Welltower: Occupancy Could Drop 6% in Q2, Senior Housing Still Key To Future of Health Care

Welltower’s (NYSE: WELL) senior housing portfolio took a substantial hit to occupancy between March and May as the Covid-19 pandemic dragged on — but the company believes the worst still is yet to come on that front.

Occupancy for the Toledo, Ohio-based company’s senior housing operating (SHO) portfolio fell by 70 basis points in March and another 240 basis points in April, landing at 82.7% as of May 1. But Chief Financial Officer and Executive Vice President Tim McHugh projects that number will drop even further in the second quarter as more Welltower communities enact comprehensive move-in restrictions.

“We expect these occupancy declines continue throughout the second quarter, with occupancy expected to decrease 500 to 600 basis points by June 30,” McHugh said on an earnings call with executives, investors and analysts Thursday.


Still, despite short-term uncertainty, CEO Tom DeRosa believes senior housing plays an important part in the Welltower’s model of vertically integrating care across multiple settings, such as hospitals or senior living communities.

“We still believe that because of the aging of the population, and because of the needs of a population of seniors who are going to be living longer, we are still committed to models that bring those seniors together in settings that can better manage their needs, whether they are less acute or more acute,” DeRosa said. “We are very much still committed to the senior business because we think it has the biggest impact on the future of health care.”

At the same time, Welltower has made some big investments to protect senior living workers and residents from the spread of Covid-19. These include moves to source and distribute large amounts of personal protective equipment (PPE) and testing kits, and certain measures to maintain liquidity as the pandemic roiled capital markets.


Like some other publicly traded real estate investment trusts (REITs), Welltower withdrew its 2020 guidance due to Covid-19 uncertainty. As of May 1, Welltower had counted 1,044 residents with confirmed cases of Covid-19 in its SHO portfolio of 586 properties. About 72% of those communities reported no confirmed cases, while 13% reported between one and three cases and 15% reported four or more cases.

“There is much outside of our control, but we are taking steps to manage what is within our control,” DeRosa said.

Overall, the REIT’s first-quarter results were not as bad as some analysts worried they could be.

“WELL’s 1Q20 report was better than feared, as the pace of occupancy loss in the SHO portfolio flattened in early May versus the pace reported in early April,” wrote Jordan Sadler, equity research analyst KeyBanc Capital Markets.

For Lukas Hartwich, a senior analyst with Green Street Advisors, the REIT performed in line with expectations for the first quarter, given the circumstances.

“Like its peers, SHOP occupancy is seeing sizable declines due to unfavorable move-in/move-out trends,” Hartwich wrote in a note to investors. “However, Welltower’s portfolio appears to be holding up slightly better than average on this front.”

Welltower’s share price dipped by slightly less than 7.5% to land at $42 by the time the markets closed Thursday.

Occupancy down, expenses up

As was the case with many other senior housing companies, Welltower’s first-quarter results were marred by declining occupancy coupled with rising expenses due to Covid-19 disruptions. The REIT felt as though it was gaining momentum with a strong start in the beginning of 2020 — but all that quickly changed when the pandemic hit, according to Vice Chairman and COO Shankh Mitra.

“In January and February, we delivered results that were ahead of this bullish outlook,” Mitra said on the call Thursday. “And then, with the flip of a switch, our business changed in March due to Covid-19.”

Welltower’s net operating income (NOI) for its SHO portfolio declined 1.6% in the first quarter of 2020. And the company expects further erosion to margins in the second quarter on further occupancy losses and higher labor expenses. Meanwhile, revenue per occupied room (REVPOR) growth is expected to be flat through the second quarter, Welltower noted.

The declines in occupancy were driven by a slowdown in move-ins, which fell 30% in March and 73% in April compared to move-ins during the same periods in the first quarter of last year. At the same time, tours and lead generation have declined “meaningfully” since mid-to-late March, according to Welltower.

Operators in the company’s triple-net portfolio experienced largely the same kind of operational headwinds as those in the SHOP, Welltower noted. But the REIT did receive about 97% of the rent due in April from operators under triple-net lease agreements, which are mostly senior housing communities and post-acute care facilities.

At the pandemic’s outset, Welltower made significant investments in PPE, such as masks, gowns and gloves. The provider also purchased Covid-19 test kits to help its operator partners separate healthy residents from sick ones.

“This is not what a REIT typically does,” DeRosa said. “But extraordinary measures are often needed in extraordinary times like these.”

But all of this came with a price. Welltower incurred $7 million worth of property-level expenses from the procurement of personal protective equipment (PPE) and from higher labor costs in the first quarter.

Looking ahead, Welltower anticipates expenses for its SHO portfolio will rise by approximately 5% in the second quarter as compared to the first. That’s primarily to do with labor expenses, which it expects will remain high through May and June as a result of hazard pay.

To offset those expenses, the REIT anticipates reducing costs on multiple fronts.

Welltower is planning for an approximately $90 million reduction to full-year capital expenditures in 2020 due to tighter restrictions on capital in both the senior housing and outpatient medical sectors. The company also is currently not contemplating any material acquisitions, though its development pipeline beyond 2020 currently totals $178 million. Welltower also plans to reduce its general and administrative (G&A) expenses by $15 million on an annual basis.

Positive stories

Though the long-term picture looks hazier now than in January or February, Welltower believes there are reasons to be optimistic that business will pick up once Covid-19 is gone. For one, pent-up demand after the pandemic may help fill vacant rooms in a short period of time. Already, some of Welltower’s operating partners have begun to gain occupancy as they reopen communities to move-ins.

“One of our operators opened a handful of buildings on May 1,” Mitra said. “The moment that building opened, occupancy went up on that day by 50 basis points.”

Mitra also shared a similar anecdote regarding one of Welltower’s top-performing operators in New Jersey.

“The CEO told me that if she opens up buildings today, the occupancy can go up by 300 basis points because there is that much pent-up demand,” Mitra said.

But he cautioned that every market is different, and that it’s still too early in the pandemic to definitively say how things will play out in the end.

Mitra also said he was heartened by a recent survey showing that just 4% of the people who end up in New York hospitals for Covid-19 treatment come from assisted living.

“That tells you that our industry is doing something right,” Mitra said. “We believe that our operators and all of our people on the frontline are doing amazing work to keep our residents safe.”

And although it’s clear the REIT faces a tough road ahead, DeRosa is confident that the long-term viability of the business is sound, and that Welltower will play a crucial role in the health care landscape going forward.

“When Covid-19 is a bad memory, we will still need to meet the health and wellness needs of a rapidly aging population, and to reimagine and develop a more sustainable health care delivery infrastructure,” DeRosa said.

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