Welltower Draws Confidence from Senior Housing Results, $400 Million MOB Deal

Welltower Inc. (NYSE: WELL) is in a good position heading into the last months of 2018 despite persistent challenges facing the senior housing industry, leaders with the Toledo, Ohio-based real estate investment trust (REIT) said Tuesday in announcing third-quarter earnings.

The REIT’s senior housing operating portfolio is relatively insulated from new competition, and the portfolio’s latest financial results and occupancy trends are encouraging. Meanwhile, Welltower is continuing to pursue a new strategic direction focused on health system partnerships, including through the $400 million acquisition of a 23-property medical office building (MOB) portfolio, CEO Tom DeRosa said on the company’s Q3 2018 earnings call. 

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Welltower CEO Tom DeRosa

“Welltower’s value proposition is being embraced by the broader health care delivery sector and truly differentiates us from REITs and other capital sources,” DeRosa said. “A knowledge-based strategy aligned with our proprietary data and analytics capabilities is enabling Welltower to drive hundreds of basis points of better operating performance from our senior housing assets even in a challenging new supply and labor environment.”

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The company posted same-store net operating income of about $448.7 million in Q3 2018, representing a 1.6% year-over-year increase. Its Q3 funds from operations (FFO) of $1.04 per share beat analyst expectations. Welltower increased its normalized 2018 FFO guidance from $3.99 to $4.06 per diluted share to $4.02 to $4.07 per diluted share. Shares in the company were up 5.37% in mid-day trading on Tuesday, at $69.51.

SHO-ing off

About half of Welltower’s total NOI comes from its senior housing operating (SHO) portfolio, which consists of 587 properties. The REIT has not been immune from headwinds, including an influx of new supply and tight labor markets, that have battered the senior housing sector over several quarters. However, Welltower is putting up some better numbers than its chief rivals in the space, Chicago-based Ventas (NYSE: VTR) and Irvine, California-based HCP (NYSE: HCP).

“Welltower’s high-quality portfolio continued outpacing its peers in 3Q18, and managed to keep its streak of positive NOI growth (+0.3%) alive,” Green Street analyst Lukas Hartwich wrote in a note issued Tuesday. The 0.3% NOI increase is on a year-over-year basis.

By way of comparison, same-store NOI was down nearly 3% year-over-year in Ventas’ senior housing operating portfolio. HCP is scheduled to release its Q3 financials on Oct. 31.

In addition, Welltower’s SHO portfolio is relatively insulated from new competition.

About 6% of Welltower’s total NOI — or 17% of NOI from its domestic SHO portfolio — is exposed to competitive pressure from new supply, Raymond James analyst Jonathan Hughes pointed out in a note on the REIT’s Q3 financials.

Going by the most recent numbers for HCP, that REIT has 32% of its senior housing operating portfolio NOI and about 4% of total NOI exposed to new competition, according to Hughes.

Meanwhile, about 11% of Ventas’ total NOI — or roughly 35% of its senior housing operating NOI — is exposed to new supply pressure, according to the REIT’s Q3 supplemental.

Direct comparisons between Ventas and other REITs may not be fair, given differences in how the various companies arrive at these numbers, Ventas CFO Bob Probst told SHN.

“We think there are methodology differences,” he said, adding that it’s not enough simply to evaluate new supply in a market, and demand must be factored in as well.

Based on Ventas’ internal supply-demand analysis, “we believe our portfolios are more similar than different,” Probst said, referring to Welltower and Ventas.

Raymond James’ Hughes tells a simpler story.

“Welltower has less exposure to new supply because they have picked better submarkets,” he told SHN.

Stifel analyst Chad Vanacore added that Welltower’s operator mix may also be playing a role.

“I attribute the outperformance of Welltower’s seniors housing operating platform to a combination of better geographies with higher demand and fewer entrants as well as a larger portfolio of regional operators who benefit from greater focus and regional density,” Vanacore told SHN.

Welltower lists 20 current operating partners for its SHO portfolio. Ventas has two primary operators, both of them large national providers: Louisville, Kentucky-based Atria Senior Living and McLean, Virginia-based Sunrise Senior Living.

“We believe strongly that leading operators that have scale both at a local and a national level have a competitive advantage,” Probst told SHN.”[Whether it be] marketing capabilities, procurement and cost synergies, ability to retain talent and give great career development in this business, and invest in technology and tools for success, all benefit from being local and national in scale … We’re very happy with that model.”

Despite overarching differences in their SHO portfolio operator mix, there are similarities between Ventas and Welltower here as well. Sunrise is the largest operator in Welltower’s SHO portfolio, with 176 properties. And both REITs are telling an optimistic story about the future, pointing to a slowdown in new starts as a sign that better supply-demand equilibrium could be on the way. 

Indeed, an inflection point might be seen in Welltower’s SHO portfolio occupancy.

“Q3 over Q2 sequential occupancy growth of 80 basis points is the best we’ve seen since Q3 of 2014,” Welltower Executive Vice President and Chief Investment Officer Shankh Mitra said on the company’s earnings call. “This allowed year-over-year revenue growth of 2.9%, which accelerated for the first time since Q3 of 2014 on a sequential basis.”

Mitra cautioned against drawing conclusions from just one quarter, but also noted that seasonal occupancy patterns appear to be taking hold again.

“We saw seasonal strength over the summer that we haven’t over the past few move-in seasons because heightened supply had absorbed typical seasonal demand,” he said.

Brookdale lease renewal, health system innovation

Welltower has been bullish on its operating partnerships and growing its SHO portfolio, including through the conversion of Brandywine Living to a RIDEA structure last quarter. However, the REIT also has about 340 senior housing properties in its triple-net portfolio, with a large proportion of the these rents coming from Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD).

The largest provider in the nation, Brookdale has been re-structuring its REIT relationships as part of a larger turnaround effort. Now, it has renewed a master lease with Welltower for another eight years, Mitra announced Tuesday. The lease represents $28 million in rent and was the largest exposure in the triple-net portfolio.

Brookdale is currently in a quiet period in advance of its quarterly earnings release, and further details of the lease agreement will be forthcoming, Mitra said. But he described the terms as mutually beneficial to Welltower and Brookdale.

“We think Brookdale, which makes money from the lease today, will improve performance and will drive even more profitability as it leases out from a cyclically low occupancy,” he said. “This renewal effectively eliminates any material REIT maturities for Welltower until 2024.”

While it’s far from abandoning tried-and-true leases, Welltower is also pushing hard to create innovative care models with large health systems.

The idea is to position senior housing, post-acute, medical office and other types of real estate to enable health systems and payers to provide more and better services in lower-cost settings. This is one of the overarching goals of Welltower’s joint venture with nonprofit health system ProMedica, which involved the acquisition of skilled nursing and senior living assets formerly operated by HCR ManorCare.

This joint venture is on track and in fact should result in greater synergies than originally anticipated, Mitra said, promising further details at Welltower’s investor day in New York City next month.

Welltower’s newly announced, $400 million MOB acquisition also fits into this strategy; 96% of that portfolio of Class A properties is affiliated with a health system. And the REIT has entered into a separate agreement to acquire an outpatient medical building on the campus of Johns Hopkins Howard County General Hospital in Columbia, Maryland, for $80 million. This deepens Welltower’s existing relationship with Hopkins, which will now be the principal tenant in four of the REIT’s properties.

The depth of Welltower’s involvement in evolving health care delivery models will increasingly differentiate it from other REITs, DeRosa said on Tuesday’s call.

“I consider the company a health care delivery platform that’s very real estate heavy,” he said. “REIT is not an industry, it’s a tax selection, and because we are a very property heavy company, it makes sense for us to elect REIT tax status … But, our business model is much more than eyeing and managing real estate assets in a fund-like operating structure. We are intimately involved in the operations of this business, whether it be our senior housing business, [or] whether it be our medical office business.”

Written by Tim Mullaney