Q3 2022 Welltower Inc Earnings Call

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Hello, My name is Lisa and I will be your conference operator today.

At this time I would like to welcome everyone to the well tower third quarter 2022 earnings call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

He would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

Always like to withdraw your question Press Star one again.

In the interest of time, we ask that you limit your questions to one.

I would now like to turn the call over to Mr. Matt Mcqueen General Counsel. Please go ahead Sir.

Thank you and good morning.

Certain statements made during this call maybe deemed forward looking statements in the meaning of the private Securities Litigation Reform Act, Although <unk> 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.

Thank you, Matt and good morning, everyone today, I would like to describe our capital allocation priorities for Medicare senior care transaction and the rapidly evolving capital markets environment. I will also review some high level business trends before handling the call over to John who will provide details on operational trends and a brief update on our operating platform.

I'm very pleased with the progress we have made since we last spoke 90 days ago. Despite a flattish earnings trends on a sequential basis, driven by several existent headwinds, including FX interest rates and utility expenses, our underlying business is actually improving meaningfully and setting up for the quietest.

Spring recovery that we hoped for in our senior housing operating business same store revenue was up 10, 8% year over year, driven by strong occupancy gains and most importantly pricing power.

Five 3% same store rate growth is the best we have seen in our recorded history and I want to remind everyone that were compounding already industry, leading rate of growth from last year.

From these early trends I believe you will see a further improvement in Q4, which will create a strong setup for 2023, however, perhaps what I'm. Most excited about is the progress we're making on the labor front with compensation per occupied unit is up four 3% year over year, the lowest level of growth we have reported since the.

Beginning a pandemic our operating partners are experiencing a significant surge in applications, which has translated into strong increase of net hiring in fact in September total portfolio monthly contract labor spend was the lowest since August of 2021 and subsequently improved in October we believe.

This trend will continue into year end outside the normal pick up where you didn't see us during the holiday season and into well into the next year.

We strongly believe the labor market is changing for the better and it will help our sector to be a total standout amongst all real estate sectors next year on a relative basis.

<unk> portfolio of same store NOI growth was 17, 6% in the quarter led by U S, which posted third quarter up 20 plus percent growth in assisted living product type reported same store NOI growth of an impressive 25, 1%.

Let me highlight three operating partners for you that provide further insight into why im so pleased with our progress over the last 90 days number one oakmont as Youll recall, we transition 10 top California assets to open in August while we expected some initial disruption to occupancy NOI during that transition.

In actuality, we recognized an immediate benefits due to remarkable performance from Courtney steam.

These assets have experienced a slight increase of NOI and occupancy. Despite challenges that are normally incurred during a transition. This is the first time I've seen a transition with no negative P&L impact apart from the fixed assets, we transition to off my last year.

I expect these properties as well as the other assets that we transitioned to oakmont to add significantly to our 2023 growth. If you are visiting San Francisco. This month for NAREIT Conference I recommend you to join our property tour and experienced firsthand the remarkable job. This team has done.

To my earlier point on a shift of labor market during the summer open positions across the optimal platform was 16% of total jobs. It is down to low single digit at this point.

Number two storey point story point is one of our best operating partners, perhaps will be the source of biggest N Y swing next year with a $1 billion of investment with low occupancy properties, which are generating approximately two 7% yield in Q3 storey point made remarkable improvement in our topline and.

Both occupancy and rate, but the properties have not yet as significant NOI in 2022 as these properties, but just over the breakeven occupancy and agency cost strides very detrimental their open positions are now down more than 50% through the end of October and we expect 80% reduction of agency by end of this.

Month, we believed our stabilized NOI for.

For this group of portfolio is about circa $80 million, which will be substantially achieved in 2024, while we will not close this gap in 2023, I expect will make significant strides next year and really over the half year Mark.

We cannot be more pleased with execution than any steam has pulled off.

Number three sunrise sunrise, because our largest operator due to a national presence Sunrise experience significant labor challenges and has had to rely on contract labor for the last many quarters Jack and his team has made remarkable progress in this area over the last 60 days contract labor down 52%.

Year to date run rate and I believe sunrise will be the biggest contributor to contract labor improvement in the coming months and quarters, given strong rates Sunrise benefit from in this incredibly well located Walt our buildings, we should see extremely strong NOI growth contribution from Sunrise.

While we are encouraged very encouraged by the strength in our fourth quarter guidance of 21% growth at the midpoint I'll remind you that we are at the very early inning of senior housing recovery will remain as excited as ever about the growth prospects in coming years, and the 80 plus population growth will continue to accelerate and.

As new construction in our sector will come to near a standstill. In fact 2023 should see four 5% increase in 80 plus population as you may have observed only 2700 units got started in Q3, and frankly I don't even understand how these people who will make any money in development.

While new development should continue to come down assuming people want to develop to make any money and other interesting phenomenon. We are observing is that the thousands of units are being taken offline either because of obsolescence or because of higher and better use like behavioral health as of 930, almost 15000 units were taken off.

Slide on a TTM basis.

I also want to highlight consistent and steady performance of our outpatient medical group under Ryan's leadership, our retention rate for the quarter is a remarkable 92, 7% and rent spreads are ticking up into the mid threes, both new and renewal leases for both new and renewal leases I'm pleased that our weighted average.

Escalators are now above 3% I'm also pleased that the low interest rate environment and the wall of capital that drove to too low 2% escalators seems to be a thing of the past Kelsey seybold, which is our largest and will be tenant and also represent a very significant portion of our development pipeline was acquired by United.

During the summer the significant credit upgrade of our largest tenant in our development client represents a meaningful value creation for our shareholders. The most significant change we observed in this however in the MLP space is a remarkable widening off cap rates I've saved like a broken record for a long time that it will be <unk>.

<unk> made no sense to us given where the forward view of inflation was relative to underlying growth rate on the cash flow I am pleased to see other capital sources are now waking up to the ugly realities are real return on capital in this inflationary environment. There was nothing wrong with this asset class except <unk>.

This and I relieved to see that has finally changed billions of dollars of transactions were consummated at low cap rates, often often with short term floating rate debt. The party is over with cap is over with capital structure and cash flow as many of these vehicles and now upside down well.

Observing this space closely in the coming months and quarter.

Now I would like to discuss our recent restructuring of a lease with for Medicare health system I'm not going to bore you with the details of our fundamental thesis of this investment in 2018.

I laid it out clearly when we did this transaction, we didn't predict COVID-19 and the impact and its impact on our cash flow portfolio, and frankly were underwhelmed by the execution.

But the fundamental investment thesis of the original transaction should still protect our shareholders' capital that basis, an appropriate structure are critical to any real estate investments.

While we have historically relied on our operate assembly to drive cash flow and thus yield we never make real estate investment decision based on yield we believe success in real estate investment over a long period of time is a function of REIT basis and staying power if.

If you own an apartment in New York City for $400000, while everybody owns equal billing department for $1 million.

You can still charged rent for that unit and generate strong returns.

That is such a simple yet perhaps one of the most overlooked concept on wall Street that capital plenty of noise around for America is negative EBITDA coverage over the last few months have reached a fever pitch and.

And we honestly understand and empathize with this pavlovian response as the his history of health care REIT sector is full of remedies, such as massive rent cuts or disposal of assets at fire sale prices that result in significant value destruction to shareholders.

Even though I am personally humbled by the cash flow deterioration in the Primerica portfolio, let me repeat that we're not experiencing a rent cut on a cash basis and our investors.

Beneficiary of satisfactory total return to date and that goes back to our incredibly favorable basis and structure.

To continue my metaphors previous metaphor Manhattan apartment rent might come down from 5000 to 4000, and a bad year, but we never hypothetically in charge for <unk>.

As we bought our unit at such a low price that is why our rent is now going up not down after this transaction and I continue to believe it remains below market and will be a source of future value creation as I mentioned in our last call Primerica has made significant strides in reducing its operating losses, which are.

Further narrowed in last 90 days through both occupancy gains and lower labor cost contract labor cost, particularly integral or its parent entity, which we have done multiple transactions previously has successfully executed many turnarounds, including those involving HCR asset that we sold it to them in last couple of years.

<unk> is well positioned to return this asset to its previous glory using a regional operators strategy just like they have done over the last couple of years.

We are looking through integrated brand entity and the owner for the downside protection through subordination their equity as well as significant other guarantees and will subsequently shares significant value creation with us.

But I cannot overemphasize that the fundamental idea of below market rent basis equals to below market trend is not about for Medicare. It is about our belief, how we invest and protect our shareholders' capital.

If a business has demand growth and you can own it for significantly less than what it cost to build and a low leverage capital structure. It is challenging for me to see how we lose money in most scenarios.

We remain partners for America, all we've done is such as on a much smaller scale and we will be delighted to see the significant credit improvement, obviously important institution and Toledo.

Finally.

Let's discuss the current capital markets environment, which excites me to know and before I go into what we might do in the future, let's discuss what we have done in the past under this leadership team.

If we go back and read all our comments about capital deployment in the last few years, you will notice few attribute one what unlevered IRR buyers and we underwrite significant cap rate expansion at exit hence the recent rate increase don't Fluster us just as we have never changed.

Low rates down under the guise of low cost of capital to our unrelenting focus on basis relative to replacement cost and as a result, we seriously dislike low cap rates and stabilized occupancy scenarios.

Nothing has happened so far even in this turbulent capital markets backdrop that require us to change how we invest capital we are experiencing historic volatility in the treasury market in every part of the with every part of the yield curve inverted right now with significantly the most important two to 10 curve.

As as inverted as it was during Paul Volcker's time 40 years ago.

One approach for us would be to ride out this storm in a shelter and do nothing.

But those of you who know us well know we're unlikely to do so we maintain a fairly favorable capital position in a war chest due to our extremely extremely talented capital markets team under the leadership of Tim.

Despite our unfavorable public cost of capital on a spot basis today, we have no doubts of global institutions, who want to partner with Us and let me remind you again, a simple capital allocation framework I've described to you before.

Every company effectively has four choices of raising capital one tapping internal cash flow to issuing debt three issuing equity and for disposition of existing assets.

It also has five essential choices are deploying that capital one investing in existing assets two acquisitions three buying debt at a discount for paying a dividend and five the buying stock at a discount you can loosely call. The first set of choices are selling but the right description will be sourcing.

Ah raising capital you can loosely call the second set of choices as buying but perhaps the correct description will be deployment of capital. Following the same line of thinking loosely speaking consistently buying low and selling high creates value for shareholders.

In a more wholesome and thoughtful description optimizing these choices from this menu of sources and uses in a tax efficient manner creates meaningful value for our continuing shareholders on a partial basis.

Our goal is to maximize our share value and Pasha cash flow not to become the biggest or the most revolutionary or capital allocation team on both sides of the balance sheet is poised to pounce on this great mineral opportunities, while the most volatile interest rate environment and for decades has put in front of us.

And at the same time John's team is just getting started on the journey of cash flow and platform optimization with that I'll pass it over to John John .

Thank you Sean I'll provide some insight into our operating business starting with the medical office portfolio in the third quarter same store NOI growth for our outpatient medical business was one 4% over the prior year's quarter, which was below trend due to some timing issues on tenant improvements delay in move ins and higher utility expenses.

We continue to see strong retention levels at 93% in the quarter and accelerating renewal rates in the marketplace.

Turning to our senior housing operating portfolio the recovery in this sector continues as Sean mentioned revenue at our same store portfolio came in at 10, 8% in the third quarter compared to the prior year's quarter. All three regions showed strong revenue growth starting with Canada at four 4% the U S and U K growing at in <unk>.

Impressive 11, six of 18, 9% respectively.

Revenue growth for the quarter was driven by a 390 basis point increase in occupancy and another quarter of healthy pricing power with Revpar growth of five 3% as Charles mentioned the highest we've witnessed.

Sequentially the portfolio occupancy continued to improve with the gain of 110 basis points during the quarter.

While expenses remained a challenge our operators continue to control expense for our expense per occupied room.

The top four or compensation per occupied room only grew at four 3% in the third quarter over the prior year's quarter, the lowest growth rate since 2019.

Expense for grew at a rate of three 7% in the third quarter on a year over year basis, well below our revpar growth of five 3% driving an expansion of 130 basis points on a year over year basis in a larger.

As our operators have pivoted from Covid from the Covid state to normalized operations and is labor and materials have become more available we have aggressively addressed maintenance that was delayed during COVID-19.

Which resulted in slightly elevated repairs and maintenance during the maintenance expense during the quarter.

Overall, the quarter's occupancy gains strong reservoir and expense controls enabled the senior housing operating portfolio to deliver 17, 6% year over year same store NOI growth in the period led by the U S with over 20% year over year growth, while Canada NOI grew at six 3% in the UK was up.

Nine 8%.

Going forward, we expect the operating portfolio to continue to deliver outsized NOI growth with each geography expected to experience accelerating NOI growth in the fourth quarter.

As we look forward to what many believe will be a weaker labor market in 2023.

It is important to realize that labor as an expense represents about 60% of our total expenses.

Additionally, nurses are only about 5% of our labor force at the communities and although there are other more specialized positions of the communities. Most of the physicians required skills that are transferable from other sectors of the economy, allowing us to benefit from a softer labor market with short notice.

Regarding our portfolio our operating platform. We continue to quickly move forward on plans to pilot our first module in early 2023 with several other modules in the works like all technology Rollouts, it's about people processes data and then technology. So it is not about flipping the switch it takes team works.

The results will show up over time, our meetings with our operators have been very productive as we bring together their skills and experience with our own to build a better future for the industry.

Finally, I would like to thank our operators and their employees for making these results possible.

Has been a full spreads since the beginning of October and they have addressed one challenge after the next.

We're finally at a point, where it seems like Theres light at the end of the tunnel occupancy continues to rise net hiring is occurring month. After month Revpar continues to outpace expense for which will drive further margin expansion and so much more we wish to thank everyone and wish them a wonderful Thanksgiving and thank you for your <unk>.

Work I'll now turn the call over to Ken.

Thank you John .

My comments today will focus on our third quarter 2022 results.

<unk> of our Triple net investment segments in the quarter our capital activity.

<unk> sheet liquidity update and finally, our outlook for the fourth quarter.

<unk> reported third quarter normalized funds from operations of 84 per diluted share representing.

Representing six 2% growth over the prior year period, when adjusting for HHS funds received and changes in FX rates.

Marking our second consecutive quarter of year over year growth since the start of the pandemic.

We also reported our second consecutive quarter of positive total portfolio same store NOI growth was seven 2% year over year growth.

Turning to our Triple net lease portfolios 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 and a 632022.

And our senior housing Triple net portfolio same store NOI increased one 6% year over year below the low end of our guidance range, which is primarily timing related trail.

Trailing 12 month EBITDAR coverage was <unk> 83 times in the quarter.

Next same store NOI on a long term post acute portfolio grew three 1% year over year and trailing 12 month EBITDAR coverage of 131 times.

And lastly, health systems, which comprised of our joint venture with <unk> Health system has.

Same store NOI growth of positive, 275% year over year, and trailing 12 month, EBITDAR and EBITDAR coverages were negative 0.01 and negative <unk> six respectively. As operations continue to be impacted by high agency utilization costs in the second quarter relative to the prior year.

Pardon me coverage figures in context of our announcement last night.

Trailing 12 month for medical senior care EBITDAR coverage of negative negative point in year, one implied trailing 12 month EBITDA of negative $1 6 million relative to $168 million of cash rent paid and the trailing 12 month period ending 632022.

The transition of the skilled nursing business will bring the remaining chromatic as senior care EBITDAR back to profitability with a trailing 12 month coverage of nearly two times relative to the remaining rent on the 58 assisted living facilities. They will continue to operate.

Thus the transition to Integra health has a dual benefit providing us a well capitalized and strategic partner to focus on the skilled nursing properties, while also leaving chromatic as senior care.

Abstentious better financial state following the transaction.

Turning to capital market activity.

In the quarter, we continued to enhance our balance sheet strength by utilizing our ATM program to raise approximately $760 million of forward equity and an average price of $80 12.

We set up $9 1 million shares for total proceeds of $842 million to fund $1 billion of net investment activity, leaving $1 5 billion of unsettled forward ATM as of 930.

Post quarter end, we settle additional ATM proceeds to fund investment activity and pay down $850 million of total debt.

817 million of which was floating rates.

Post debt pay down we've done.

Full 4.0.

Your $1 billion available borrowing capacity on our line of credit and no unsecured maturities until 2024.

We expect to finish the fourth quarter with consolidated net debt to EBITDA below six five times for the first time since 2020.

From a liquidity perspective in addition to the $4 billion in capacity and line of credit we have $1 billion of cash and forward equity and $580 million remaining near term dispositions and loan pay down proceeds and a four six yield.

Spending $5 6 billion of total near term liquidity.

Lastly, moving to our fourth quarter outlook.

Last night, we provided an outlook for the fourth quarter of net income attributable to common stockholders of eight to 13 per diluted share and normalized <unk> of 80 to 85 per diluted share were <unk> 82, and a half cents at the midpoint.

As mentioned in the release, our fourth quarter guidance contemplates no HHS funds to be received in the fourth quarter. So after adjusting for $1.05 of nonrecurring items, including HHS funds received in the third quarter were effectively flat.

For sequential up above.

The sequential change is composed of two cents from sketch sequential increases in senior housing operating portfolio and one from sequential increases in outpatient medical and senior housing Triple net.

These are offset by <unk> <unk> of interest expense and foreign exchange headwinds.

Underlying this <unk> guidance is estimated total portfolio year over year same store NOI growth of eight five to 10, 5%.

Driven by sub segment growth of outpatient medical 152, 5% long term post Q2, and a half to three 5%.

Senior housing Triple net 5% to 6% and finally senior housing operating growth of 18, five to 23, 5%.

Driven by revenue growth of approximately nine 5% year over year.

Underlying this revenue growth is an expectation of approximately 200 basis points of year over year average occupancy increase and rent growth of approximately 7%.

And with that I'll hand, it back the call back over to Sean Thanks, Tim.

One of my mentors Peter Kaufman, often says life is not about predicting it's about positioning.

Did we predicted for medicare's EBITDAR coverage will turn negative absolutely not but we positioned for it and structured as such.

Did we know Covid will happen and <unk> credit in senior housing sector will weaken no, but we positioned for it we own more than 11000 units of age restricted and age targeted apartments that will benefit from government agency backstop financing at very attractive pricing from which we can generate a couple of billions of dollars.

The proceeds do do we predict that our stock will be in the low 60, then we will lose our access to equity capital no. We didn't but we positioned for it and raised $3 $28 billion of capital at an average price of $86 55 this year.

We have no idea if rates are going back down are going back up and how ugly that capital markets environment, My turn before it gets better.

We're laser focused on what we can control and have an incredible organization that is railing to take advantage of the opportunities with <unk> as opposed to gamblers art I cannot be more excited about the period of unprecedented bar share value creation that we're embarking on for our existing owners and.

With that I'll open the call up for questions.

At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.

In the interest of time, we ask that you. Please limit your questions to one.

Your first question comes from the line of Vikram Malhotra with Google.

Good morning, Thanks, so much for taking the questions just a quick two parter.

One you talked a lot about pricing power you gave the examples across operators on how pricing and neighbors improving just how sustainable is this across your regions, maybe within the U S. But also globally.

Then could you just add onto that any early signs that the elevated flu is impacting fundamentals.

Thank you.

I'll take the pricing power John if you take the flu that's great. So from a pricing power standpoint. We're currently if you just look at what we said at the beginning of the year.

Nothing really changed.

Except if you think about what happens is in the industry not at least for our portfolio <unk> got a lot of renewables in the beginning of the year and this year, we got very strong pricing obviously.

And given that the year that gap between where market rent is as well as where your renewal rates are obviously, what the rents that are rolling off there is a gap over a period of the year that sort of sort of.

Calms down right, that's sort of what happens in a normal year.

What we have said this year that given that market rents have been rising at a faster rates than annual rates first time honestly in like a decade. So we have seen that gap closed down pretty meaningfully and youre seeing revpar increases are actually getting better through the year you add on top of that that we are seeing some early renewals for next.

Tier in that sort of call. It another 10 ish percent range and we expect that obviously, we will do similar type of pricing increases as we come to next year, you will see that pricing power will continue to hold up then revpar rate increases will continue to hold up so we're pretty excited about it but remember pricing power also comes in many forms.

And substances right. So you have occupancy of the portfolio in many parts of the portfolio is getting to a point overall portfolio might still be at 80% occupancy, but there is segment of the portfolio is well above high <unk>, 90% occupancy will start to get pretty meaningful pricing power because you are going to sell anymore right.

So as we get into that environment more and more I believe that you will see sustainable pricing power I have no crystal ball on exactly what the macroeconomic environment will be next year, but as we sit here today, we feel very good about pricing.

Yes on your question regarding the flu.

Most certainly can't predict the future, but what I can say is that the COVID-19 protocols I think will mitigate the situation within our communities. They are still in place that was at one of the properties are very recently and I'm waiting in line to get in we wash hands temperature checks wear a mask et cetera.

I'm going to align with.

Employees any vendor all of US that's the protocol, it's a safe thoughtful protocol.

So my expectation is that that will have a very positive impact in the communities how the flu season goes.

In the U S and otherwise I don't I can't predict that but I do think that COVID-19 protocols will be very positive going forward.

Your next question comes from the line of Derek Johnston with Deutsche Bank.

Hi, everybody good morning.

Can we discuss the newly authorized $3 billion share repurchase program. How do you feel about the shares at current levels and I guess the possible timing of execution given.

Given the announcement comes in conjunction with earnings which is same as unique.

Good morning, Derik, I think I laid out pretty clearly what our possible capital deployment.

Opportunities look like buying back shares is one of them.

And frankly speaking as you know how we think we are unlevered IRR buyers and we look at everything from that lens are you can look at from the basis lens and you will see that we find our stock to be very very attractively priced and we'll measure that against every other opportunities we have.

Cannot predict on timing, that's just not we.

We just don't do that as you know, but we know you know how we think we think through a lens of basis to replacement cost and we think through and I often total unlevered IRR.

And if you do those calculations you will come to the perhaps the same conclusion that we have.

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

Okay.

Thanks for the time.

John Burkart as.

As operations recover in the shop portfolio and between al versus IL expect structurally different margins between the two businesses once fundamentals fully stabilized.

Theyre naturally are different margins starting out, but do I think that the end point.

Will change I think what we're doing with the operating platform will change that across the board.

And because <unk> has.

Absolutely, let's say more opportunity.

The impact might be slightly greater there but.

I think the whole business is going in the right direction at this point in time, but I think I.

I think we're benefiting across the board across the board John you didn't ask for my opinion.

My two cents.

On this topic is that you will see more improvement in El Nio.

You will see improvement in both.

But you asked the right person that cushion.

Yes.

Your next question comes on the line of Wendy <unk> with Evercore.

Hi, Good morning, Thank you for taking my question.

Could you please give us some color about moving trend different senior housing property types.

L a al and his senior apartments and also given the current slowdown of the housing transaction market have you observed any slowdown of your independent living move in.

Okay.

I'm not sure I completely follow the question, but do you think I think you hired you Oscar bogged.

The move in trends in the Senior's apartment business, if I heard that correctly.

Yes, you bet.

Go ahead, and also Oh, sorry.

Can you give some color for our key furnished senior housing types like IL al and also the senior apartments.

Yeah, Okay. So I think I understand the caution.

So look I mean, if you think about from a product type perspective, as I mentioned that the assisted living is going through probably the most robust recovery.

Perhaps for nothing other than the fact that it is the most need based environment is more susceptible lease susceptible.

Two and macroeconomic environment right when you need it you need the product when you need it and obviously it also failed five dose. So we have more rooms to climb back up so thats why youre seeing the most sort of robust recovery as I mentioned, the NOI growth in that sector for the quarter was 25.

<unk> percent right, so that sort of.

Let's just let's talk about the seniors apartment business that business has been as good of a business as any business I've seen has been very strong through COVID-19 has been very very strong through times I mean, our portfolio is at 95 plus percent occupancy as you know we operate in the mid market portion.

That business, which is very dependent on social security and everything else and you got a massive Cola increase next year, which we also think will be very beneficial for the pricing power increase in that business next year independent living you are obviously independent living did not fall as far as assisted living and it's coming back more slowly.

But.

I personally think that's a good business when you combine that with other property types and I think obviously, Canada, which is a majority of our independent living exposure has been slower to recover but as John noted that we are starting to see improvement there.

Your next question comes from the line of Dan Bernstein with capital one.

Hey, good morning.

I just wanted to kind of expand on your comments about the upside down.

Private buyers in the MLP space, just trying to understand there a little bit more if lenders are actually foreclosing on assets.

And maybe if you're already seeing some opportunities there to.

To buy assets or are you at a better IRR.

And maybe on a related question does that just do your comments also apply to seniors housing and skilled nursing, where I believe there are some upside down loans as well.

Yes.

So then we haven't seen lenders are for closing.

On medical office loans yet.

But my comment was if you sort of called the convexity.

The situation right when you have very very low rates.

And people buy and cap rates that are in that environment makes sense and then treasury curve moves 200, 300 basis points. I know you know treasury cups sitting on top or above the cap rates that you are paid that's a pre are upside down convexity situation and thats the comment I was making.

It takes time for lenders to foreclose. It takes time, but we are starting to see some meaningful increase in the cap rates there.

Which is interesting.

Not yet to talk about whether we are.

Going to look at that and execute on that yet we have lots of opportunities that we see in a relative basis. We talked about obviously senior housing is one of those nothing changed I'm, specifically pointed out <unk> because that is chain senior housing as an opportunity was there for last 18 months and we are in executing on it nothing changed there right.

<unk> continues to be super attractive on top of that to the Eylea question dairy cost our stock is really attractive. So we will look at every <unk>.

Every opportunity and think about what's the unlevered IRR on a risk adjusted basis, and what that sort of execution risk as well as obviously the frictional cost that comes with the execution risk but is this space. Finally first time in years has become interesting. The answer is yes, but it's interesting at a price and that price is <unk>.

Likely lot lower than most wall Street thinks.

Okay.

Your next question comes from the line of Ronald Camden with Morgan Stanley .

Hey, just 112 parter just looking back at the slide in the deck on the long term $543 million embedded NOI. My question is just on on that 230 million that comes from getting back to for 2019 NOI levels.

Your comments sounds like Youre pretty constructive on sort of margin improvement.

Especially with sort of the acceleration you saw it in revenues relative to expenses. This quarter can you just remind us how you're thinking about the margins of that $230 million.

Versus sort of the <unk> 19 level.

As part one and if I could sneak in a part two which is just on the <unk> consideration that half a billion how much of that is the 15% stake that theyre, giving up and how much is that is sort of the working capital sorry.

Yes, I'll start with the.

The first comment on the margin side.

The assumption as we get back to pre Covid levels. So no no assumption on change in margins.

We assume you get back to pre COVID-19 level profitability and operating margins of about 38% across the portfolio.

Sure.

Sure.

And on the consideration, it's roughly half and half.

Okay.

Your next question comes from the line of Michael Carroll with RBC capital markets.

Yes, I just wanted to touch on the new sniff JV I know you just kind of highlighted the rough size of the operating reserves <unk>, because it's going to be providing but how's that going to be distributed to the new operators are they simply earmarked to fund near term cash flow losses during the transitions and what happens if these new operators don't.

Actually need to access those reserves.

So the reserves are year marked for the operating losses working capital losses.

<unk>.

That reserve will go to them to improve the quality of the portfolio. So yeah.

If they do a good job and don't need them. All that's good for them right. So that they share the risk and they get the benefit of their savings there.

Yeah.

Your next question comes from the line of Kayo Okusanya with credit Suisse.

Hi, yes.

Good morning, and again, congrats on the quarter end.

The transition I've been covering this space 15 years, I don't think I've ever seen in Iraq restructuring, where the rent went up so that's that's really cool to see.

In regards to <unk>.

Integra and again this idea that they're going to be sub leasing a lot of the assets to regional operators.

Just curious a little bit again.

Your mantra in the hospital is going to get close to the operator.

Possibly can you'll actually even on the board at <unk>.

How is that relationship going to be with the subcontracted operators on how do you kind of manage that so I'm sure you continue to kind of get operational excellence out of them.

Yes, Tayo extraordinary good question and thank you for.

Thank you for your comment there.

I'll just one add one thing to that not only the rent is going up the previous tenant living close to half a million dollars on the table to make sure that these properties.

Are taken care of going forward. So we think our partner.

For that so I'll, just add to that portion of why.

We didn't go and find the offer is our mantra is to get close to the operators, but that's in the senior housing business.

I fundamentally believe in the expertise and we have walked with integra and its parent company on many of these transactions before there is no question that they are significantly better in the skilled nursing business then.

Or are aware and will ever be right. So we are sharing and for creating that value I have mentioned in my script that we're sharing very significant upside that they can create with them.

In return they are providing us the downside protection, which is very important for us. So you think about it you got to do in life. What you are best at right think about from an op standpoint, we think we understand operations.

Senior living the wellness housing business as well as <unk> business, and we want to partner with people, who we fundamentally believe on the other hand are very good in other businesses and that's what you were saying fundamentally it is.

Going through the decision, making is going to the people who are the best at what they're good at at the same time, it sort of cut the risk reward in terms of whole creates value. It just as simple as that.

As I've said before.

You can see the value still remains at very attractively very attractive basis, which you can get to you know the total rent you know what market rents sort of constant of scholastic businesses and you can divide to get to a value and you will see that value is still extraordinarily attractive and thus the ramp is extra.

Joining an attractive and remains below market. So there will be hopefully a lot of upside as the retail operators to bring this portfolio back to its previous glory, which we actually this is not a guess right. We have nikhil, how many assets we have transacted <unk> Medicare assets, we have transacted with integrating experience about 'twenty one at 21 assets right. We are.

<unk> seen them doing it and we are going on in execution path that we have seen in last couple of years. So fully there is a lot of value to be created.

For residents for employees for capital and that will be shared between the two parties, but it is fundamentally the believe off theyre, giving us downside protection for which they should enjoy a very significant upside that they create on the other hand for us it's all about where we sit in the rest of our spectrum.

So it's a win win win for all three <unk> Pro America wants to focus on its core business and wants to be in the higher margin business and that the leadership that they are taking that forward is a very significant improvement in their credit for well tower. It's obviously, a great day for some value realization as well as obvious.

Taking this portfolio to the hand, where we can create another round of very significant upstairs values for integra, they're coming in at a very attractive basis, and obviously they are creating the value that they will share the upside with us. So it's a win win win on all fronts.

Your next question comes from the line of Mike Mueller with JP Morgan.

Yes, we appreciate the expanded development disclosure, but what's the timeframe that you see for ramping the developments from.

One 6% initial yield to the 7% stabilized yields.

Yes, Michael Yes, I appreciate recognizing that we're trying to help with just the.

The ramp or the kind of trajectory of of how that cash flow comes through and it depends on type of development. So you think about are we are a lot of our starts have been as of late is more in the senior apartments homeless housing side and there youre talking about.

More 12 to 18 month type ramps towards stabilization and on the traditional senior housing side.

It's more or less 24 to 36 month ramp and that's where more of the lower yields negative yields come in the first 12 months.

Your next question comes from the line of.

<unk> <unk> with Scotiabank.

Thanks, Good morning, everyone I just wanted to go back to pro Medica, clearly strong pricing you got there and the cash rent going up it's attractive.

Want to see though if you could let us know the GAAP impact.

Because I didn't see any mention of lease escalators for the new arrangement you had them previously.

So I'm just trying to understand the <unk> impact from this and separately.

If you had.

I don't know if youre going to be filing details on the new lease, but if you had anything you can share right now in terms of escalators financial covenants capex requirements, because those were specific very.

Very sort of onerous.

Conditions of the last lease with pro Medica, which kind of strengthened and I think the whole process. You went through so any detail there would be helpful. Thanks.

Very good question the escalators remains the same to 75%.

And.

The GAAP impact as we mentioned will be roughly neutral to slightly accretive one of the leases are remaining the same lease.

Medicare.

<unk> Corp.

Senior living lease is going to 10 years. So you have a negative GAAP impact there. So net net you will be roughly neutral to slightly accretive.

Okay.

Your next question comes from the line of Austin <unk> with Keybanc.

Hey, good morning curious first off if there were other partners you approach for the <unk>.

For America joint venture.

How do we think about it.

You're going from a health system investment with feeders into these assets to the more regional operator approach and then just lastly, I'm curious kind of going back to 2016 2017 wasn't the plan to ultimately exit the sniff business and so curious how you think about the strategic direction of that segment of the portfolio.

So can you. Please repeat the first part of your question again.

Yes, I was just curious if you approach to any other partners beyond just integra for joint venture.

So look it is no secret that we have been thinking about in the industry that we have been thinking about.

This particular portfolio for a long time, we have been approached by at least five parties, who were interested in doing a transaction a similar or higher value similar our highest structures. We went with the partner that we know very well, where we felt the execution risk is much lower.

2016, and 17 I think your question wants to exit.

<unk> business.

Your next question comes from the line of one sanabria with BMO capital markets.

Hi, good morning.

Opportunities as cheap as it looks today.

You're picking up the right thing, we're absolutely thinking about it.

Thanks, Good morning, correct. Congrats on the <unk> Integra transaction the market seems to be rewarding you for that resolution, but the way I look at it is.

You kind of married for Medica in 2018, but you signed a prenup.

So our basis remains very attractive obviously, we got the support for the operator, who is living in living as I mentioned.

Having close to $1 billion on the table, we created another structure, where that 15%, which integrates paying four remains subordinated that farther lower solid net basis, which is the first time when I remember I talked about that that condition remains we have obviously.

<unk> in place as I said.

And if that's not the case remains remember then the last question I said that people wanted these assets because they are very well located assets and theyre very good location and they are very attractive basis. So we don't see as I said look anything can happen rich, but as I've mentioned before four years ago on this topic.

That low basis, well located asset that have demand that is held in low leverage structure, it's hard to see how we lose money anything can happen right anything is possible, but if you think about we have to leave within the realms of probabilities not possibilities it looks pretty good to me.

Thanks, Nick Joseph here with Michael.

So look I've mentioned very very clearly that we do not consider ourselves as skilled nursing expert. If we did then we would not bring in our partners in this deal who we consider knows the business better than we do.

So I will leave that to our partner to execute this strategy, which we have mentioned as Nikhil. Just mentioned that we have done just from this portfolio 21 assets before we leave it to them to maximize.

Where in this case is as sort of a structural protection is what we are after not maximizing value through operators thats, what they are bringing to the table in this case and we remain focused on our core businesses.

Whether it's senior living whether it's well as housing our medical office and Thats, what joining spending all this time.

Okay.

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

Great. Thanks, good morning.

Just sticking with <unk> for a minute here I guess, one of the expected operational synergies from primerica acquiring the Medicare sniff assets in the first place was likely centered around.

A good flow of patient referrals from <unk> hospitals into at least some of the manor care Sniffs were made sense geographically I guess I'm curious with hindsight it that part of the strategy play out the way everyone thought it would maybe just perhaps the underwhelmed execution that you alluded to shine I was just more a function of just tough industry dynamics for snips overall.

Paul.

And also under the New agreement then does paramedic pay.

Patient referrals.

Maybe widen and expand the.

First is the.

We couldnt execute our permitted that could not execute I don't know the answer to their costs. In hindsight is 2020 right, but there is no caution that it hasnt played out and the leadership of preventing a firsthand will tell you that there are no wildwood execution as well.

So no question it Hasnt played out and the second but if you think about again I would recommend you it's hard to say pigs easy to say things sort of looking back I would like you to go back and to the call where I've described why we did the transaction and we will see how much we emphasized that we fundamentally think if everything goes.

That's what we saw and that has played out I hopefully you'll agree in this transaction and the Kid you wanted to add anything to the second part of the question, Yes, I think from a clinical program in perspective I think.

This portfolio Medicare for America has always been good at providing good clinical program and they work closely with hospitals across different markets, whether it's for medical hospitals or not and creating programming that serves the need for local hospitals and that programming stays in place and obviously as new operators come in they will decide if they want to.

Yeah.

Your next question comes from the line of Dave Rodgers with Baird.

One of our operators that has very high occupancy in the 90 fives <unk> expenses going backwards.

And so you see tremendous.

Margin improvement there the whole portfolio is going that way and no doubt that the higher occupancy levels as Sean mentioned with pushing able to push rents or achieve higher rent, which is again driving better.

Better margins, but on the expense side, we continue to see opportunities to do.

To improve as we go forward and move out of the situation during COVID-19.

And in my prepared remarks, one of the.

Situations during Covid was a challenge to get some maintenance done get people into the buildings et cetera et cetera, So our numbers today even reflect some.

Elevated maintenance expenses, which will.

The reduced over the coming quarters, and again provide a stronger stronger run rate.

So yes things are going very good theyre going good at all levels.

Mark mentioned, we have maybe four buckets of assets with different levels of occupancy.

Across the board and it would be at the top occupancy assets.

We're achieving fantastic margins as you get down to the wrong, obviously thats not the case, but we're continuing to improve occupancy and things are all looking forward to hopefully that answers your question.

Your next question comes from the line of Joshua <unk> with Bank of America.

Yes, no I appreciate all the color on Pro America I guess.

Maybe one question on the senior housing side for the Pro America was there any discussion of potentially moving that to another operator.

Are you guys felt pretty comfortable with how they're performing.

As Tim mentioned, those those assets actually Jen decent amount of profitability for them and for Medicare that as part of <unk> strategic obviously plan and those are as you know our high margin businesses and if they have been even before COVID-19.

We expect they will continue to come back to.

The amendment of our pre Covid. These assets on mid 82% occupancy was generating high 30% margin right. So I expect as you sort of come back from the Covid and get that occupancy stabilize frankly speaking I will venture to guess that would be the best sort of margin part offer them all up front.

<unk> businesses so.

Not happy with where margins are today, and we're seeing obviously a lot of signs of improvement that we discussed but the margin of this business should come back to a much higher level and <unk> enjoyed that.

Like everybody else in the business.

Okay.

At this time there are no further questions. This concludes today's conference you may now disconnect.

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