Welltower Takes Occupancy Hit in Challenging Senior Housing Environment

Welltower Inc.’s (NYSE: WELL) senior housing occupancy declined as expected in the first quarter of 2018, according to an earnings report published late on Wednesday.

The Toledo, Ohio-based health care real estate investment trust (REIT) also announced it has reached an agreement to acquire Quality Care Properties (NYSE: QCP) in a $1.95 billion, all-cash transaction. 

In the senior housing realm, though, Welltower was bogged down by a harsh flu season and new supply. As of market close on Thursday, the REIT’s share price had fallen 1.01% to $50.01. 

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‘Challenging’ senior housing environment

Welltower’s senior housing operating portfolio (SHOP) saw an occupancy decline of 190 basis points year-over-year in the first quarter. At the same time, the SHOP portfolio experienced 2% expense growth.

The current senior housing environment is “challenging,” according to John Goodey, Welltower’s executive vice president and CFO, who noted that new supply is continuing to impact U.S. markets and that this year’s flu season was particularly bad.

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Still, the REIT was “encouraged by how [its] operators responded” to the flu epidemic, Mercedes Kerr, executive vice president – business relationship management, said on Thursday’s call with analysts.

Welltower saw the most impact from the flu in its higher-acuity portfolio in California and in the Southwest U.S., and the number of senior housing vacancies due to deaths is higher than it was in previous flu seasons, Kerr added. 

Additionally, Welltower’s NOI exposure to competitive new supply under construction represents 18% of the U.S. SHOP portfolio, or 6% of Welltower’s total NOI, according to an analyst note published Thursday by Raymond James & Associates. This is only a slight increase from the fourth quarter of 2017.

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Overall, though, the company’s first-quarter 2018 revenue of $1.09 billion beat analysts’ expectations by $10 million, and first-quarter 2018 rate growth in the SHOP portfolio totaled 3.5% year-over-year.

Disposition-heavy quarter

Welltower completed dispositions totaling $987 million in the first quarter, made up of property sales of $895 million and loan payoffs of $92 million.

Among these dispositions was a 22-property senior housing portfolio operated by Bothell, Washington-based Cascade Living Group, which sold for $378 million to a private investor. The communities, which Cascade will continue to manage, were located throughout the Western U.S. 

Also in the quarter, Welltower completed $578 million of pro rata gross investments, comprising $476 million in joint ventures or acquisitions, $43 million in loans and $59 million in development funding.

Going forward, Welltower isn’t likely to embrace the “easy money asset aggregation models of the past,” according to DeRosa.

“You have to make hard decisions about where you invest,” DeRosa explained. “These decisions do not always make you popular.”

Written by Mary Kate Nelson

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