[UPDATE] Welltower to Acquire 19-Property West Coast Portfolio for $1.15 Billion

Welltower Inc. (NYSE: HCN) has agreed to purchase a portfolio of 19 senior housing properties on the West Coast for $1.15 billion, which will make the Toledo, Ohio-based real estate investment trust (REIT) the largest owner of senior housing in Northern and Southern California. The announcement coincided with the release of the REIT’s 2nd quarter earnings.

The properties currently are operated by Vintage Senior Living. The 2,590 units include a mix of independent living, assisted living, and memory care. The operations will transfer to three existing Welltower operating partners: 11 will go to Senior Resource Group, seven to Sunrise Senior Living, and one to Silverado.

“Bringing in Welltower’s established operators to take over the operations of these buildings will bring additional value to the portfolio,” Mike Garbers, managing director at Greystone Real Estate Advisors, told Senior Housing News. “Their operating partners are well established, institutional quality operators – the best in breed.”

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‘The Sexy Six’

With properties concentrated in Northern California and Southern California—including the Los Angeles and San Francisco metropolitan areas—the portfolio will enable Welltower to be the largest senior housing owner in both regions of the state. The portfolio also includes properties in Washington.

“These properties are in attractive markets including irreplaceable locations near San Francisco’s Golden Gate Park and Nob Hill, with a growing population of seniors, favorable supply-and-demand fundamentals and high barriers to entry,” said Welltower CIO Scott Brinker in a press release.

The regions are within Welltower’s designated core markets.

“This is an ideal, strategic acquisition for us,” Welltower CEO Tom DeRosa said during a quarterly earnings call with analysts Tuesday. “It allows us to go deeper into two important core markets, solidifying our No. 1 market share in Los Angeles, gaining the No. 1 position in San Francisco. That adds to our No. 1 position in New York, Boston and Seattle – five of the sexy six core markets in the U.S.”

The nine Vintage properties in Northern California currently have an occupancy of 87%, and adding them will bring Welltower’s total ownership in the area to 36 communities. The eight Vintage properties in Southern California currently have an occupancy of 82.6%, and their addition will take Welltower to 58 senior housing properties owned in that part of the state. The portfolio has an expected stabilized yield of mid- to high-6%.

Welltower expects to increase service offerings across the West Coast portfolio and boost occupancy over time, executives said on the conference call Tuesday. Some of the properties also include excess land that could be used for potential development. However, Welltower is focused first on “filling  the buildings we have,” Scott Brinker, Welltower executive vice president and chief investment officer, told analysts.

“This acquisition reinforces our high-quality health care real estate portfolio and leading presence in two of the top U.S. metro markets,” stated DeRosa. “We have a unique platform for delivering operational improvements and driving value for our shareholders.”

The price tag on the deal is the most recent major REIT acquisition, following a slow start to the year. Rebounding stock prices may have had a hand influencing REITs to make big acquisitions later in 2016.

“It’s helped that the REITs’ stock prices have increased approximately 44% since the lows of February 2016,” Garbers said. “This increase in stock prices has been driven mainly by the low interest rate environment, as investors are seeking higher yields.”

The acquisition also bumps up the REIT’s RIDEA portfolio share above 40%, executives noted during the call.

“We don’t think it elevates the risk profile because we have very seasoned operators and an infrastructure to manage RIDEA assets that is unparalleled,” DeRosa said of the higher RIDEA portfolio share. “We feel more comfortable managing our RIDEA assets than some triple net assets. We think we know how to manage risk and enhance value through a RIDEA structure better than anybody.”

Defining Dispositions

The acquisition will be funded primarily through dispositions expected to take place throughout the rest of this year, DeRosa also stated. Previously, Welltower has indicated that it will undertake dispositions of as much as $1 billion in 2016. During the second quarter of 2016, the company completed total dispositions of $227 million, including loan payoffs and property sales. In the third quarter, Welltower expects to complete $300 million in dispositions, half of which will come from skilled nursing.

“Vintage is a very unique opportunity due to its extremely high-barrier to entry markets and scale,” DeRosa said Tuesday. “The timing for a big, core acquisition is perfect given our pending dispositions.”

Welltower expects the Vintage acquisition to close in tranches starting in September 2016, subject to customary approvals. Vintage Senior Living will continue to operate the communities until the purchase is complete.

The acquisition was announced in conjunction with Welltower’s strong second quarter earnings. Its normalized FFO of $1.15 per share beat analyst expectations, and it also increased same-store net operating income 3.3% and boosted occupancy by 100 basis points. The quarter represented the company’s 181st consecutive dividend growth, executives said Tuesday.

“We have edited the portfolio over many years and that’s why the performance is better,” DeRosa said. “We don’t have a lot of weak links. It’s not magic that our same store numbers are what they are. It’s because we have better assets and fewer lower quality assets.”

Welltower’s skilled nursing tenant, Genesis HealthCare (NYSE: GEN) repaid $61 million in Welltower mortgage loan debt during the second quarter. As of June 30, 2016, the remaining mortgage loans stood at $311 million. As Genesis pays down its debt, Welltower anticipates completing $68 million in sales of Genesis properties currently under process.

“We are selling the real estate, they are exiting the operations,” Welltower executives said Tuesday.

Another senior housing REIT, Sabra Health Care REIT (Nasdaq: SBRA), similarly plans to reduce its skilled nursing exposure by selling off 29 Genesis properties, the REIT announced August 1.

Genesis has had a rocky year, with its share prices sliding and multiple investigations by the U.S. Department of Justice. The skilled nursing, senior housing and rehabilitative care company settled with the DOJ for $52.7 million this week. Welltower executives were bullish on the settlement, along with a refinance of its mortgage loans with the tenant. DeRosa noted that with the refinance, Genesis’ “hostile lender is gone.” The changes and settlement also enable Genesis to focus on its business rather than debt maturities and DOJ investigations, DeRosa said.

Written by Tim Mullaney

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