Welltower CEO: Future of Senior Housing is Not What Exists Today

Buoyed by solid quarterly earnings, executives with Welltower (NYSE: WELL) on Thursday touted that the company’s ambitious strategy is paying off.

With regard to senior housing, CEO Tom DeRosa indicated that the industry at large is still working from an old playbook that will not produce satisfactory results in future years, and Welltower is writing a new playbook.

“The future of the senior housing industry is not what exists today,” DeRosa said on the company’s Q4 and full-year 2019 earnings call.

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DeRosa also took the time to reflect on the REIT’s efforts to reshape its portfolio and operator partnerships in recent years, and teased its increasing interest in active adult properties for middle-income residents.

Welltower reported $1.26 billion in total revenue in the fourth quarter of 2019, a 1.6% increase over the previous year. For the full year, the REIT generated $5.12 billion in revenue, a 8.2% increase over 2018. It also reported $0.55 of net income per share, funds from operations (FFO) of $1.05 per share, and blended total portfolio net operating income (NOI) growth of 2.2%, with all three of its service lines showing consistent performance.

Welltower also set its initial 2020 guidance: net income ranging between $2.96 and $3.06 per share, and adjusted FFO per share in a range from $4.20 to $4.30 per share, and average blended portfolio same store cash NOI growth of 1.5% to 2.5%.

The NOI guidance is in line with analysts’ expectations and a 50-basis point increase over the previous year.

“While management expects results to moderate slightly in 2020, the trend is still positive,” RBC Capital Markets Analyst Michael Carroll wrote in a note to investors.

SHOP deals almost complete

Welltower’s senior housing operating (SHO) portfolio same-store NOI improved 1.5%, year-over year. The SHO portfolio also achieved a revenue per occupied room (RevPOR) growth rate of 3.5% in the fourth quarter, spurred by strong performance in the REIT’s U.S. and UK portfolios.

“[Welltower’s same-store] SHO was led by UK’s +8.8% NOI and +3.9% REVPOR,” BMO Analyst John Kim wrote in a note to investors.

Welltower Chief Investment Officer Shankh Mitra attributed the performance to relatively stable occupancy, increased pricing power and better-than-expected labor cost inflation. Total SHOP occupancy was 86.1% in Q4, a 1.3% dropoff from the previous year, but only a 10 basis point decline from the first quarter of 2019.

DeRosa and Mitra touted the heavy lifting Welltower did to get its SHO portfolio to this position. The REIT’s major deals in the fourth quarter included the $297 million acquisition of six new communities in California from Oakmont Senior Living, as well as the acquisition of three Florida communities from Discovery Senior Living for $91 million.

The dealmaking continued into 2020. Yesterday, Welltower announced it agreed to sell a portfolio of assisted living communities in California, Nevada and Washington to a private investor for $740 million.

Welltower would not disclose the identity of the buyer, but did hint that it is a well-known institutional investor known for making smart real estate decisions and that the portfolio — which has a 97% occupancy rate — would provide the buyer with opportunities to push growth.

“We have a tremendous amount of respect for them and we do a lot of business with them in different places,” Mitra said of the buyer.

Welltower and Louisville, Kentucky-based operator Atria Senior Living are also involved in the construction of a mixed-use tower near New York City’s Hudson Yards mega-development, in a partnership with Related Companies and Spitzer Enterprises, the real estate company of former New York Governor Eliot Spitzer. The 44-story tower will include 126 luxury senior housing units, and is part of a $3 billion pipeline of luxury senior housing in major U.S. metros being developed between Related and Atria.

Welltower expanded its roster of operators in 2019 to include Denver-based Balfour Senior Living; Portland, Oregon-based Frontier Management; and Norwood, Massachusetts-based LCB Senior Living, in addition to Atria. All of the partnerships are under Welltower’s “RIDEA 3.0” management structure.

Mitra estimated that roughly 80% of Welltower’s operating partners are in RIDEA 3.0 agreements. DeRosa added that future dispositions of high-quality senior housing will likely be a result of an operator not wanting to enter RIDEA 3.0.

In 2019, the REIT also partnered with Buffalo, New York-based Clover Management to develop a pipeline of independent living communities geared to middle-market renters. Discussions are underway with other providers making moves into the active adult rental space — particularly targeting middle-market consumers — and further details should emerge over the course of the year, executives noted.

Welltower announced no changes to how it reports SHOP numbers moving forward. This stands out in contrast to the other “Big 3” health care REITS, Ventas (NYSE: VTR) and Healthpeak Properties (NYSE: PEAK). Both announced changes in how they would report same-store SHOP numbers in 2020 and beyond, in order to be consistent with industry best practices. Notably, Ventas and Healthpeak also contended with weaker senior housing performance in their Q3 2019 earnings.

Welltower’s same-store definition already aligns with the changes that Healthpeak addressed in its earnings call on Wednesday, Raymond James Analyst Jonathan Hughes wrote in a note to investors.

There has been some discussion among the “BIG 3” REITs about standardizing their same-store reporting practices. Welltower has no plans to update its practices, and has suggested the discussion stems from its senior housing portfolio performance, compared to Ventas and Healthpeak.

“We’re certainly not trying to mimic anyone else’s disclosure. We’re trying to provide disclosure to investors that allow them to compare and do what they need to do,” Welltower CFO Tim McHugh said.

Beyond cashing rent checks

Welltower is determined to not simply buy real estate but proactively work with its partners to unlock untapped value, DeRosa said during the call.

“Our [business] model is based on a belief that we can capture revenue beyond collecting rent checks,” he said.

One key part of this strategy involves health system partnerships. Welltower broke new ground in this regard with its acquisition of the large HCR ManorCare portfolio in a joint venture with Toledo-based nonprofit health system ProMedica. The fourth quarter marked a full year for ManorCare as a Welltower tenant, and the skilled nursing giant outperformed the REIT’s projections.

ManorCare reported $307 million of EBITDAR for 2019. All three business lines — skilled nursing, home health, and memory care — showed fourth-quarter EBITDAR growth for the first time in seven years, Mitra said.

Since the ManorCare deal, Welltower has forged relationships with other health systems, including a recently announced partnership with Jefferson Health.

DeRosa shared more details about the memorandum of understanding that Welltower reached last month with Philadelphia-based Thomas Jefferson University and Jefferson Health. If the details can be agreed upon, the two sides would create a JV where Welltower would acquire a stake in Jefferson Health’s real estate portfolio, allowing Jefferson to expedite its ambulatory care network expansion plans, and leverage Welltower’s predictive data analytics to determine the best sites to build these centers.

A linchpin to the potential JV is it would give Jefferson Health clinicians the ability to provide health care within Welltower senior housing and post-acute care communities in the greater Philly and southern New Jersey region — a potential customer base of nearly 20,000 people. The two would also co-develop new communities.

DeRosa has been outspoken in his belief that nonprofit health systems are an untapped opportunity for health care REITS, and estimated that there is up to $600 billion in real estate controlled by these health systems, waiting for influxes of capital from the right partners. Additionally, Welltower believes that senior housing will become more embedded as a component of the health care continuum in moving forward. Health system partnerships like its one with ProMedica and the pending Jefferson Health JV are the future of senior living, by bringing the care directly to the resident.

“It will start to be driven in scale with Jefferson Health,” he said.

Monitoring labor pains

Welltower has benefited from two consecutive quarters of labor costs not rising as high as projected, and is cautiously optimistic that this trend will continue,

“We’re not assuming that trend will continue. But if we do get some help on the labor side, what we have seen in fourth quarter, if that continues obviously there will be upside,” McHugh said.

Solving for labor costs is a huge challenge facing the senior housing industry, and one that DeRosa has been focused on since taking the reins at Welltower. He recalled that when he stepped into the CEO role, having a 2-to-1 ratio of full-time employees to residents was considered a marker of being a high quality operator.

“That is not sustainable. And so we’re looking for [ways to] improve [the] resident experience and care and do it at a lower cost of labor,” he said.

Technology is the only solution that Welltower can think of to alleviate labor pressures while maintaining care quality.

The REIT’s first Manhattan project, a 15-story, 151-unit purpose-built assisted living and memory care community on East 56th Street which will be operated by Sunrise Senior Living, is slated to open in late spring 2020. The building will be outfitted with advanced technology through a partnership with Philips, and most of this tech is new to the industry, DeRosa said.

That community will be operated by Sunrise Senior Living, which has already implemented workforce related tech that has helped slash turnover by 30%, DeRosa noted.
Welltower stock closed trading Thursday up 2.14%, to $87.70/share.