Welltower’s (NYSE: WELL) senior housing portfolio performance drove strong earnings in the first quarter of 2019, which also included notable transactions such as the $290 million disposition of a triple-net leased portfolio operated by StoryPoint Senior Living.
The Toledo, Ohio-based health care real estate investment trust (REIT) on Tuesday reported total revenue of 1.27 billion in Q1, a 13.4% increase over Q1 2018. Welltower reported resident fees and service revenue of $868.3 million, an 18% increase year-over-year. Rental income grew 11% to $381.1 million.
The strong performance allowed Welltower to report normalized funds from operations (FFO) of $1.02 per share, up from $0.99 per share a year prior.
Welltower’s positive quarterly results come against the backdrop of a shifting senior housing landscape. A supply glut in certain markets has weighed heavily on occupancy, but the most recent quarterly data suggests that new construction is slowing and occupancy may start stabilizing as a result.
Last week, executives with another major senior housing REIT — Chicago-based Ventas — expressed optimism in current trends. Welltower leaders struck a similar note, but emphasized that while bullish on their own book of business they are not making calls that would necessarily apply to the whole industry.
“Our data analytics gives us what we believed to be unique and proprietary insights into the way we run our business,” Chief Investment Officer Shankh Mitra said. “But again, we do not think our results and what we’re seeing in our portfolio is a call on the senior housing industry changing.”
Senior housing drives performance
Welltower’s overall same-store net operating income (NOI) increased 3.1%, led by a 3% growth in its seniors housing operating portfolio (SHOP). SHOP occupancy dropped 100 basis points year-over-year, to 86.2%. Still, industry-wide occupancy erosion is slowing and Welltower is no exception, CEO Tom DeRosa said during a Tuesday earnings call.
“[Senior housing] performance is being driven by an ongoing stabilization of occupancy which Welltower began to benefit from in 2018,” he said. “We expect this to continue through the rest of the year.”
The Q1 SHOP results exceeded even Welltower’s expectations, Chief Investment Officer Shankh Mitra said. Same-store results for the segment were up 3% year-over-year, driven by 60 basis points of occupancy growth, 2.9% rate growth, and partially offset by a 3.6% labor cost growth.
“These are the best fundamental results we’ve seen in a long time,” he said.
Welltower’s Q1 SHOP revenue marked a 0.4% increase over the previous quarter, which Mitra noted was even more impressive given first quarters are traditionally weak.
Sequential revenue per occupied room (RevPOR), meanwhile, increased 3.3% and outpaced compensation per occupied room by 50 basis points — the first time in five years that has happened.
A busy transaction period
Welltower started 2019 active on the transactions and dispositions front, completing $259 million in proportionate real estate acquisitions — with an additional $519 million in proportionate acquisitions subsequent to the end of the quarter — for a total blended yield of 5.9% across eight separate transactions.
Notably, it completed a $290 million disposition of its eight-property StoryPoint triple-net portfolio which resulted in a gain on sale of $169 million and an unlevered IRR of 18.7%. StoryPoint Senior Living is based in Michigan, and operates an overall portfolio of 14 properties.
“We consider StoryPoint to be one of our best and most strategic operating partners, yet we sold this asset at an offer we could not refuse,” Mitra said.
Welltower did not disclose the identity of the buyer, and StoryPoint had not responded to inquiries from Senior Housing News as of press time.
The company also completed the $9 million sale of its 47.5% interest in a non-core stand-alone memory care property operated by San Diego-based Senior Resource Group.
On the investment side, Welltower extended its RIDEA relationship with StoryPoint , acquiring a Michigan senior housing community with a proportional investment of $57 million.
Welltower formalized a RIDEA relationship with Portland, Oregon-based Frontier Management, by acquiring four assisted living and stand-alone memory care communities in Oregon and Washington State for a proportional investment of $39 million. Frontier is one of the largest senior living providers in the nation, with about 80 properties overall.
The opportunity to enter into a RIDEA partnership with Welltower was too attractive to pass up, Frontier President and CEO Greg Roderick told Senior Housing News.
“Welltower saw in Frontier what it looks for in its family of best-in-class operators: a market innovator in the higher-acuity segment of the seniors housing business, along with seasoned leadership working in concert with an operations-focused management team,” he said.
The REIT was also busy on the triple-net lease front, expanding a relationship with Fanwood, New Jersey-based operator Chelsea Senior living by completing an $80 million acquisition of three senior housing communities in New Jersey. Despite Welltower building up its RIDEA portfolio through recent triple-net conversions with operators such as Brandywine Living, the Chelsea deal underscores an ongoing commitment to triple-net, leaders with the REIT emphasized.
“We completely believe in the triple-net business,” DeRosa said. “Our primary focus is the quality of assets, the quality of markets and an alignment with an operator.”
Despite the impressive earnings numbers, DeRosa indicated Welltower would remained focused on long-term performance.
“We’re encouraged by the first quarter results. But this is not yet the time to take a victory lap,” he said. “But we do think, if you think about a longer period of time, we think that you will see improvement in both sides of the house.”
Welltower’s first quarter results were in line with consensus, Stifel analyst Chad Vanacore wrote in a note to investors.
“Welltower continues to generate solid organic growth in addition to accretive acquisitions,” he wrote. “Front-loaded dispositions leads us to believe net acquisitions will increase as the year progresses and we expect quarterly FFO to grow throughout 2019.”
Welltower stock ended trading Monday up 2.14%, to $74.55 per share.