s CEO made me a promise that our 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're not performing. I'm confident that I will be able to soon report to you that this portfolio has reached 90 plus percent occupancy level. 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 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 of properties to 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 success and the 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 last 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 know -- as you have come to know, Welltower -- at Welltower, we vehemently reject mediocrity and are in relentless pursuit of high standards. We continue to behave -- believe that there's 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 it trend, we are optimistic that John and his team are on the verge of some real creative breakthrough more on that incoming quarters.

In terms of recent operating conditions, while I don't like to fix it on 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 and tours have picked up further in April. While we remain confident in the prospect of 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 are seeing so far, which admittedly is also the seasonally lowest -- slowest point in the year. Therefore, we need to see the -- 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 delusion of certainty.

Moving to capital allocation, since our last call, U.S. banking sector has started to show some significant signs of strains, resulting in material declining trade flow in the economy. While no one is rooting for macroeconomic uncertainty, the current backdrop has certainly created a further expansion to our already attractive set of capital deployment opportunities. We remain disciplined and will not risk the enterprise that we built with blood, sweat and tears, but we remain optimistic that we'll be able to grow our portfolio with well located asset at highly favorable bases and in-place cash flow.

To illustrate that point further, we acquired $529 million of asset during 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 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 leveraged 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 data 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 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 markets 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 are 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. Top-line growth remains 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 element of the business and build out of the platform. John?

John Burkart

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% and 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 growth for Q4 2022 for the comparable portfolio.

All three of our regions continued to show strong revenue growth, starting with Canada 7.7% and the U.S. and UK growing 9.3% and 17.4%, respectively. Revenue growth for the quarter was driven by a 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 decline 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 decrease year-over-year for the same store portfolio in the first quarter of 2023. Welltower's continued aggressive asset management to 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're 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.

Tim McHugh

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 rates on 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 is 0.86 times in the quarter.

Next 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 maintain 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, bringing 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 in 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 has started to recover, we have experienced beginning stages of a cash flow growth driven deleveraging. And we have amplified this organic leverage reduction, the 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 environment 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 or $3.465 at the midpoint. Our updated normalized FFO guidance represents $0.025 increase at the midpoint from our previously issued guidance. This increase in guidance is reflective of $0.02 of fundamental outperformance, mainly from our senior housing operating segment, roughly $0.005 of which is from subsidies received in Q1 and a $0.005 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% to 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, approximately 9.5%. Underlying this revenue growth is expectation of approximately 230 basis points of year-over-year average occupancy increase and rent growth from approximately 6.3%.

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

Shankh Mitra

Thank you, Tim. While 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 Health Care REIT, Welltower’s very sister 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 at Health Care REIT, George not only served as a leader of the company, but was also 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 schools 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'll be missed dearly.

Lastly, before we go into Q&A, I wanted to highlight a document which we posted on our website last evening, which was also part of our shareholder letter published a couple of weeks ago. This document contents 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 the most importantly -- 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.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question this morning from Derek Johnston of Deutsche Bank.

Derek Johnston

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 from seven or eight communities, like you did with the 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

So, Derek, you asked a lot of questions, so I'll try to -- I think I'll try to remember answer the question. Kisco is one of our best operating partners, and there 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. So -- and we’re having all these conversations going on.

As I've mentioned on last quarter’s call, I believe that we finally have figured out hopefully how to do transition very creatively as you -- sort of your words, 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, 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, there's 18 properties, the StoryPoint took over from a -- on the existing operator. At that point, that end of Q2, it had 74% occupancy, call it circa $6.5 million, $6.4 million of NOI, annualized NOI. 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 NOI -- that it will be great win, if occupancy and NOI held. Nine months later, today -- not today, end of March and the quarter end, occupancy was at 2%, 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 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 creatively. 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 said, optimizing four things, right? It's an optimization problem, which is location, product, price point, and operator, right? So, that's what you know, obviously Swagat and Kevin and their team are trying to constantly do, and we're executing that with our premium operating partners.

Operator

We’ll go next now to Connor Siversky at Wells Fargo.

Connor Siversky

Question on labor for me. I 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. And 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 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

Yes. 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 that personnel and effectively created a hiring funnel to move people through that process. The training is 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 agencies stepping in when necessary to provide some assistance, but it's obviously both disruptive and not very efficient. So, as we move forward and we reduce agency and create 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 reduce the expense, the benefits will come through via increased occupancy, increased RevPOR et cetera.

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. As 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, et cetera, 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

We’ll go next now to Vikram Malhotra at Mizuho.

Vikram Malhotra

Shankh or Tim, I have a broad two-part question surrounding investments. Just maybe first, one of your peers had some challenges with the debt investment, they had to convert that. There are some headwinds there. If you could maybe give us some color on your loan book, and particularly, the investment you made with HC-One, I think a couple of years ago. 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 even an update on the status? And just related to investments, Shankh you have very unique cost of capital -- relative cost of capital in a world where equity and debt is very, very hard to get, a 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

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're finding opportunities, as I mentioned, on my prepared remarks, that we see a substantial -- we have substantial actionable pipeline in seniors housing in all three countries. This is the first time we're seeing opportunities, not just in the 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, albeit small deals. But as you know, Vikram, we're very focused on individual buying, individual assets, small transactions, outpatient medical in the U.S., right? So, that's sort of -- and we're seeing -- across capital structure, we're 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 specific question, I'll get to it. The second bucket is our partnership is related. And as I mentioned in previous call, these developments are structured as a participating means, right? That's the second bucket. Those are majority of the loans. If you take that -- go beyond that, the average size of the loan is like $12 million, right?

So, we're focused on -- 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 bid, and possibly as a majority of these cases an equity feature that is attached to that debt. So let's talk about one at a time.

We talked about the relative development pipeline, and that's obviously structured as a participating means. 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 a whole loan, that is a 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 $32,000 pounds per debt, which tells you how low levered 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, 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, there's a lot of participating prep, participating mezz. So, that's sort of the convention of the loan book.

So, we are -- we don't land anywhere where we don't think the last dollar is not significantly beneficial to us. We hope the people who borrow from us will do substantially well. And from the equity participating nature of many of these loans, we’ll participate with them, not just get a return on and off our capital. Hopefully that's what's helpful for you.

Tim McHugh

I'll just quickly add on the two related projects that have 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, which has been over -- open for about a year, is also ahead of underwriting…

Shankh Mitra

And rates are substantial above…

Tim McHugh

Exactly.

Operator

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

John Pawlowski

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. I'm just curious if some of the early operating initiatives you're currently working on were flowing through the cost structure of the business in recent quarters, how much lower would expense per occupied room growth been relative to like the 3.5% reported growth in recent quarters?

Shankh Mitra

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

The other side of that, your question is operating platform question. Here today, John is entirely focused on top line 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's focused on the big ball today on the revenue side.

Operator

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

Michael Griffin

Maybe turning back to capital allocation, I'd just like to get some color maybe around the MOB acquisitions. It seems like it's pretty opportunistic. I believe, you all were selling MOBs back in summer of 2020, when people were buying. Maybe some color around -- you list the initial yields here. The occupancy at least for the K Street one seemed kind low. Maybe Nikhil, in your underwriting, are you assuming maybe a stabilized high-80s, low-90s occupancy? And then, Shankh, as a capital allocator, if we go back to your third quarter prepared remarks about those -- those five sources of capital. Does any one of those, whether it's debt or equity, selling assets, does any one screen as more attractive right now?

Shankh Mitra

Okay. Nikhil will walk you through the MOB acquisitions that we did in the quarter. But let me just answer some of the other questions you asked.

So, as you think about it, the five sources of capital, we have accessed three of them this quarter. We have done public equity, we have done private equity. We have sold assets and took capital, and very attractive, obviously return. So 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 good -- 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 manual auction, how it is priced on a given day, we execute and think -- and only think through that use of capital as it relates to what are the returns of that as we deploy the capital back on an unlevered IRR basis, and from the perspective of the long term return. That's just how we invest capital. Nikhil?

Nikhil Chaudhri

Yes. I think to answer your question on the MOB, if you look at the K Street, that's roughly 20% of the capital we deployed to large 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 an 8% stabilized yield with occupancy with a 9 in front of it. I mean just think about the quality of the real estate, right? I mean, it's 3 blocks from the metro station; it's 2 blocks from the George Washington University Hospital. You've got top grade parking. I mean, it has high quality of an asset that 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 core as they get. They've got healthy lease terms, high occupancy, above 95%, and very good affiliation with great health systems.

Operator

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

Joshua Dennerlein

Tim, I would -- 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

So, we -- as we've talked about in the past, there's kind of two prongs to which we get the balance sheet back to the range, pre-COVID range, target range of 5.5 times 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 that shouldn't be taken as a stated goal of where NOI and those assets sit, just more so a marker on the ground of 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 at the equity. And so, we've driven down current leverage much faster than what -- 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 get down to around 5 times flat.

So that's kind of the comment on seeing expectation that if you just take our current capital structure, we knew nothing and you continue to see NOI recover back to pre-COVID levels, you'll see us get to a leverage level that's well below where we would have been or where we were pre-COVID.

Operator

We go next now to Steve Sakwa at Evercore ISI.

Steve Sakwa

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-à-vis kind of the residents and how you see that pricing may be trending into the second half of the year. And does that continue in the ‘24.

Shankh Mitra

John, do you want to take that?

John Burkart

Yes, glad to take that. What we're seeing is tremendous strength in the -- 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're appreciating 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 expectation is 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 substantial and supply is very, very, very limited going forward.

Shankh Mitra

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 these communities to a profitable level or the only which -- 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 last call that you will see the next 12, 18 months handover from pricing because cost has gone up to pricing power because we have no room to sell, right? And that handover will come. And so the second point is just understand that we're not focused on absolute level of pricing but we are focused on the difference, the delta between RevPOR and ExpPOR. That's what drives P&L, right? So keep those two in mind, and you will see where our focus has been and continue to -- will be. As we think as just understand our portfolio, it’s roughly speaking, half and half on an average basis and an average year is January versus throughout the year, right? And so we continue to -- as we roll these leases and market rate continues go up, we expect that pricing will continue to remain strong.

Operator

We'll go next now to Mike Mueller of JPMorgan.

Michael Mueller

Our 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

Actually, if you look at into the senior housing bucket, you will see that majority of the new capital outlay has been on the wellness side of the house rather than on the senior housing side. So, 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 development have been a 100% pre-leased yield on cost development. So we're not exposed to the cost risk. 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 are 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 projects that Nikhil talked about.

Operator

We go next now to Michael Carroll of RBC Capital Markets.

Michael Carroll

So if the 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 1 last thought. Are these -- 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? SP1

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 aligned interest with our operators. As always said, for years and years that the RIDEA or are the 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. So this is -- we have different types of arrangements with different people. We're not going to obviously get into on this call. But I understand, at the end of the day, the goals are very simple. And 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 lower 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 -- robust investment pipeline with opportunities across all your regions I know you're return-driven as you consistently highlight. But given the pricing power you're seeing in IL in Canada or the acceleration in growth you highlighted in the U.K. 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

I wish the answer to your question is yes, but the answer is no. Canada is a very tight market with very significant -- a few handful of owners, handful of banks and very significant CMAC presence. So returns in Canada usually are pretty tight. We're seeing opportunities to create value through our great operating partner that's there. U.K., we're actually now starting to see very significant returns. We made 1 investment in U.K. this quarter, like last quarter. And we are seeing that. So U.K. retails are good, but actually very good. but I will tell you the vast majority of opportunities are in the U.S. And frankly speaking, there -- because it's such a deep and robust pipeline that you can pick your spots and make some significant returns -- as we're seeing the unlevered IRRs in the senior space today without getting into which country -- what return for which country, but roughly speaking, I'll say, close to double digits.

We're seeing opportunities that are in the double digits. Medical office today are our opportunities are 8.5% plus, I would say. And obviously, we are very focused on sort of participating debt structures in the SNF side where we can create high-teen returns despite using some debt and some equity like features that I talked about in 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 are trying to do is we're trying to figure out where can we add value, not through just financial capital, but those 4 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

We go next now to Steven Valiquette at Barclays.

Steven Valiquette

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, but just more on the spread between RevPAR versus export. 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 RevPAR versus export over the next few years? Is 200 to 300 basis points or a reasonable assumption, the trend you've seen over the past several quarters? Or should we think more conservatively at this stage when they can beyond '23? .

Shankh Mitra

Thank you, Steve. So I was trying to add value, added color to the question that previously was asked. Tim already gave you our view of RevPAR 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 RevPAR and export. By no means, I'm trying to say that we're seeing anything in this sort of around us that says that pricing power is cooling down. In fact, it's top of it. And I think John probably mentioned that. all I was trying to point out that long term without thinking about is it 6%, is it 12%? Is it 3%? The way you're going to get the P&L right, which is ultimately what we are focused on, is the spread between that RevPAR and POR, right? So that's what I was trying to answer. We do think that we'll see significant pricing power continue, as I mentioned, half of our portfolio gets renewed at different points in the anniversary cycle, and street trade continues to go up. Hope that's helpful.

Operator

We'll go next now to Nick Yulico at Deutsche Bank.

Nick Yulico

Just turning to the guidance. 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. A lot of that the transaction costs promotes. I know you guys break this out, but just trying to understand what's driving that. It's a pretty regular line item going back for the last year? And how we should think about -- is this 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?

Tim McHugh

Yes. Thanks, Nick. So the transaction cost you're referencing, so other expenses, which is predominantly transaction costs, think about that being, as I described in the footnote noncapitalizable transaction costs, a lot of that tends to be dead deal cost. So tough to predict kind of how that comes through. We're a pretty active firm. I'd say that's stepped up a bit this quarter just because of -- as we've talked about and as Sean highlighted on a few prior calls, our underwriting standards have picked up a bit, and we've seen cost increase. So you think about some developments that we've gotten beyond Ken -- similar to the way we don't try to guide to acquisition cost.

We try to have 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 with them. They could not come to this line item, but it's not something that we kind of have -- we've made decisions on right now or else it would be coming through this quarter.

Operator

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

Ronald Kamdem

Just the presentation has sort of highlighted that the outsized occupancy gains was in AL and in 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 suggests IL is accelerating. 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

Let me try to take the first one, and John, why don't you take the second one? As I mentioned on my prepared remarks, assisted living continued to significantly outperform in [indiscernible] 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. There is no question that assisted living has been outperforming. And if economic continues to weaken, might on a given rolling 12 to 18-month period, my guess is that it will continue to outperform very significantly given the need-driven nature of the business.

John Burkart

Yes. Regarding the self-management of [indiscernible] I want everyone to keep in mind, our focus is it always has been on driving results. That is the #1 most important thing to whether we're managing directly whether we're asset managing and our partners are managing is less the point it's more about getting the results. So with that said, I think it's probable that we end up in some form of self-management this year. And I would say as far as the cost 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 module. So that is close to a net 0 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 wouldn't worry about that in the sense of very big surprises. It's just really changing out and getting improved modules going forward. Hopefully, that's helpful.

Operator

We go next now to Michael Griffin at Citi.

Michael Griffin

Appreciate the

Just a quick one. I noticed in your investor presentation, I think it's Slide 7. Last quarter, I said the comp for growth we've seen kind of export pick up from fourth quarter to 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, the reported same-store number in 4Q, 1Q, it's actually because we continue to expand the same-store pool. So you've got 95% of our operational properties that we've owned for more than 4 quarters in our same-store pool now and a lot of the transitions that came in were from the U.K. and U.K., 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 on this call.

So some of the increase you're seeing just in 1Q is from that mix shift and inclusion of more U.K. properties. SP1 Also, you gave is that the sort of the earlier stages of normalizing labor cost. So it's the addition of U.K. that it makes it look like the comp 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 it was relatively the same.

Operator

We go next now to Juan Sanabria of BMO Capital Markets.

Juan Sanabria

Just a big picture question. Curious if you guys could comment on overall seniors housing penetration. Talking to some of the privates and just reading some of the trade racks, 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

So I'll try to address the first part of your question. So Acuity actually went off I would say, in 2020, right? If you didn't absolutely need it, you would avoid the product pre vaccine. So we obviously have seen acuity gone up in 2020, but since then, we have seen acuity sort of normalize. So I'm not sure that I subscribe to this idea that acuity across the board for the industry is going up. In fact, someone just asked earlier in the portion for about Cisco. I was with the Cisco team last week. -- and Cisco's CEO were talking to me that [indiscernible] the have seen at 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 a vaccine coming to play. You want to answer the second?

John Burkart

Yes, I'll just add a little bit. So obviously, as I said, the 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 senior desire, the loneliness of 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 home care. 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 costs 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'll get that benefit as well. So I see a very, very favorable future going forward.

Operator

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

Vikram Malhotra

Just 2 clarifications. Tim, I guess, in your last call, you had mentioned in the guide, you were keeping the temp usage as a percent of total intact or flat through the year in your guide. And 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 your -- the OpEx went up maybe 7% or 8%. I'm just wondering, is there anything onetime in that number?

Tim McHugh

Yes. So I'll start with your first question on senior housing and John can add any color on the movie 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. And of course, some of that benefit gets netted out with full-time employees coming on, but 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 is just a better trend coming out 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

And then on the MOB, as I mentioned in my prepared remarks, we're expecting guidance between 2% and 3%. And so that is a timing issue for Q1, and it will reverse as we go through Q2, 3 and 4.

Operator

Thank you. And ladies and gentlemen, that will bring us to the conclusion of the Welltower First Quarter 2023 Earnings Release Conference Call. We'd like to thank you all so much for joining us this morning and wish you all a great remainder of your day. Goodbye.