Welltower Invests in $555 Million Senior Housing Joint Venture

Health care REIT Welltower, Inc. (NYSE: HCN) has purchased a majority stake in a portfolio of six seniors housing properties in Florida as part of a $555 million joint venture with Canada Pension Plan Investment Board (CPPIB), a global investment management organization that invests the assets of the Canada Pension Plan.

This is the first investment in U.S. seniors housing for CPPIB. Welltower announced the acquisition Thursday prior to its earnings call for the fourth quarter, during which it also announced record-high funds from operations.

Together, the JV partners own 97.5% of the Florida portfolio. Welltower owns 55% and CPPIB owns 45% of the joint venture. Discovery Senior Living (DSL) owns the remaining 2.5% of the Florida properties, Aston Gardens, and also operates them.

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“I think this announcement that we made today—that now again you have another big global institution partnering with us in the senior housing space—I think it raises a flag to others that maybe you should take a look, as well,” Welltower CEO Thomas J. DeRosa said during Thursday’s call. He also noted in a news release that CPPIB represents a capital source separate from the public markets.

The Florida portfolio is comprised of six private pay senior housing properties, totaling 1,930 rental units, and offers campus-style accommodations in low-rise buildings surrounding a central clubhouse. The campus is a lifestyle-oriented community, and the units are mostly independent living. The properties are typically 100% full with waiting lists, Welltower’s chief investment officer Scott Brinker said.

“We don’t have much in Florida, actually,” said Scott Estes, Welltower’s executive vice president and CFO. “We just happened to like these campuses in particular. Our business is driven not only by real estate but also operations, and that’s what drove this.”

While CPPIB didn’t comment on further partnerships with Welltower, the organization believes senior housing is “a compelling subsector of health care real estate.”

“With an aging population and a needs-driven demand, we view the U.S. seniors housing sector as an attractive long-term investment,” Dan Madge, CPPIB’s senior manager of media relations, told Senior Housing News.

DeRosa foresees discussing more investment opportunities with CPPIB beyond the Florida investment, and noted that CPPIB won’t be the end of such partnerships for Welltower.

“We had many discussions with [CPPIB],” he said. “They are a close partner of ours now, and so you should assume that any and all opportunities are discussed with [CPPIB]. …We’re a long-term investor, and these are long-term investors. We’re much more aligned with that investor class [than private equity]. I think you’ll see much more of this from us.”

Headquartered in Toronto, CPPIB’s fund totaled $282.6 billion as of December 31, 2015. The fund primarily invests the funds that are not needed by Canada’s Pension Plan in public and private equities, real estate, infrastructure and fixed income instruments.

Acquisitions On Hold

Also on the earnings call, Welltower discussed $1 billion in dispositions, a freeze on acquisitions and a focus on post-acute products.

The REIT included $1 billion in dispositions in its 2016 forecast, a figure that is mostly comprised of loan repayments, as well as $178 million of proceeds from assets currently held for sale. The dispositions will be spread out over the four quarters.

“Although we prefer to avoid any specifics of what we might sell this year, we have a successful history of selling not only non-strategic assets, but also more opportunistic asset sales to lock in attractive values,” Estes said. “My point here is that we have multiple options in our approach to sales this year and believe there are no pools of assets that are off limit as we evaluate asset sales to most efficiently allocate capital.”

Aside from that, DeRosa and is predicting more joint ventures, so in that way, the DSL acquisition may be similar to others in the pipeline. But don’t expect independent living to be the main asset class Welltower is targeting—the REIT has its sights set on post-acute.

Moving forward, Welltower will likely remain conservative throughout 2016 in terms of acquisitions, and investments will primarily center on the post-acute sector, the REIT divulged during Thursday’s call.

“We believe in the post-acute sector,” DeRosa said. “We do not think it’s going to go away. And so we will deploy capital into the next generation of post-acute of which [Genesis Healthcare] is one. …Hospitals more than ever need strong post-acute operators. We’re not looking to acquire skilled nursing beds [just] because the cap rates look attractive. That is not what we do as a company.”

In fact, the only senior housing acquisitions planned so far for 2016 include approximately $163 million associated with the REIT’s $2.3 billion partnership with Mainstreet, a Carmel, Indiana-based development and investment company that has focused on post-acute, transitional care as a standalone offering.

“We are not really thinking about acquisitions right now,” Brinker said. “There is a pretty large gap between market expectations for cap rates and what would make sense for us, and that means we are going to keep relationships warm. And when that discrepancy flips, and at some point it will, we will be active again.”

Earnings for Welltower for the fourth quarter show that funds from operations (FFO) and funds available for distribution (FAD) increased by 10% and 9%, respectively, from the fourth quarter of 2014. The Toledo, Ohio-based REIT reported record-high normalized FFO of $1.13 per diluted share and FAD of $0.99 per share, and also completed $1.5 billion in investments for the quarter, including $1.2 billion in acquisitions and joint ventures, $95 million in development funding and $163 million in loans.

Welltower beat analysts expectations on earnings per share (EPS) at $1.13 EPS and revenue at $1.03 billion during the quarter, and the share price jumped when earnings were reported.

Written by Amy Baxter and Kourtney Liepelt

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