Welltower Supports Brookdale Changes, Defends Genesis Moves

Welltower Inc. (NYSE: HCN) is upbeat about the year ahead, despite the fact that two of its largest tenants are in rough waters and headwinds are hitting both the senior living and skilled nursing industries.

The Toledo, Ohio-based real estate investment trust (REIT) is one of the largest senior housing real estate owners in the U.S., with a portfolio of hundreds of senior housing properties spread across the country.

Welltower reported its normalized funds from operations (FFO) per share for the fourth quarter of 2017 was $1.02 per share, which missed analyst expectations by $0.03. However, its revenue of $1.1 billion, a 1.9% year-over-year increase, beat analyst projections by $30 million.

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Overall, Welltower’s same-store net operating income (SSNOI) grew 2.7% in 2017. For the year ahead, the REIT set its SSNOI growth guidance to just 1%-2% in anticipation of a roughly 3% rate growth, 50-100 basis points in occupancy decline and a 3-4% growth in operating expenses.

Regardless of the challenges implied by the anticipated occupancy decline, and the cautious notes sounded by other REITs recently, 2018 should present nothing dire, according to Welltower CEO Tom DeRosa.

“Despite headlines of oversupply and flu, our senior housing operation portfolio continued to deliver solid growth through 2017, and the outlook for 2018 remains positive,” DeRosa said during Thursday’s earnings call.

Welltower’s stock price fell 0.25% to $53.74 by the time the markets closed Thursday afternoon.

‘Back to basics’ for BKD

One of the company’s largest operating partners, Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) on Thursday named a new CEO and announced the conclusion of its ongoing strategic review process. Welltower’s Brookdale portfolio consists of 148 communities in 29 states.

Brookdale has had to contend with a variety of challenges since acquiring rival Emeritus Corp. in 2014, and spent the last year considering various potential buyout deals. Still, executives were upbeat regarding the operator’s performance during Thursday’s call.

“We hope that their decision to end their strategic review process…will now allow them to get back to the basics,” Executive Vice President of Business Development Mercedes Kerr said. “Like we have said before, we’re satisfied with our portfolio holdings with Brookdale, and we will continue to collaborate them going forward.”

Brookdale wasn’t the only senior living provider that Welltower mentioned during Thursday’s call. The REIT also expanded upon its newly bolstered relationship with Sunrise Senior Living.

Welltower last month entered into a definitive agreement with Sunrise to acquire a portfolio of four rental continuing care retirement communities (CCRCs) located in the Washington, D.C., Miami and Charlottesville metro areas for $368 million. Under the deal, Welltower will transition the communities to a RIDEA structure, with Sunrise continuing to manage the communities under an incentive-based management contract.

Overall, the REIT has 168 Sunrise properties in its portfolio in both North America and the United Kingdom.

Weathering the storm

DeRosa also spent a good portion of Thursday’s call talking up one of the REIT’s largest post-acute operating partners, Kennett Square, Pennsylvania-based Genesis HealthCare (NYSE: GEN). Welltower’s wholly-owned Genesis portfolio consists of four senior housing properties and 82 long term and post-acute care properties. Welltower also owns a minority stake in a joint venture which owns 28 long-term and post-acute care properties.

Genesis is the nation’s largest skilled nursing facility (SNF) and post-acute operating company. Like others in the space, they’ve encountered financial challenges linked to a tough operating environment. The operator’s stock prices have also fallen sharply over the past year.

Welltower recently helped Genesis secure a $555 million credit facility with MidCap Financial, a wholly owned subsidiary of alternative asset manager Apollo. This follows dispositions of Genesis assets. Some investors might have been hoping for more aggressive actions to limit Welltower’s exposure, DeRosa said, but he staunchly defended the REIT’s decisions.

“The public markets were screaming at us to have taken a different approach with Genesis. I think we took the right approach,” DeRosa said. “We did the responsible thing for Genesis and our shareholders, and I think that will prove out versus other roads we could have gone down.”

That cash infusion, paired with the provider’s ongoing restructuring efforts, could be what Genesis needs to ride through uncertain times for the post-acute care landscape—an industry Welltower plans to stay in.

“The road ahead will be bumpy, but we think now with the restructuring of Genesis, we have the right coverage and credit profile to withstand choppiness,” DeRosa said.

Some market-watchers, like Mizuho analyst Rich Anderson, are taking a wait-and-see-approach.

“Genesis has had false starts in the past, and we don’t want to lose sight of that,” Anderson wrote in a note Thursday. “So, we remain cautious, admittedly with a dose of optimism, as we monitor events with an open mind.”

Investors, however, seemed more cautious than optimistic. Genesis’ share value had fallen 21.25% to $1.26 by the time the markets closed Thursday afternoon.

Written by Tim Regan

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