Welltower Credits ‘Painful’ Restructuring for Strong Senior Housing Performance

Welltower (NYSE: WELL) posted solid senior housing gains in the third quarter of 2019, thanks in part to the last few years spent unwinding certain “one-sided” relationships while forging new ones under more well-aligned RIDEA structures.

That’s according to CEO and Chairman Thomas DeRosa, who on a Tuesday earnings call with investors and analysts laid out what the Toledo, Ohio-based real estate investment trust (REIT) has achieved, and what’s to come in the months and years ahead.

When DeRosa first stepped into his role in 2014, the REIT was known for its operator relationships — but many of those relationships were at the expense of Welltower, he said.


“It took me a bit of time to realize that many of those relationships were very one-sided, based on paying the most for an operator’s real estate with few rights, and they were clearly not in favor of Welltower and its shareholders,” DeRosa said during Tuesday’s call. “That is not who we are today.”

The portfolio restructuring has been comprehensive and involved some “painful” decisions regarding certain operators, he added. But he and other Welltower executives pointed to the current senior housing numbers to make the case that their strategy has paid off.

In the first quarter of 2019, the REIT logged a normalized funds from operations (FFO) of $1.05 per share, which beat analysts’ expectations by one cent.


The REIT’s senior housing operating portfolio (SHOP) — which accounts for 44% of its total net operating income (NOI) with 418 properties in the U.S., Canada and the UK — grew its same-property NOI by 2.8% in the third quarter of 2019. For U.S. properties alone, that number was 4.3%.

On the triple-net side — which represents almost 19% of NOI at 291 properties — Welltower saw same-store NOI growth of 3.4%.

This comes against a backdrop of overall industry challenges, with nationwide occupancy only starting to creep up from historically low levels, particularly in assisted living. Last week, Chicago-based REIT Ventas (NYSE: VTR) announced that Q3 senior housing performance lagged their expectations, due to the cumulative effects of new competition.

Welltower’s leaders touted the REIT’s ability to rise above industry headwinds, crediting its stable of operating partners, its careful market selection, and data-driven asset management, among other factors.

“The strong structural alignment between us and our partners is especially important when the industry fundamentals are not necessarily lifting all the boards,” Executive Vice President and Chief Investment Officer Shankh Mitra said. “To paraphrase Warren Buffett, in these times of low tide, you get to know more about other people’s swim suits.”

SHOP shines

Markets where the provider saw particularly strong NOI growth this quarter included Washington, D.C., Chicago, Seattle and San Diego. Bucking industry trends elsewhere, the company’s assisted living and memory care properties continued to outperform its independent living segment.

Total SHOP occupancy was 86% in the third quarter of 2019, a decrease of 90 basis points from the 86.9% Welltower reported in the same period of last year.

Overall the REIT has focused this year not just on supply in the markets where it does business, but also other factors, such as pricing, occupancy and labor costs.

“I often think senior housing results are … too associated with NIC data and the supply issues,” DeRosa said. “I actually think not enough attention is focused on the operating expense side.”

Welltower reported net income of $589 million in the third quarter of 2019, up from $64 million compared with the same period last year.

The REIT’s top-performing senior living operators drove NOI gains, with some of them achieving as high as a 5.5% growth rate, Mitra said.

“We had a couple of operators in the 1% range, but a majority of the operators are between the 2.5% and 4.5% range,” Mitra explained. “With a couple of large operators that have clocked a 5.5% rate growth in U.S., which is remarkable.”

Analysts viewed the company’s Tuesday earnings call as positive, highlighting the performance of Weltower’s SHOP assets.

“Welltower delivered a healthy earnings report with FFO surpassing consensus,” RBC Capital Markets Analyst Michael Carroll in a note to investors. “The same-store portfolio including the SHO portfolio also delivered largely stable growth compared to the prior quarter.”

For Green Street Advisors, the company’s latest earnings report eased concerns that there are cracks in the senior housing industry’s overall recovery, especially given a recent poor third-quarter earnings report related to senior housing from Ventas.

“Investors were worried that Ventas’ poor SHOP performance during 3Q19 was an industry-wide, rather than company-specific, issue,” Green Street Advisors Analyst Lukas Hartwich wrote. “While the senior housing industry is clearly not ‘out of the woods’ yet on the oversupply front, Welltower’s 3Q19 performance adds another data point, in addition to 3Q19 NIC data, that suggests Ventas’ weak SHOP results were more company-specific in nature.”

Stifel also maintained its positive outlook for the REIT.

“Going forward, we expect the company to continue to recycle assets, source accretive investments and outperform in seniors housing portfolio,” the firm’s most recent note to investors read.

Welltower’s share price gained 2.76% to land at $89.44 by the time the markets closed Tuesday.

Evolving portfolio

The REIT has undertaken “sometimes tough decisions” regarding its exposure to companies like Brookdale (NYSE: BKD) and Genesis (NYSE: GEN), with a focus on paring down on what DeRosa characterized as “last-generation real estate, bad capital structures, misaligned operating agreements, misguided private equity investments, and frankly, simply paying too much for real estate.”

“While we will never stop optimizing our investment portfolio, the dispositions, as well as the acquisitions made in the last three years, have significantly de-risked the enterprise,” he added.

Those decisions have given the company room to develop new relationships under what it calls its “RIDEA 3.0” structure. Welltower forged five relationships this year with operators that include Norwood, Massachusetts-based LCB Senior Living; Louisville, Kentucky-based Atria Senior Living; Louisville, Colorado-based Balfour Senior Living; Portland, Oregon-based Frontier Management; and Williamsville, New York-based Clover Management.

In the third quarter of this year alone, Welltower invested $435 million, including $294 million for acquisitions and $141 million for development. The REIT also sold roughly $2 billion worth of assets during that period of time.

Accounting for a significant portion of those total invested dollars, the REIT agreed to acquire six newly built Oakmont Senior Living communities in California for approximately $297 million.

With regard to LCB, Welltower acquired a senior housing community in Connecticut for $31 million, and transitioned to the operator two former Brookdale communities in Chelmsfold, Massachusetts, and Rocky Hill, Connecticut. The new and growing relationship with LCB comes just months after Welltower disposed of its 48-property interest in Waltham, Massachusetts-based Benchmark for a gross sale price of $1.8 billion.

“People might have thought we were exiting New England when we exited Benchmark,” DeRosa said on Tuesday’s call. “But actually, what we did was, we aligned ourselves with a premium operator who was in the right markets in New England, and we’re hoping that we’re going to have a growing business with LCB.”

Welltower also recently expanded its RIDEA relationship with Senior Resource Group (SRG) by buying a senior housing community in the San Francisco metro area for $35 million. The REIT had 24 properties with SRG as of June 30, according to its investor documents.

Welltower acquired two assets already operated by Frontier Management in Boise, Idaho, and Turlock, California, for about $39 million. Earlier this year, Frontier took over management of 20 memory care communities formerly operated by Irvine, California-based Silverado. Overbuilding in memory care has begun to result in investment opportunities, Welltower executives noted on Tuesday’s call.

Other recent investments by the REIT include a $237 million acquisition of a six-property Balfour Senior Living portfolio and a $343 million deal to buy a portfolio of 32 Clover Management communities, including four under development.


And the company has grown more than its operator relationships in recent months. Welltower also last month formed a partnership with Anthem (NYSE: ANTM) affiliate CareMore. The partnership is aimed at improving health and wellness for senior housing residents, while increasing length of stay and reducing ER visits or other costly interventions in the process.

One analyst suggested that some operators may be wary of working with Welltower only to be replaced with another operator, such as what occurred with Silverado earlier this year.

But these are just the stakes to work with Welltower, Mitra responded.

“If an operator doesn’t want to take the bet on themselves and doesn’t have the confidence to do so from an operating capability perspective, then I guess that’s a very good tool to figure out on the very front-end who you should not do business with,” Mitra said. “We have plenty of people to do business with, and at the end of the day, that tool … is helping us from an adverse selection perspective.”

DeRosa added that Welltower prefers to work with operators that want to have some skin in the game, and not just look to the REIT as a way to unlock real estate value.

“If you’re just interested in monetizing your real estate, we don’t want you, and you don’t want us,” DeRosa said. “But … the people that are aligned with us about where we’re headed, where the future is going to be for this asset class, want to work with Welltower.”

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