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spk06: Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2021 Welltower, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After this speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. It is now my pleasure to introduce General Counsel Matt McQueen.
spk00: 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 Sean for his remarks. Sean?
spk12: Thank you, Matt, and good morning, everyone. I hope that all of you and your families are safe and healthy during these extraordinary times. I'll make some introductory comments on the state of senior housing business, our ongoing alignment efforts with our operating partners, and we'll also provide a detailed perspective on our current thoughts related to capital allocation. Tim will then get into detailed operating and financial results. We are cautiously optimistic on the senior housing business with green shoots emerging in U.S. and U.K., While it is too early to raise an all-clear flag as another COVID resurgence can never be ruled out, we're delighted to report an occupancy increase of 120 BIPs in UK and 90 BIPs in US over past six weeks. Despite growing optimism in US and UK, performance in Canada has remained somewhat weak due to an increased COVID cases across many regions. While most residents within our Canadian senior housing properties have been vaccinated, the rollout to the broader population has lagged meaningfully. Due to lockdown in certain areas within Ontario and Quebec, move-in stores and visitation have been highly restricted, which has ultimately led to an occupancy loss of 50 basis points since mid-March. This trend has improved in April. Despite the draft from Canada, the move-in activity in March is higher than the last non-COVID impacted month of February of 2020. In addition, as I have described in past quarters, rates continue to hold. As adjusted for 2020 leap year, AL rates are up 1.6%, IL rates are up 0.7%, mostly dragged down by the Canadian business. Senior apartments and wellness housing rates are up 6.3%. Our operators across the board are seeing broad momentum that continue to build. Irrespective of product type, geography, acuity, this is the most optimistic tone I've heard from our operating partners in a long time. We're even seeing the lifestyle-driven customers are starting to come back, which frankly surprised me in a positive way. Fundamental results have exceeded our expectations in Q1, and we're anticipating strong momentum in Q2. While we continue to have our speculation on what the arc of the recovery may look like, we have provided additional disclosure on the additional NOI and earnings power of our portfolio, assuming a return to 2019 level of NOI for our stable portfolio and adding incremental NOI from our fill-up portfolio. We believe this would result in additional $480 million of NOI. And remember, this assumes a return to 2019 level of occupancy and margin, and it does not assume a return to frictional vacancy or any rate growth since Q4 of 2019. We're seeing something similar happening in the private market. While current cash flow multiples of what we are buying might be high, as compared to what we were willing to pay two to three years ago, this is a moot point. we're paying a much lower multiple and a stabilized cash flow as evidenced by a much lower price per unit. While in most other asset classes this could be a matter of opinion, I believe in real estate is a simple business where you can obtain a very granular view of price per unit and how this compares to replacement cost. While we can sit here and debate how different assets and portfolios prices compared to prices per unit two to three years ago, replacement costs are shooting upwards with a white-hot housing market driving construction costs exponentially higher in recent quarters. This phenomenon is now spelling into other material costs due to a $2 trillion infrastructure plan announced by the Biden administration. As costs continue to rise, the market clearing rent to achieve minimum acceptable return is also ratcheting up. However, those returns are not going to be easy to achieve. Today, as much of the senior housing industry effectively remains in lease-up mode, given the impact of COVID on occupancy. If this was not enough, now the interest rate curve is backing up, creating further pressure on developers' performance. This backdrop clearly is unique to the current cycle, which we believe will result in meaningfully lower new starts in near to medium term. The supply outlook, along with already rising demographic growth in the first half of the decade, gives us confidence that we'll achieve the level of asset performance that we provided. Although I have nothing to add in terms of the timing and or the trajectory of the recovery, our analysis was done one asset at a time, and I hope you will find this new disclosure useful. During the first quarter, we continued our effort to create greater alignment of interest with our operating partners by restructuring several relationship constructs. And as we mentioned on our last call, we have made structural changes to several senior housing agreements. I would also like to highlight some recently announced strategic transactions with Genesys and Prometica, with elements of both deals reflect our approach to value creation for our shareholders. First, Genesys. As we announced last month, after 10 years, we have substantially exited our Genesis real estate relationship through a series of transactions, which meaningfully de-risked our cash flow stream going forward. Effectuating this nearly $900 million transaction wasn't easy. It involved a skilled nursing operator deeply impacted by a COVID-19 pandemic. The transition of access to local and regional operators, working through our outstanding loans to Genesys, at the same time creating opportunity for WorldTower to participate in the post-COVID recovery in post-acute fundamentals. Ultimately, we executed a mutually beneficial transaction for Genesys and WorldTower shareholders. For Genesys, the transaction resulted in a meaningful deleveraging of its balance sheet, which will help you to reposition the company post-COVID-19. And for WorldTower, we're able to execute the transaction at a private value of $144,000 and generated an 8.5% unlevered return over the full term of Genesys' relationship. And upon the repayment of the outstanding debt, that return will rise to 9% with even further upside potential from participating preferred and the equity position. We believe that this represents a very favorable outcome for the shareholders, World Tower shareholders, particularly in light of challenging environment that we have faced in the post-acute sector and then COVID-related pandemic-induced downside we have seen. While transactions will result in some near-term earnings dilution for WorldTower, we expect to create significant value for our shareholders following the deployment of the $745 million of anticipated proceeds over a range of high-quality opportunities that I'll discuss shortly. Since our announcement last month, Genesys has received an infusion of equity capital and named a turnaround specialist in Harry Wilson as CEO. We wish the team of Genesys much success in the future as we have substantially exited a challenging legacy structure with Genesys. I hope our shareholders appreciate the favorable ultimate outcome. As we have done with several operating relationships over the last few years and discussed on various calls, our team embraces complexity, takes creative solutions, doesn't run away from the problems and situations where the choices may be imperfect and ultimately works tirelessly to fulfill our commitment to our owners, operating partners, and employees. Second, Prumerica. Prumerica. We announced two transactions to strengthen and expand our relationship with Prometica, which will enhance the quality of our joint venture position and continued growth. The first transaction involved $265 million sale of 25 skilled nursing assets with an average age of 41 years, which will result in an immediate improvement to the quality of the portfolio. At the same time, we also crystallize a 22% unlevered RR over two and a half years of ownership of the asset, which is a true reflection of the power of our value-oriented investment philosophy. We at Wealthower firmly believe that basis, not yield or cap rate, determines investment success. Through a separate transaction, we're pleased to maintain an 80% stake in our state-of-the-art power back assets, which has been contributed to our 80-20 joint venture with Prometica. Prometica has already assumed the operations of these assets, which have been rebranded as Prometica Senior Care. This successful transaction is yet another example of our focus on improving quality and growth profile of our portfolio, while doing so at favorable economic terms to all stakeholders. Prometica team is making progress in developing new relationships with other health systems as a provider of choice, as Prometica represents the premium not-for-profit provider at the leading edge of healthcare evolution. We're hopeful that we'll be able to deploy far-direct creative capital with this innovative partner of ours. Speaking of accretive capital deployment, we are pleased to share with you that we have closed in excess of $1.3 billion of acquisitions year-to-date with very attractive unlevered RRs. In particular, extremely happy to announce that we have partnered with a softener-led investment group to recapitalize HC1, the largest and most reputable operator of care home communities in the U.K., Our investment in excess of $800 million comes in form of first mortgage debt on HC1's real estate and equity in recapitalization. We also receive significant warrants that will further allow us to participate in the post-COVID upside that we are confident that management is in process of executing. HC1 will add... a value option to our high-end focus UK platform. This is significant. There is significant opportunity to upgrade the asset-based operating platform and people in this portfolio, and we have tremendous confidence in James and David to fulfill their mission to deliver the highest quality care along with the resident and employee satisfaction. In recent weeks, AC1 has experienced the same positive occupancy momentum as our broader UK portfolio, gaining 90 bits of occupancy from the March 2021 trough. Our debt investment represents the last found exposure of just 40K per unit, and important statistics given our unrelenting focus on basis. This basis also represents a significant discount to replacement costs. In addition to the upside from equity and warrants, we think this is an extraordinary risk-adjusted return story. We believe we'll be able to generate low-to-mid teens' unlevered IRR from this transaction while adding a highly strategic partner to fill a gap that we have in our portfolio in the U.K. With acquisitions, patience is a virtue, and so is occasional boldness. Since we mentioned in our October call the moment of boldness is here, we have closed in excess of $1.8 billion of acquisitions. The initial yield of this whole tranche is 6.8%, but we expect it will stabilize at a significantly higher number. While the environment was very uncertain then, and we didn't give in to institutional imperative or headline pressures, and we relied on independent thinking and resilience of our team, we remain very bullish on acquisition opportunities and have several attractive deals under contract currently and a highly visible pipeline, which we think we'll be able to execute through year-end. While our focus continues to be on the right asset with the right basis and with the right operator, I'm hopeful that our 2021 class of acquisition will be immediately accretive to 2022 earnings and will be significantly accretive to 2023 and beyond. Lastly, I will address a very interesting question I received from an investor post our last call. I was asked why we have such an emphasis on partner selection and whether we'd be better off vertically integrating. We think this is an excellent question that deserves some reflecting for a moment. Notwithstanding with the right here law in senior housing, we believe we're better off in this ecosystem of partners than implementing an industrial view of vertical integration. That view is rooted in our belief that the combination of centralized capital allocation and decentralized execution creates the best long-term return. We believe the strategy of decentralized execution releases the entrepreneurial energy and keeps politics and costs at bay. This is especially important in real estate, which is profoundly a local business. However, overall, we're happy with our execution so far in the year to create partial value for our shareholders, but by no means we're satisfied. We're cautiously optimistic about the fundamental environment and excited about our opportunity to acquire assets, create new relationships, and attract quality talent. With that, I'll pass it over to Tim. Tim?
spk01: Thank you, Shank. My comments today will focus on our first quarter 2021 results, the performance of our investment segments in the quarter, our capital activity, and finally a balance sheet liquidity update in addition to an outlook for the second quarter. After a year defined by infection protocols, move-in restrictions, and incredible operating challenges for our partners, we started 2021 in arguably the most challenging environment yet, with case counts hitting new highs across all three of our geographies and operating restrictions moving up in lockstep. Towards the end of February, the vaccine rollout hit its stride, and nearly 80% of our facilities had their second vaccine clinic. Case counts across the portfolio dropped precipitously, and we started to see the early signs of stabilization. The effectiveness and rapid deployment of vaccines within our communities are just starting to be felt across our resident population. And while we're encouraged by the last six weeks of recovery from the U.S. and U.K., significant uncertainty remains with respect to the prevalence of the virus amongst the general population, the timing of the reopening of the economy, and the timing of further rollbacks of operating restrictions, especially with respect to our Canadian portfolio. The result is a near-term operating environment that, although notably improved, remains highly unpredictable in the short term. As a result of this uncertainty, like last quarter, we provided a one-quarter outlook with our results last night. As we have done over the past 14-plus months, we will continue to disclose and update information on a frequent basis, with the intention of providing a more complete outlook as soon as the virus-related variables moderate to a level that allows for more reliable forecasting. Now turning to the quarter. Maltau reported net income attributable to common stockholders of $0.17 per diluted share and normalized funds from operations of $0.80 per diluted share versus guidance of $0.71 to $0.76 per share. In providing guidance last quarter, we also provided expectations for $31 million of HHS provider relief funds to be received in the quarter. We ended up recognizing approximately $34.7 million of HHS funds, along with $2.5 million of out-of-period payments for similar programs in Canada. Removing the impact of these funds, along with the $3.5 million termination fee that was received in one of our senior housing management company investments, which was not contemplating guidance, our normalized FFO moved to $0.70 per share. Therefore, on an apples-to-apples basis, we came out a penny above the top end of our HHS-adjusted prior guidances of 64 to 69 cents per share. Now turning to our individual portfolio components. First, our triple net lease portfolios. As a reminder, our triple net lease portfolio coverage and occupancy stats reported a quarter in arrears. These statistics reflected trailing 12 months ending 12-31-2020. Importantly, our collection rate for rent remained high in the first quarter, having collected 96% of triple net contractual rent due in the period. Starting with our senior housing triple net portfolio, Same sort of fine, 2% year-over-year, as leases that were moved to cash recognition in prior quarters continue to comp against prior-year full contractual rent received. EBITDA coverage decreased 0.01 times on a sequential basis in the portfolio to 1.00. During the quarter, we transitioned the remaining five capital senior assets, moving one to a triple net structure under a new operator and the other four to a data structure with CSU until transition. We also completed the transition of four properties leased by Hark Management to StoryPoint under a new lease agreement. These transitions had a net positive impact of 0.02 times in total portfolio coverage. Next, our long-term post-suit portfolio generated positive 0.2% year-over-year same-store growth, and EBITDA coverage increased 0.37 times sequentially to 1.37 times. As 51 of the 79 Genesis assets began operator transitions. Twenty-three assets have already transitioned as of this call, including nine former power back properties, which moved to ProMedica Senior Care. ProForum for the already completed ProMedica JV, Genesis Healthcare represents less than 90 basis points of our total in-place NOI, and long-term post-acute will be reduced to 6% of total NOI. And lastly, Health Systems, which is comprised of our ProMedica Senior Care joint venture with the ProMedica Health System. We had saved through NOI growth of positive 2.8% year-over-year, and trailing 12 EBITDA coverage was 1.9 times. Before turning to outpatient medical, I want to highlight a disclosure change we made to our presentation of occupancy and our supplemental disclosure. Historically, we've reported occupancy to 100% ownership, but going forward, we will present both at Welltower's pro rata share to better reflect Welltower's ownership economics. This has no impact on NOI, which has always been presented at Welltower's share. We have footnoted the occupancy levels, if presented to 100% ownership, in both the senior housing operating and medical office portion of our supplement. Now turning to our outpatient medical portfolio, which delivered positive 3.1% year-over-year same-store growth, as cash rent growth and higher platform profitability combined to produce an acceleration in NOI growth. Tenant retention continued to be strong at 87.7% in the quarter, as we executed renewals on more than 540,000 square feet of space in the quarter, our highest amount ever reported. Additionally, we've also seen the length of term in executed renewals increase as compared to last year. Also in the quarter, we completed our second joint venture with Invesco Real Estate for a portfolio of outpatient medical assets and completed our first with WAPRA. Our ability to form joint ventures with best-in-class capital partners over the last two years has allowed us to maintain scale and, more importantly, the tenant relationships generated from our in-house asset management platform. At the same time, we diversified our access to capital during a period of significant capital market turbulence. We look forward to growing these relationships further going forward. Now turning to our senior housing operating portfolio. Before getting into this quarter's results, I want to point out that we received approximately $35 million from our Department of Health and Human Services CARES Act Provider Relief Fund. As we have done in the past quarters, the funds are recognized on a cash basis and, as such, will flow through financials the quarter they are received. We are normalizing these HHS funds out of same-store metrics, however, along with any other government funds received that are not matched to expenses incurred in the period they are received. In the first quarter, there were approximately $33.8 million of reimbursement normalized out of our same-store senior housing operating results, mainly tied to the HHS program in the U.S. Now turning to results of the quarter, same-store NOI decreased 44% as compared to first quarter 2020 and decreased 15.6% sequentially from the fourth quarter. Sequential same-store revenue was down 3.6% in Q1, driven primarily by a 310 basis point drop in average occupancy versus our guidance midpoint of 325 basis points. Turning to REV4 in the quarter. Show portfolio REV4 was down 1.5% year-over-year, but mixed shift and extra day of rent in the comparable leap year quarter are distorting the true picture of rent growth metrics, as over 40% of our revenue is derived on a per diem basis. When adjusting for the leap year, total portfolio REV4 growth moves to negative 1%, and breaking out our individual segments, our active adult, independent living, and assisted living segments record year-over-year growth of positive 6.3%, positive 0.7%, and positive 1.6% respectively. As I've mentioned in the past few quarters, the combined total portfolio metric is being impacted by considerable change in the composition of occupied units in the year-over-year portfolio. Our lower acuity properties, comprised of independent living and senior departments, held up considerably better on the occupancy front since the start of COVID, which has the mathematical impact of having a higher portion of our total portfolio occupied units being lower acuity and therefore lower rent-paying units. So in conclusion, rental rates are proving more resilient across our portfolio than what appear in our aggregated reported statistics. Lastly, expenses. Total same-store expenses declined 2.6% year-over-year and decreased 20 basis points sequentially. I will focus on sequential since the changes are more relevant to trends in the current operating environment. The 20 basis points sequential decline in operating costs was driven mainly by lower COVID costs as case counts dropped dramatically in March. The meaningful decline in our top line, combined with these expense pressures, had a significant impact to our operating margins, which declined 280 basis points sequentially at 19.4%. As I noted earlier in the call, we did not include government reimbursement that was not tied to period expenses, and therefore COVID expenses negatively impacted same-store by $14.8 million. We are not factoring any HHS funds into our second quarter outlook. Looking forward to the second quarter, and starting with the April quarter-to-date data we've already observed, we've experienced a 20 basis point increase in occupancy through April 23rd, with the U.S. and U.K. up 40 and 90 basis points respectively, while Canada is down 20 basis points. While we are encouraged by the recovery in the U.S. and U.K. and are hopeful that the effectiveness of the vaccines has put a floor underneath operating results, we remain cautious on projecting acceleration in recent trends given the lack of historical precedence and uncertainty of reopening trends, particularly in Canada. On a spot basis, we are currently projecting 130 basis point increase in occupancy from March 31st through June 30th. We expect monthly REV4 to be plus 1.2% sequentially, although adjusting from the extra day in 2Q versus 1Q is reduced to plus 70 basis points sequentially. Lastly, we expect total expenses to be effectively flat, as increases in operating costs from higher occupancy should be offset by reduction in COVID-related expenses. Turn to capital market activity. We continue to execute in our strategy of maximizing balance sheet stability or maintaining flexibility to position us to take advantage of attractive capital deployment opportunities. In March, we issued $750 million of senior unsecured notes due June 2031, bearing an interest rate of 2.8%, and used these proceeds to redeem all remaining senior unsecured notes due 2023. As a result, we were able to extend all senior unsecured debt maturities to 2024 and beyond, and extend our weighted average maturity profile to nearly eight years. We also extinguished $42 million of secured debt at a blended average interest rate of 7.6% per quarter. In February, we highlighted a robust pipeline of capital deployment opportunities. As these transactions have materialized and the pipeline has grown, we've utilized our forward ATM program, selling 3.7 million shares of common stock to date at an initial average weighted price of $73.43 per share. These shares will generate future gross proceeds of approximately $272 million. and along with $1 billion of cash in our balance sheet, will enable us to efficiently capitalize our highly visible pipeline of capital deployment opportunities. Moving on to leverage. We're in the quarter at 6.59 times that debt to adjusted EBITDA, a 31 basis point increase over the previous quarter, as underlying cash flows continue to be pressured by the impact of COVID. While transactions closed in the second quarter will result in a slight increase in leverage, after adjusting for expected proceeds from assets held for sale, and $272 million in proceeds from the forward sales of common stock, we expect leverage to settle in the high sixes before the rampant senior housing cash flows begin to naturally drive leverage lower in the coming quarters. Speaking of recovery, Sean spoke earlier about the magnitude of potential cash flow growth from just returning to pre-COVID levels of margins and occupancy in our senior housing operating portfolio. This will have a significantly positive impact in cash flow-based leverage metrics. And although the duration of this recovery remains highly uncertain, The inflection point this quarter leaves us optimistic that it has begun, and our demonstrated ability to access significant equity proceeds through asset sales, even in the most difficult of times, along with our return to the equity markets this last quarter, leaves us confident that we will be able to keep the balance sheet in a position of strength as a natural deleveraging from a senior housing recovery returns us to well within our historical target levels in the not-too-distant future. Lastly, moving to our second quarter outlook. Last night, we provided an outlook for the second quarter of net income attributable to common stockholders per diluted share of $0.31 to $0.36, and normalized FFO per diluted share of $0.72 to $0.77 per share. As I noted earlier, this guidance has not taken into consideration any further HHS funds or similar government programs in the U.K. and Canada. So in comparing it sequentially to our first quarter normalized FFO per share, it's better to use the $0.70 per share number I mentioned earlier in my comments, which excludes the benefits of these programs as well. On this comparison, the midpoint of our second quarter guidance of 74.5 cents per share represents a 4.5 cent sequential increase from one Q. The 4.5 cent increase is composed of a 2 cent increase per share increased from our senior housing operating portfolio, driven by an increase in sequential average occupancy and expected reduction in COVID costs. A 2.5 cents per share increase in net investment activity. This strong post-quarter investment is offsetting the initial dilution from loan reductions and operator transitions related to Genesis. a one cent increase in NOI from triple net and outpatient medical segments. And this is offset by an expected one cent increase in sequential GNA, driven mainly by new hires. And with that, I'll turn the call back over to Sean.
spk12: Thank you, Tim. Despite the challenges posed by the pandemic on our business, we have remained resolute in our commitment to ESG initiatives. In fact, our efforts on this front have only grown over the past year, and we are pleased to report significant progress, not just in terms of numerous awards and accolades we have received, but also by our action to strengthen and expand our ESG platform, which we believe will bear fruit in many years to come. We have recently received the Energy Star Partner of the Year Award for the third consecutive year and elevated to the level of sustained excellence the EPA's highest recognition within the Energy Star program. We have also been honored that our social initiatives, we are recognized with a quality score of one by IFS, the highest ranking in the social category. And last but not least, we continue to receive an A rating from MSCI, one of the most widely well-respected global organizations for our broader ESG practices and disclosure. I'm extremely proud to be working with our board of directors, one of the most diverse in corporate America, in this commitment to create long-term and sustainable shareholder value per share through our ESG initiative. With that, operator, we can open it up for questions.
spk06: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Due to time constraints, we ask that you please limit yourself to one question. If time permits... You may re-answer the queue with any additional questions. Our first question comes from the line of Rich Anderson with SMBC.
spk02: Hey, thanks. Good morning. I got up at 6 this morning to be first in line. Good morning, Rich. So the disclosure on the recovery is great, and I appreciate that you can't comment or know what the trajectory is going to be, but it is question number one. one in every one of my conversations because right now, you know, we have to deal with an elevated multiple because of trough earnings. And so people want to know what the snapback is going to look like. You know, my estimates are down 30% versus pre-COVID because of all this noise. And so I guess the way I would ask the question is, if you can't give trajectory, what would disappoint you in terms of, you know, getting back to square one? Would you say, boy, if we're not there in two years – That would be quite a disappointment. You know, can you kind of triangulate at least a range of expectations as opposed to committing to one?
spk12: Yeah. Well, thank you very much, Rich. I hope you don't have to wake up at 6 a.m. to be first in line. But I'll just address the question. Is any definitive answer from our end is as much of a guess from us as it is from you, right? So just understand there's no historical precedence to what's going on. We're simply telling you if we go back, acid by acid, to where the NOI of these acids were. It's an important exercise because we have sold a lot of acids, bought a lot of acids, so it's very hard for you to figure out from our supplement what the number looks like. So we try to answer that question. If we just went back for the stabilized pool of acids to Q4 of 19, what will the NOI look like? And we add the filler portfolio and stabilize that. What does that combined look like? Now, I cannot answer the question whether it's two years or four years or, you know, you've got to really put that into context and your expectation. However, I will say this, and it's a very important point. It is to a Q4 of 2019 rent level, a.k.a. that if you assume that this will be expanded out, let's just say it will take four years from today to get to that stabilized level of NOI. So it's going to stabilize in 2026. you have to assume the rent of the business remains flat to achieve that NOI. which we don't think obviously is happening. We have continued to say that we expect that rent growth will hold up. So you might get it later, but you will get X number of years of rent growth to get added to that. Obviously that rent growth has a contribution margin that's very high and it falls to the bottom line. On the other hand, if you say, okay, we're going to get that earlier, you are not going to get as much rent growth. You will only just say that you decide that you're going to get that in two years. I'm making this up. and two years so you will only get the rent growth from 19 to 23 instead of 19 to 26. so i'm pointing out that there are many levers here that you have to think through the longer gestation period will bring you ultimately a higher number because of the rent growth aspect that i'm talking about versus the shorter and that's all i'm willing to say right now i can guess but it is a guess we're underwriting assets in a way that, you know, frankly speaking, we don't need to know. That's why we're so focused on basis. If you look at our stock, it's a real estate company. You can look at what the basis looks like on a price per unit basis and then go and think about what it takes to build that portfolio. You will see that portfolio trades at a significant discount to what it takes to build it today. Thank you.
spk06: Thank you. And our next question comes from the line of Jordan Sandler with KeyBank. Good morning. Wanted to hone in on a little bit of a different question, which is really the pacing of move-ins and move-outs. It's something, Tim, that you addressed on the last call. And, you know, I couldn't help but notice that indexed move-ins are are now above what seem to be pre-pandemic levels, or at least in March they were, you know, 103.1 on slide 14 of your deck. And so that's pretty interesting, and I know it's probably, and you've just addressed, Shank, you don't really want to speak to the potential trajectory of move-in, so I totally get that. Can you just maybe talk to us about move-out? you know, they're at 91.1 in March, so they're, you know, indexed as they're below. Why would they remain sort of below, you know, pre-pandemic levels going forward? How would you be able to keep them, or how would your operators be able to keep them below pre-pandemic levels for a sustained period that would sort of maintain or improve even this net absorption pace that we've recently seen?
spk01: Yeah, good question, Jordan. It's mainly due to just lower occupancy in the building. So, you know, right now we're seeing 140 basis points below where we were, or 1,400 basis points below where we were pre-COVID on occupancy front. So you've just got substantially lower number of residents in the building. So if you run it kind of historical churn levels, It obviously changes occupancy builds and then move outs start to kind of match historical levels. But as historical turn levels, you should be running at around 80% of kind of indexed historical levels of move outs. If that gets elevated a bit, you know, we've talked about this from, you know, a higher acuity resident moving in during COVID, that probably moves to mid to upper 80s. But that can stay, I think, pretty consistent through a recovery. It is tough looking at the last kind of six months, picking through what has been natural move-outs and what's been really certainly a spike we've seen from COVID in the December, January, February period. I think what you're starting to see in March is a return to that kind of 80% level that we would expect. Again, giving historical type of churn, but it's certainly something we're watching pretty closely. But from just a level of kind of the comment I made last quarter was from a level of occupancy in the buildings, that move out percentage, getting back to historical levels of 2019 levels of move-ins, you can drive 80, 90 basis points a month in occupancy by just getting back there because The move out is going to be lower purely mathematically based off the occupancy level.
spk06: Thank you. And our next question comes from the line of Nick Joseph with Citi.
spk14: Thanks. Good morning. I was hoping to get a few more details on the HC1 transaction in terms of the rate on the loan and then the strike price and amount of the warrants. And then what happened to the previous MADS investment with them?
spk12: Thank you, Nick. The previous MES investments was paid off at par. And we know we are seeing HC1 as a three-part investment. One is a combination of first mortgage, equity, and warrant. And we think that combination will generate low to mid-double-digit type IRR. We also give you the basis which we invested a majority of that capital. The equity basis is slightly higher, but it's a substantial discount to replacement cost as well. So to hit those IRRs, you don't really need much of an expansion of multiple. What you need is the EBITDA to come back, which we think the management is already executing, and we've noted that the occupancy is already moving in the right direction. I'm not going to break out the specific parts. You know that we do not believe in yields and cap rates determining investment success. We believe basis and RRs, you know, get to the investment success. And I'm consistent with that. And, you know, and that's what we are willing to provide.
spk06: Thank you. And our next question comes from the line of Vikram Mahaltra with Morgan Stanley.
spk11: Thanks so much. Good morning, everyone. Shank and Tim, maybe if you can describe just the acquisition opportunity set as it's evolved over the last three or four months since your last call, you talked about potentially a $10 billion opportunity over time. HC1 obviously expands your opportunity set in the UK. But if you just talk about the opportunity set in terms of assets, returns, and also just in terms of underwriting. I think you referenced your underwriting, if I'm correct, differently or, you know, not to a set time when you don't need it because of the basis. But I just ask that because your math that you described here obviously talks about pre-COVID levels. We all know, obviously, before pre-COVID, we still had a five-year period of occupancy loss because of supply. So theoretically, there's even you know, more upside. But if you can talk about the opportunity set and underwriting from that perspective, it'll be helpful.
spk12: Yeah, okay. Thank you, Vikram. First is the $10 billion number that I mentioned. I mentioned, obviously, as a multi-year opportunity, not a one-year opportunity, right? So I just want to clarify that. But you're right in that expansion with, obviously, expanding with HC1, this transaction expands that opportunity. I want you to understand, as I've said in my prepared remarks, that this investment is not just a financial investment, it's a strategic investment. And we looked at the company, its footprint, its management, and we see an opportunity that fills a big hole that we have in our portfolio. Our portfolio in UK is very focused on high end, and we didn't have a value option. And there is a tremendous opportunity to grow in that value option, which we think we'll be able to execute through the HC1 platform. We structure the investment, you know, in these three tranches that we talked about. We don't go into an investment thinking we'll do debt, we'll do equity, we'll do, you know, man's or participating equity or press. That's not how we think about it. We just look at an opportunity first. Think about what is the first asset opportunity and the strategic opportunity. Then think about how we get to invest capital so that we can be aligned with our partners. That's a very different approach than, you know, it's an asset and we've got to buy it or we've got to lend to it. That's just not how we think. And it is a right risk-adjusted return. You look at an asset or a collection of assets or a portfolio and you think about what way in the capital structure is you have the best risk-adjusted return for your investors. Remember, there are different investors in, obviously, the spectrum of this transaction. There's $235 million in equity on top of us, which, obviously, soft-nut-led investment group that includes Fanning and others. they're obviously bringing in and they think there's an extraordinary opportunity to create value for their capital, right? So that's a very important point. Now, going back to the pipeline, the pipeline is primarily today is senior housing, and the pipeline is very much what we talked about. It's significant. It's very robust. It's large. and it reflects a very significant discount replacement cost. We're not going to sit here and tell you that we believe that every deal we'll do will have this kind of return that we have described in HC1, but I've said before that we think we can hit a high single digit to low double digit RR, and that environment is still here. We don't necessarily, given our cost of capital, need to hit that, but we're still seeing returns many, many, many opportunities that we have under contract today that will get you to that kind of return, which is a high single digit, low double digit type of IRA. Hope that helps.
spk06: Thank you. And our next question comes from the line of Derek Johnson with Deutsche Bank.
spk08: Hi, everyone. Good morning and thank you. On leading demand indicators and community details, It's certainly encouraging to see visitation and communal dining almost back to historic levels. One missing component is the current quarantine requirement for new residents. Is it still the two weeks quarantine or perhaps longer if not vaccinated? Then secondly, you know, the lower level of in-person tours, is that being negatively impacted by restrictions in Canada versus other markets? Any geographic context is welcome.
spk01: Yeah, thanks, Derek. So I'll start with the question on quarantining. This is a state-by-state process. Part of my comments in my opening comments, part of the uncertainty around this is that it's local from a lot of the regulations around scaling back COVID, the regulations from last year, restrictions from last year. So we're seeing it kind of unfold state-to-state, but largely the U.S. now quarantining restrictions are gone if you come in vaccinated. If you don't come in vaccinated, then you do have a quarantining. But you've seen through the success of the vaccination of the over 65 population in the U.S. that largely majority of movement now that we're seeing come in vaccinated and you're eliminating that quarantine period. And then the second question on tours, you're correct. Canada is dragging down statistics. So you've seen A vast improvement in the U.K. The U.S. is a little different state to state, but now largely all states are allowing in-person tours, and Canada is still in a bit more of a restricted state.
spk06: Thank you. And our next question comes from the line of Michael Carroll with RBC Capital Markets.
spk03: Yeah, thanks. I wanted to jump on the HC1 transaction. I think, Shaq, you kind of already answered this a little bit. But when you think about that deal, should we think of more of a strategic type investment and ability for you to continue to grow in the UK with that operator? Or was it more of an opportunistic type deal? I mean, since this is a debt investment, I guess it's a little confusing on the strategic nature of it.
spk12: Yeah, so, Mike, it's a great question. It is not a debt investment. It is structured as a lot of capital deployed is debt investment, but it also comes with a very significant equity ownership through and warrant, or future ownership through and warrant, and current ownership through the equity stakes. So that's how we thought about it. This is not an opportunistic investment. This is a strategic investment. If you look at our portfolio, you will see majority of our UK portfolio is kind of in that, you know, 1,400, 1,350, 1,400 pounds per week to 1,600 plus pounds per week kind of, that's our sweet spot. And we think there is a real value option needed in UK where, you know, for the private pay side, you can, there's a tremendous amount of, there's a tremendous depth of need in let's call it the 900 to 1,000 pounds per week. So this feels true. strategic hole that we have in our portfolio, which we have been, you know, looking for a long time, not just last 12 months, to fill that hole. And we think, you know, this will be our platform. And, you know, as we have talked to, you know, our partners here, SoftNod, we have always seen it as a strategic investment. That's what we have talked to James and David, who runs H21. And we think you will see Fonda capital deployment activity coming through it in that segment. We're not going to go, you know, I don't want to speak for the management. I do not believe suddenly they're pivoting the business going from 1,000 pounds a week to $1,600 pounds per week. That's not the vision of the company is. Their vision is to grab that demand that's in that segment, and there's not a lot of quality, a lot of quality provided in that segment. So that's what we see here.
spk06: Thank you. And our next question comes from the line of Jonathan Hughes with Raymond James.
spk04: I understand the potential for your show operators, senior housing operating partners, to raise rents going forward. But when I look at costs, of which 60% is labor, do your operators have an expectation of increases to staff these properties? Labor costs were up 67% over the past couple quarters. Wage increases across the country, it seems like labor costs could inflate just as fast or even faster than rates. So any color on labor cost expectations and how you incorporated that on slide 13 would be great. Thank you.
spk12: Jonathan, there's no question that you will have labor cost inflation. I do not believe that problem will be as acute as you have seen last five years when, you know, all the, frankly speaking, all of our portfolios, given what the locations are, regardless of local regulations that sort of moved at or above that $15 type of numbers. So you have seen a very significant increase of labor costs. Will you see labor cost inflation? Absolutely. But I think you will also see margin expansion from, as Tim talked about previously, we believe that you will see the margin expansion going back to the historic margins level. So it's the yin and the yang. I will tell you one thing, though. I would highly encourage you not to look at one quarter or one month of labor costs and projecting that. There's a lot of noise and volatility around the fact that a lot of people have received a stimulus shake, and that has, in fact, a short term. We do not believe that will be sustained as this dries up. However, you know, you are right that labor cost inflation will remain, but it will not be what you see in other sectors, because what you are seeing in other sectors, such as lodging and, you know, all those sectors, they have laid off all their employees. They shut down, right? That was the case for us. Our communities have never shut down. They continue to employ our, you know, obviously, because to take care of our residents, and that continues. Is there no issues? Absolutely not. It will remain so. I will also encourage you to think about potential immigration changes that we're hearing about. Obviously, I know it probably less than you do, but that also has an offsetting impact. So it's a long-term problem, but just understanding the demand supply of labor as it relates to demand supply of people and also how that impacts people's other choices at home. This will all come into play. We'll talk about it as we go through.
spk06: Thank you. And our next question comes from the line of Mike Mueller with J.P. Morgan.
spk15: Hi. I'm just wondering, how are the occupancy trends trending at the new development, say, fill of properties compared to the more established properties that you have?
spk01: Right now, there's not much of a difference. I'd say we're seeing... we're seeing pretty uniform recovery across the board. So likely we'll start to see that start to change as you see some of the fill-up properties accelerate just purely by their current occupancy level. But right now we're seeing pretty uniform recovery across the board.
spk06: Thank you. Our next question comes from the line of Juan Santabria with BMO Capital Markets.
spk13: just hoping to spend a little time on the triple net seniors housing business that hasn't had the same amount of focus. But if you could just try to help us understand kind of what has been done to date to rectify some of the low coverage, presumably some of the 2% decrease in same-star NOI in the first quarter was driven by some restructurings or adjustments. And you had, I think it looks like... some straight line rent write-offs in the quarter as per some of your supplemental slides. If you could just help us think through what you've done to date and maybe what's left to do because I think that's a big piece of the recovery once that bottoms about what the portfolio could look like going forward with more clarity on the shop side.
spk01: Yeah, Juan. So I think the right way to think about it is it has been a main focus point for us and And it seems to be for investors as well. But I think within the triple net senior housing portfolio, around 20% of that in-place rent is now cash. So it pretty much reflects the underlying economics in those buildings. We have been pretty quick to move to cash when we have tenants that are not paying rent. So I think looking at our in-place, looking at our coverage metrics, those are tenants that are current on rent paying us and very much are doing so because of their long-term belief in their business. And if anything, I think what we've seen in the first quarter from the start of a recovery enhances that belief that there won't be much impairment here. I think the other key here is I think the difference between cash flow and value. And the underlying assets, I think you're seeing this across the board, are holding value. So the impairment to cash flow, I think, is short-term. That speaks to the view there's a recovery. And so I don't think about this being a value problem to Welltower, and if anything, kind of a short-term liquidity problem to operators.
spk12: I'll just add, as I've said, probably every call we discuss this, so I'm not sure why you think there's not been a focus. A majority of these leases that we have, and you should see that in our idea portfolio as well, usually the assets are owned, and the PropCo is jointly owned by the operator and us, and the operator's PropCo interest backs our lease, aka what you see as just from the rent does not reflect the collateral behind the lease. As you will see, these things get restructured, you will notice that, you know, that value of operators that they own the real estate, their prop to interest, will really back this rent and will create substantial protection of downsides for our shareholders. So I don't want to get into too much of details before everything is done. As I've said before, that you will continue to be surprised how much rent we continue to get from this portfolio? Will there be, you know, dilution of short-term cash flow? Absolutely will, and you're seeing that flowing through. Do we think there will be diminution of value? Absolutely not. So that's, you know, that's a general average statement, but that's what we continue to believe, and that's what you have seen through a 100-year flood, you know, once in a 100-year flood, which is this pandemic, that held up will continue to hold up.
spk06: Thank you. Our next question comes from the line of Connor Saversky with Barenburg.
spk07: Good morning, everybody. Thanks for having me on the call. Just to follow up on Juan's question, I'm wondering if this straight line write-down was at all related to some of the movement we've seen in the top tenants, and if so, could you maybe provide some color on what we're seeing there, what we could expect going forward?
spk12: No, we will not, Connor. It's, you know, we do not talk about specific operators on this call, and that's not relevant. As I said, that this, you know, lease that we restructured, you're only seeing one side of that. You haven't seen the other side. And the operator has substantial amount of ownership in the prop code, and that ownership backs the rent, you know, rent. And this operator, it's an extraordinarily highly respected operator, and we think we'll get to a point that works for our shareholders and their ownership. And you are only seeing one part of it. Just give us time, and you will see it will result into a mutually beneficial arrangement where we will be able to protect all of our value.
spk06: Thank you. Our next question comes from the line of Stephen Valliquette with Barclays.
spk17: Thanks. Good morning, everybody. So one other debate point to add in to the mix on the $480 million of embedded NOI, and that's really the slide 10 as far as the construction versus inventory. As we look at your NOI margins in your shop portfolio, it went from 32% to 30%, let's call it, from, I don't know, 2015, 2016 to 2019. A lot of that was that big increase in... construction, now that slide shows that's coming way down, which should alleviate some of the pressure as well. So I want to just talk about that on the plus side. And to the extent that you have some visibility maybe just in your just overall strategic review of the industry, do you think that that number goes lower from here on that chart on the bottom of slide 10 as far as construction versus inventory? Thanks.
spk12: So, Steve, that's an extremely important question. I try to address that in my prepared remarks. Look, we're all guessing, right? And we have to assume that people will do things that is economically beneficial to them. If you look at how much the costs have changed, you know, let's just say, you know, let's just talk about cost in the last three years. You have places in the coast that costs are probably up 20 plus percent, low 20%. And if you look at, you know, some of the locations in, you know, pick Dallas, Charlotte, you know, Nashville, costs are up between 30 and 35%. The housing market is very significantly impacting not just the cost of lumber, which is everybody's talking about, but the cost and availability of labor, right? So that's sort of one big impact. And a development model is a highly leveraged model, right? So if you thought you were going to make 7% yield on cost and suddenly now it looks like 5%, you're in trouble. But on the other hand, if you see what's going on, interest rate is backing up in a highly leveraged model. By definition, development is a highly leveraged model with construction loans, etc., what you have is now interest rates is backing up. So it's farther eating into your pro forma. And those two combinations, assuming people don't develop for fun, they want to develop to make money, that proposition is increasingly becoming very difficult. This is an industry-wide comment. This is not, I'm not suggesting, Steve, you can go and, you know, develop a building in a given location and can make money. That's not the point. As an industry-wide, it is becoming much more difficult and assuming people want to develop to make money, you know, that proposition is getting much, much harder. I'm not even talking about availability of debt capital, et cetera. The attractiveness of the model has been meaningfully hit in the last, call it, three years, particularly the last 12 months as, you know, housing has just gone parabolic. So in that context, we think there will be obviously a lot less supply than it has been in, call it, between 15 to 19 years. Also the 15 to 19, you know, sort of the supply boom was, you know, frankly was created by, you know, a lot of the players, you know, including our company was paid, you know, 120, 150 cents on the dollar on the basis. I do not see those participants in the industry anymore, right? People are very, very, people who are involved in buying assets today, they're very focused on the right basis. And a lot of the sort of the takeout, premium is meaningfully gone from the industry as well. So if you put all of those things together, we think that it is reasonable to expect, you can never accurately forecast what the future will look like, it is reasonable to expect that supply in next five years will be a lot less than last five years. But it is guess nonetheless. And we do think that will impact the rent growth, which is the point I was trying to make on the 480, you know, that is the beauty of basis. I highly encourage all of you to look at what is the implied part basis value of wall tower. And if you have to make at that basis a number, what rent do you need versus what it takes to build and to make some minimum acceptable return, call it 10%, whatever you think is the development yield should be and what is the rent. And you will see what it takes to build on our, you know, today in our company, there's a huge gap between that potential rent, what's potential to bring new supplies versus what you can get. It's not just a world-star problem. I'm saying existing inventory versus the new inventory, and that will give you much more insight into what the rent may or may not be.
spk06: Thank you. And our next question comes from the line of Omatenyo Okusanya with Mizzouho.
spk16: Yes, hi. I just wanted to go back to Juan and Connor's question about some of the restructured leases. And, Shanky, you know, you made a point that, again, you're working on structures to help you kind of recover, you know, some of the kind of initial rent breaks or, you know, whatever benefits you're kind of giving these tenants in the short term. Could you just talk a little bit about what some of those kind of, you know, lease terms would be to kind of make sure, again, you kind of get those benefits back in, you know, when ultimately, you know, this tenant starts to recover?
spk12: Yeah, that's a very good question, Todd. So, there are many ways you can do this. If you keep the asset under lease, you can give people, obviously, you know, short-term break and, you know, but you can create two years out, three years out, depending on the level of EBITDA, you can do all bells and whistles to recoup that rent as cash flow comes back. And that's the point Tim was trying to make. Remember, this is, you know, cash flow is now starting to come back, right? So that sort of, if you retain it, obviously, in the lease, remember, these leases are not, you know, there's nothing behind the leases. There's the profit interest sits behind the leases. So you have a value protection. If you go to RIDEA, We are not afraid, Tayo, just to take a wrench cut And if that is what, you know, what is the sustainable level of rent from the sustainable level of production, right? You saw that we bought a new, we bought a bunch of new assets in the quarter, reported quarter, where we did a triple net loop with a highly respected operator. In that particular case, you would say, why didn't they do a RIDEA? Because, you know, if you look at in that portfolio, what we bought, the rent before us was substantially higher, right? 50% higher than we were paying to the previous landlord. Our rent is much lower, we set it in a way, but then we have some sort of a catch up. Our rent goes up, not by 3%, but as the EBITDA comes back significantly, and the EBITDA is already moving in that direction, we have a provision to get some more rent. It is also, you know, for the operator, you know, at some point they were paying 50% higher rent, and they will end up probably paying from the current rent level 10% more, 15% more, but they will keep rest of the cash flow, right? So it works out on both sides. Why does it work out on both sides? Because the basis is lower. The issue is not a lease. It's fundamentally a form of a leverage. And if you put the basis in the asset so much higher, and then you put a high LTV loan or high LTV credit, call a lease, you are kind of creating problems from two ends. In this case... It's a very low basis that helps both parties, the owner as well as the operators, to make money going forward. Going back to your specific question, there's a lot of collateral that sits behind these leases from this specific issue that Juan and Connor and now you are asking about. This particular operator, which is one of the most respected operators in our space, has a substantial amount of profitable interest that they have created through a very significant the helping machine through 90s. And that prop co-interest sits behind that lease. So let's just say you can do it from a lease. This is just a JX statement. Or you can go to a RIDEA, right? If you go to a RIDEA, the ownership will change. And we'll reflect the fact that, you know, their future liability is lower, a.k.a. we lost an asset, and we have assets that, you know, back that lease, and we have an opportunity in that restructuring to own more of the real estate, not the same amount. That's the way to think about it.
spk06: Thank you. And our next question comes from the line of Nick Ulico with Scotiabank.
spk09: Thank you. So, you know, looking at a couple of different slides you guys have and just trying to put this all together. So you have this slide that's showing the future NOI potential getting back to pre-COVID occupancy. And, you know, yet at the same time, you're not providing full year guidance for this year. So on one hand, you know, you're implying a lot of optimism about getting back to a occupancy number, which is much higher than where you are right now. yet you're not really willing to commit to an occupancy range on the year. And I guess I'm just wondering, you know, what is giving you confidence that you're going to get back to a higher occupancy level? I mean, the 20 basis points of April occupancy benefit seems like it's a smaller number than what you were talking about with your weekly benefit when you put out a presentation earlier this month. So I'm just wondering if there's something that you can point to. You have a backlog of pent-up demand that you're learning from prospective residents that's going to increase move-ins as you get into the third quarter and beyond. I mean, what else can we sort of point to here that you think should give us confidence that you're going to get back to pre-COVID occupancy?
spk12: Yeah, so nowhere on that slide, if you go back and say, see that we said we will. We just said if we do go back to that occupancy, this is what the numbers looks like under this assumption of no rent growth and at the margin that it was at that point in time. You will decide whether we will go back or not go back, that's a matter of opinion. What we have stated on the slide is a matter of fact. So that's sort of number one point. Number two point, we are nowhere implying that you will get to that number within a specific timeframe. Full year guidance that you have raised, that is a specific timeframe. We're not committing to a specific timeframe on that 480, which is on slide 13 of the presentation, because frankly, we have no clue, right? Third, I mentioned on my presentation or prepared remarks that we are, you know, this is probably the most optimistic I've heard all of our operating partners from an industry momentum perspective. We're yet to see it on, you know, sort of in our occupancy. Hopefully we'll see it. We're not baking. We're not, you know, sort of counting on it. We're not giving you an occupancy guidance. We're giving you an FFO guidance, and we're simply telling you what underlies that FFO guidance, which is basically straight-lining what we have seen so far. Hopefully that answers your question.
spk06: Thank you. Our next question comes from the line of Lucas Hartwich with Green Street.
spk05: You hit bottom on shop occupancy. And it kind of looks steady based on some of the numbers you put in your release. But I'm just hoping you can talk a little bit more about the cadence of the increase in occupancy over the past six weeks. Is it steady or is it bumpier? Just kind of curious what that looks like.
spk12: You know, six weeks is not a long enough time frame, Lucas, to give you a trend. But if you insist, I can tell you if it is 60 basis points over six weeks, you know, the weeks that are closer to us today have seen higher than the 10, and the weeks that are farther from us have seen lower than the 10. But six weeks is not a good enough time frame for you to project. At least we don't have confidence to project that. I can tell you the tone... of our operating partners is a lot more positive than what you're seeing. I want to see first in the numbers and then talk about it. This is a highly uncertain environment. We're just not gonna sit here and try to guess how things might or might not play out. Remember, there is a possibility things can get much worse. If we have significant resurgence of COVID, it can get worse, right? So we're just telling you what we are seeing. We're telling you things obviously seasonally, we're seeing things improving. But we just were not ready to go out and tell you that, you know, things will successively better every week. And we have some sort of a secret sauce to see that. It's just a highly uncertain environment.
spk06: Thank you. And our next question comes from the line of Daniel Bernstein with Capital One.
spk18: Hi. Good morning. I just wanted to go back to the idea of pricing power within seniors housing. And I haven't fully run the numbers, but My guess is with home prices rising significantly, rent prices rising significantly, senior housing is probably about as affordable as it's been in the last 20 years. I don't know if you've had discussions or thought about it with your operators, but, you know, maybe, you know, does that change the equation of what occupancy levels need to be for the industry to have pricing power? You know, traditionally you think about 85% or better occupancy for pricing power, but maybe the equation's changed some. So just...
spk12: John, very good question. I'm happy to start, you know, sort of engage in a guest work with you, but it is a guest work nonetheless. I can tell you historically speaking, HBA or House Price Appreciation Index has a very strong correlation with, you know, obviously rent growth. But, you know, this is a very interesting market, right? It's unprecedented in many, many ways. You haven't seen this kind of, you know, housing shortage yet. combined with demand, you haven't seen this kind of escalation of, you know, rent, I mean, cost, that makes it very, very difficult to build something. Reasonably speaking, you would say, if all of those are together, you should see rent growth. At the same time, you have to acknowledge the fact that entire industry is in lease-up, right? So I am not comfortable underwriting a lot of rent growth, but I also believe that you will see Modest rent growth like you are seeing. Now, do I think that, you know, three years from now the rent growth will be better than what we are seeing today? You know, that's reasonable to expect. Do I know for sure? No. But I think that's reasonable to expect.
spk06: Thank you. Here we have a follow-up question from Lucas Hartwich with Green Street.
spk05: Thank you. On the HC1 loan, I'm just curious if you could provide the debt service coverage, what that looks like on pre-COVID NOI from that portfolio or that company.
spk12: Lucas, can I get back to you on that? I don't have that on top of my mind. I'll get back to you on that. I can tell you on a LTV basis, If you ascribe no value to the actual business, which backs the loan, not just the real estate, the overall fee in that LTV is extremely low. And it's a substantial, substantial discount to replacement costs. But I don't have the service coverage ratio pre-COVID basis in my head. I will call you offline and give you that number.
spk06: Thank you. We have a follow-up question from the line of Ometeo Okusanya with Mizuho.
spk16: Yes, just a quick one for Tim. Tim, I noticed that there was a little bit of equity issuance this quarter, about $270 million. Can you talk a little bit about why that decision was made when, again, you guys have so much cash on balance sheet?
spk01: Yes, that's a great question. It really has to do with our confidence in our pipeline. So we've got... Between our development spend and the external opportunities we're seeing, it's got less to do, and it's why you're seeing it done in a forward structure is it'll fund activity when it occurs, but it's highly visible activity.
spk06: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
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