‘Crazy Prices’ Keep Welltower Sidelined on Deals

Earnings for Welltower Inc. (NYSE: HCN) for the third quarter reflect record-high funds from operations (FFO) and funds available for distribution (FAD), but soaring asset prices and fluctuating cap rates have the real estate investment trust holding off on major deals.

“I think you’ve seen, if you just look at this quarter, our investment activity was lower than you’ve seen in prior quarters,” Welltower CEO Tom DeRosa told analysts on Friday’s quarterly earnings call. “We have passed on lots of things, because we saw cap rates going to levels that just made no sense to us. We’re seeing a lot of crazy prices, and we’ve stood on the sidelines.”

Welltower reported a normalized FFO of $1.12 per share and FAD of $0.99 per share, representing 8% and 9% increases, respectively, from the third quarter of 2014. In total, the Toledo, Ohio-based REIT completed $472 million in new investments for the quarter, including $361 million in acquisitions and joint ventures, $69 million in development funding and $44 million in loans.

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Despite proceeding with caution on investments, Welltower indicated it sees memory care as a “compelling long-term investment and growth opportunity,” along with the potential of ramping up more streamlined care.

“We are focused on providing the capital necessary for our operating partners to build the infrastructure needed to deliver wellness and a healthy and safe quality of life to our cognitively impaired seniors,” DeRosa said. “We are focused on providing capital to the most prominent health systems as they exit their old, out-moded acute care hospital buildings in favor of more modern, efficient, out-patient-focused settings that can work effectively with post-acute and senior housing to manage the challenges of health care delivery in the future.”

Modernizing outpatient settings, in particular, is an area where Welltower could generate substantial growth, DeRosa said. The REIT’s $1.4 billion partnership with short-term rehabilitation and boutique post-acute developer Mainstreet and investment in Genesis Healthcare are perhaps its means to this end.

“These are development opportunities; these are not acquisition opportunities,” he said. “We think that’s the future of, an important part of the growth profile of, Welltower.”

In terms of supply, Welltower noted its markets face few pressures, with just 21 of Welltower’s same store properties having a new competitor open in their respective “competitive rings” over the past few years, said Scott Brinker, the REIT’s chief investment officer. Net operating income (NOI) for these properties in the months leading up to and immediately following competitors’ openings increased by more than 4% on average, and occupancy remained flat.

“Were some buildings down? Yes, but on average, the buildings were remarkably resilient in the face of new competition,” Brinker said. “New supply is not necessarily a doomsday scenario, especially if you’re in markets that have a lot of affluence, density and differentiated operations.”

By contrast, Ventas (NYSE: VTR) previously revealed that nearly one-third of its portfolio is exposed to excess supply pressures in specific markets, resulting in third-quarter performance that missed expectations on revenue.

Overall, Welltower registered NOI growth of 3.3% in senior housing and 3.4% in post-acute for the third quarter. The REIT also hit all-time highs in occupancy and tenant retention, Brinker said, leading to 2.5% same store growth. Moving forward, Welltower intends to remain in the same vein, particularly when it comes to transactions.

“We’ve been very judicious, and we will continue to be,” DeRosa said.

Written by Kourtney Liepelt

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