Welltower Cautiously Optimistic as Senior Housing Occupancy Rises

Despite ongoing senior housing headwinds, executives with Welltower (NYSE: WELL) are encouraged by occupancy increases that occurred in the fourth quarter of 2018.

“We’re cautiously optimistic about the recent performance of our senior housing operating portfolio,” Executive Vice President and Chief Investment Officer Shankh Mitra said Tuesday, on an earnings call with analysts and investors. “It appears that occupancy has reached an inflection point this quarter.”

Occupancy in Welltower’s domestic senior housing operating (SHO) portfolio increased 40 basis points year-over-year, to 88.3%. This is the first positive year-over-year comparison since Q3 of 2016, Raymond James analyst Jonathan Hughes observed, in a note on the earnings.

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The senior housing operating segment represents about half of Welltower’s overall portfolio value. Same-store net operating income (NOI) for the SHO portfolio increased 0.6% year-over-year, while NOI for the triple-net portfolio increased a blended 3.3%.

At $1.01, normalized funds from operations per share came in below analysts’ consensus expectations. This was mainly due to the timing of certain transactions, Hughes noted.

Overall, Welltower’s leadership was bullish on what 2019 will bring, noting that demand for senior housing is on the rise, recommitting to the company’s strategy of health system partnerships, and forecasting solid growth. Part of that growth will come from a pipeline of seven development projects, representing $3 billion-plus in potential investments.

Not out of the woods yet

Even as occupancy ticks up, labor and supply headwinds continue to batter senior living communities around the country.

“Expense growth has been challenging the last five years, 2019 will continue to see that,” Mitra acknowledged.

Indeed, despite the increase in occupancy, the SHO portfolio’s margin declined 80 basis points between the third and fourth quarters of 2018. This was worse than the 20 basis point decline that Stifel analysts predicted, based on their labor expense forecasts.

Welltower prides itself on active asset management and is leveraging technology to alleviate labor pressures, Mitra and Welltower CEO Tom DeRosa emphasized on Tuesday’s call.

Workforce management platform OnShift and predictive analytics system Arena were among the technologies name-checked on the earnings call. McLean, Virginia-based Sunrise Senior Living has 124 U.S. properties in the SHO portfolio, and credits Arena for notable reductions in employee turnover.

Welltower CEO Tom DeRosa, seated RoboToaster for AMN
Welltower CEO Tom DeRosa

There could be a moderation of labor-related expenses in 2020, Mitra suggested. That’s because many California markets have been gradually raising the minimum wage to $15 an hour and will reach that threshold by 2020.

In terms of new competition, not much changed between the third and fourth quarters of last year.

“WELL’s NOI exposure to competitive new supply under construction represents 18% of the domestic SHOP portfolio, or 6% of WELL’s total NOI vs. 17%/6% as of 3Q18,” Raymond James’ Hughes pointed out.

Welltower takes a highly granular view of its markets to gauge the potential impact of new supply, Mitra said, saying that the company expects competition in the portfolio to be lower this year than last year. Green Street analyst Lukas Hartwich affirmed that Welltower has been prudent in market selection.

“Welltower’s SHOP portfolio continues to outperform its peer group, which is largely being driven by a lower drag from supply growth,” Hartwich wrote in a “Quick Take” note on the earnings.

Further fueling optimism at Welltower, demand for senior housing is gaining strength.

“The demand side of the equation is starting to look brighter,” Mitra said, again pointing to the occupancy figures. Assisted living occupancy, in particular, is trending up, he said.

Health system partnerships, MA opportunities

Welltower has been active on the acquisition front, in senior housing and other types of assets. Since its Q32018 earnings call, the REIT has announced about $2.25 billion in acquisitions, including $725 million in senior housing. The current senior housing acquisition pipeline is strong, executives said on the earnings call.

Ground-up development is also a focus for Welltower. The REIT has identified seven projects — four in senior housing and three in medical office — that represent $3 billion in potential investments. These investments could take the form of equity, debt, mezzanine arrangements or other creative structures, Mitra said.

Ground has already been broken on one project, a medical office development in Charlotte, North Carolina.

“Anything can happen in the development world, [there are] lots of reasons something might be delayed, but I can’t underscore more that we know where these opportunities are,” DeRosa said. “This is not 10 years out in the future, [but] things we’re actively engaged in right now.”

For four of these seven projects, the developers proactively reached out to Welltower. In the past, Welltower was more often the party placing the calls, DeRosa said.

This increased interest from developers is validation of Welltower’s reputation and the strategy it has been pursuing, to partner more with health systems that are shifting away from inpatient acute care toward dispersed models of community-based services, DeRosa said. The prime example of this strategy is Welltower’s joint venture with nonprofit health system ProMedica, to acquire the portfolio of HCR ManorCare skilled nursing and senior living communities.

The REIT is also eyeing changes in the Medicare Advantage landscape. Traditionally, MA plans have not primarily served the more affluent demographic in private-pay senior living, but this could change, DeRosa said.

Medicare Advantage membership rolls continue to grow as more seniors opt for these plans, run by private-sector insurers; and these insurance companies have been granted additional flexibilities to create benefits tailored to senior housing residents.

“We think that there will be development of products by payers to address the needs of people who will enter the assisted living sector,” DeRosa said.

The conversations that Welltower is having with payers and health systems is reinforcing DeRosa’s confidence that traditional models of senior housing and care are being reinvented. Innovation is also needed to meet rising consumer demand, he argued.

“Senior housing is a very expensive product. It’s a luxury product no one aspires to own,” he said. “We’ve been very careful about where to own that real estate. The cost of delivering the care has been growing, so you need to be in places where people can pay. I’m hopeful that we’ll figure out how to deliver a much-needed real estate setting that is not out of reach for the majority of the population.”

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