Despite a strong first-quarter performance, the CEO of Welltower Inc. (NYSE: HCN) is concerned about misinformation that’s affecting investors’ decisions.
It’s misinformation about Genesis Healthcare (NYSE: GEN) and skilled nursing audits, and senior housing oversupply, specifically, that’s causing Welltower’s stock to remain undervalued, according to CEO Thomas DeRosa.
After all, the Toledo, Ohio-based real estate investment trust (REIT) posted a successful first quarter. The company’s first-quarter 2016 revenue of $1.05 billion beat analysts’ expectations by $30 million and marked an increase of 17.4% from the year-ago first-quarter revenue of $894.18 million.
Meanwhile, the company’s first-quarter 2016 FFO per share of $1.13 beat analysts’ expectations by 1 cent and was up from an FFO of $1.04 per share recorded in the first quarter of 2015.
Publicly traded senior housing companies across the board have been dealing with slumping share prices so far in 2016, and Welltower is no exception. Welltower’s share price hit a low point in early February, but has been rising since. The company’s share price went up on the strong quarterly results, hitting $71.85 as of late afternoon Tuesday.
Still, investors are not properly valuing Welltower’s shares, DeRosa believes.
“There was some wholesale dumping of our stock based on misunderstandings about things,” he said during the company’s earnings call on Tuesday.
Skilled nursing and RAC audits
Misinformation about Medicare recovery audit contractor (RAC) audits has wrongly spooked investors, DeRosa and other executives said during the earnings call. Welltower currently owns 185 Genesis properties, 174 of which are long-term/post-acute care properties. Approximately 20% of Welltower’s portfolio is skilled nursing, which is subject to the RAC audits.
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“It’s hard for us to conceive that the entire value of our SNF portfolio is subject to a dramatic decline in value because of RAC audits,” Welltower Chief Investment Officer Scott Brinker said during the call.
RAC audits, which were designed specifically to go after Medicare overpayments, are controversial, as some providers believe RAC audits are overly aggressive and that they are improperly incentivized due to RACs’ payments are based on the overpayments they identify.
But the audits aren’t new, DeRosa said. The concept of RAC audits has been around for 10 years, and Welltower’s operators are prepared for them, he said.
“They have rigorous compliance and documentation procedures,” he explained. “This is not a random process on the part of our operators.”
Welltower has strategically chosen to align with operators that can handle the work, such as auditors’ documentation requests, DeRosa said.
“It’s one of the reasons why we’re very concentrated with Genesis,” he said. “Genesis has the scale and resources to invest in compliance procedures that help them operate in an environment where they are principally being paid by Medicare and Medicaid.”
Industrywide, skilled nursing should not be too worried about RAC audits, DeRosa said.
“There aren’t buses driving around the country with RAC auditors descending on skilled nursing facilities,” DeRosa said.
RAC audits aren’t going to bankrupt the industry, and for operators that have good documentation, they’re not going to impact them at all—besides the occasional headache, Brinker said. “Maybe it’s the menacing name that has people all worked up,” he concluded.
Ignoring oversupply chatter
And when it comes to senior housing oversupply, Welltower isn’t worried. In fact, company leadership continues to not believe the headlines.
“The supply issue in senior housing, which has been a huge overhang on our stock, has been overplayed,” DeRosa said.
This lack of concern is perhaps demonstrated by the company’s recently announced partnership with international real estate firm Hines to develop The Welltower, a 15-story, state-of-the-art, largely dementia/Alzheimer’s care facility in Manhattan.
“The supply of residential care options for the growing elderly population of Manhattan is, at best, pathetic,” DeRosa said. For Manhattan’s population of over 1 million people, there are only 70 memory care beds, and they’re of marginal quality, he said.
“And I can tell you that they are of marginal quality, because we used to own them,” DeRosa said.
Written by Mary Kate Nelson