Welltower Sees Senior Housing Progress in Q2, But More Covid-19 Challenges Loom

The outlook for Welltower’s (NYSE: WELL) senior housing properties improved in the second quarter of 2020 — but the company’s leaders aren’t “signaling the all-clear,” either.

When the coronavirus pandemic hit earlier this year, much of Welltower’s senior housing operating portfolio (SHO) went on lockdown and many halted move-ins. But as of the second quarter of 2020, 95% of that portfolio is again accepting new residents, and that has helped slow the rate of occupancy loss for the Toledo, Ohio-based real estate investment trust (REIT).

Cases of Covid-19 also appear to be dwindling among residents and staff at the REIT’s senior housing properties. While the number of positive cases peaked at 510 during the first week of May, Welltower now has just 98 cases among residents at its 612 SHO and 340 triple-net senior living communities.


At the same time, the company completed two recent large transactions totaling $1.3 billion in the second quarter of this year. That includes a sale of a 34-property medical office and senior housing portfolio to Kayne Anderson, and the disposition of six SHO properties operated by Senior Star located throughout the Midwest.

Those moves will help the REIT take advantage of emerging real estate opportunities as Covid-19 continues to pressure operators across the senior living industry — especially if recent pricing trends hold, according to Welltower Vice Chair, COO and Chief Investment Officer Shankh Mitra.

“We have never been more excited about the opportunity to invest capital in the senior housing space because of the pricing that we have seen,” Mitra said during the call with analysts and investors Thursday. “We’re buying communities in our core California and New Jersey markets for less than $200,000 per unit when replacement cost in these locations is in excess of half a million dollars per unit.”


Still, Welltower Chairman and CEO Tom DeRosa was careful to note that there is much uncertainty ahead as the pandemic drags on.

“While I’m encouraged by our progress, by no means are we signaling the all-clear,” DeRosa said during Thursday’s earnings call. “The toll from Covid on our business has been, and will continue to be, pronounced.”

Welltower reported normalized funds from operations (FFO) attributable to common stockholders of 86 cents per share in 2Q20, beating analysts’ expectations by three cents.

Analysts, such as BMO Capital Markets’ John Kim, noted Welltower’s progress for the quarter.

“We believe WELL is the REIT to own if and when Senior Housing rebounds, but we don’t have clarity on that timing,” Kim wrote in a note to investors ahead of Thursday’s call. “WELL’s outlook suggests vacancy will decelerate but increase nonetheless.”

RBC Capital Markets Analyst Michael Carroll also said the latest earnings report showed good progress for the REIT.

“Seniors housing trends are the primary focus, and results were better than expected,” Caroll wrote in a note to investors. “We note concerns still exist especially given the unpredictability of Covid-19.”

Welltower’s share value grew more than 6%, landing at $56.41 by the time the markets closed Thursday.

Occupancy losses decelerate

When the coronavirus pandemic took hold and infection totals climbed in February and March, many senior living operators shut their doors and halted move-ins and visitations. Welltower was no exception.

The REIT reported a 79.4% average spot occupancy rate for its SHO portfolio in July, a significant decrease from the 85.8% occupancy rate it reported in February before the pandemic hit. At the same time, the rate of occupancy decline has lessened since April, when Welltower shed 2.2% from its occupancy. In July, Welltower’s SHO occupancy declined just 70 basis points, or 0.7%.


Welltower forecasts it will lose 125 to 175 basis points of occupancy in the third quarter of 2020, as move-outs are expected to continue to exceed move-ins. And although company leadership can’t predict when it will once again see a quarter with more move-ins than move-outs, they are heartened by the fact that most of Welltower’s operating partners are continuing to accept new residents, even amid new spikes in infection totals in some markets.

“In the last week of April 42% of our communities had official admissions bans,” Mitra said. “That number today is 5%, including 3% [which have] partial bans.”

Welltower focuses in large part on needs-driven communities, which leadership believes are better-positioned to weather the Covid-19 downturn. That is evident in the company’s leads, which grew 60% in June when compared to April’s more depressed levels, and in July approached pre-Covid numbers, according to Mitra.

“We have been seeing a steady increase of leads, inquiries and deposits due to the need and nature of our business,” Mitra said. “However, move-ins are trailing … due to the hesitation in the psychology of consumers as they juggle between the difficulty of taking care of the elderly loved ones and the fear related to national headlines of rising Covid cases.”

DeRosa believes that, with the uncertainties of Covid-19 looming high, older adults and their families are now more concerned with around-the-clock care, safety and security than they are with lifestyle amenities or socialization.

“The decision has changed today,” DeRosa said. “It’s number one: Is there Covid in the building? Can you take my mother or father? Are you able to take them in? How are you going to protect them, and can you meet their needs? That is the decision chain today, because so many people have exhausted their ability to care for that relative.”

Despite its progress, Welltower’s net operating income was still markedly lower for the quarter — as analysts had expected, given all of the Covid-19 disruptions. Net operating income (NOI) for its same-store facilities declined 24.5% in the second quarter of 2020 when compared to the second quarter of 2019. Accelerating Covid-19 cases on both U.S. coasts, where Welltower has significant holdings, further complicates the future outlook.

Meanwhile, Welltower was able to collect rent from about 98% of its operators under triple-net lease agreements. Those operators primarily lie on the senior housing and post-acute care side.

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