After Surprise Timing of CEO Change, Analysts Say Welltower in Capable Hands

The news on Monday that Tom DeRosa had stepped down as CEO of Welltower (NYSE: WELL) surprised equity analysts who cover the company, and while they expressed confidence in his replacement, some also had questions about what the leadership change means for the future direction of the real estate investment trust (REIT).

The sense of surprise had to do with the timing of the announcement, as Welltower in April had extended DeRosa’s position as CEO through 2023. Shankh Mitra — who was promoted to COO and vice chair about six months ago — was no doubt a rising star in the company. But the analysts believed he was on track to become CEO at some point further down the road.

“We were surprised by the timing, but not the appointment, of Shankh Mitra as CEO,” wrote BMO Capital Markets Analyst John Kim in an Oct. 5 note to investors.

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Jordan Sadler, equity research analyst at KeyBanc Capital Markets, noted that, while Mitra appeared on track to eventually succeed DeRosa, “the decision appears to come meaningfully ahead of what was communicated or anticipated.”

Green Street Advisors Senior Analyst Lukas Hartwich wrote that while the news was “perhaps a bit sooner than expected,” it wasn’t a shock to see the REIT appoint Mitra in the role.

“While Mr. DeRosa will be missed, he is leaving the company in capable hands,” Hartwich wrote in a note to investors.

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Questions about the future

The leadership change adds a dash of uncertainty to Welltower’s future strategic direction.

Although Mitra is an “extremely capable and talented capital allocator,” he is untested in a senior leadership role such as president or CEO, or as a member of the board, Sadler noted.

As a former portfolio manager at global investment management firm Millennial Partners, Mitra also has an “unusual background” for a REIT executive, Kim pointed out. But Kim also noted that he believes Mitra is “hard-working and hyper-focused on maximizing [return on invested capital].”

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Mitra, who first joined Welltower in 2016, is well-versed in the senior living and care world, and he has taken an increasingly visible role on the company’s earnings call presentations in recent quarters. The job of chairman of Welltower’s board — which DeRosa held concurrent to his former CEO title — is going to Kenneth Bacon, who had previously worked as an independent director. That should help improve the REIT’s corporate governance profile, Hartwich noted.

It was not clear whether DeRosa’s sudden departure might portend a shift in strategy for the REIT, Kim wrote. While the former CEO made moves to enhance the quality of Welltower’s portfolio of health care properties over the last six years, the REITs earnings “have failed to grow” under his leadership, according to BMO’s Kim.

Still, Welltower has outperformed by delivering about a 30% total return since 2014, compared to diversified health care REIT peers that have delivered returns of about 10% in that time period, Hartwich pointed out. He noted that DeRosa’s strategic vision also put the company on a path that might take a long time to pay off.

Welltower had reshaped its roster of operating partners during DeRosa’s time as CEO, primarily through RIDEA management structures. Under DeRosa, Welltower also spearheaded an effort to make senior housing and care a more integrated part of the U.S. health care system. In 2018, the company bought soon-to-be-rebranded nursing home chain, HCR ManorCare, in a $4.4 billion deal with nonprofit health system ProMedica. Other deals and partnerships with health systems and payers include agreements struck with Philadelphia-based Jefferson Health and Anthem affiliate CareMore.

“The company has made progress on this front, but the seeds planted by Mr. DeRosa will likely take more time to fully bear fruit, especially when considering the health care system’s glacial pace of innovation,” Hartwich wrote.

A representative for Welltower didn’t elaborate on the announcement when reached by Senior Housing News, including regarding the company’s future strategic direction under Mitra’s leadership or his first priorities as CEO.

In an Oct. 6 note to investors, Barclays Managing Director Steve Valiquette noted that Welltower’s normalized funds from operations (FFO) have been “flat-to-down due to industry challenges related to senior housing supply/demand trends, and vast divestiture activity.”

There are some signs the company’s senior housing portfolio is leveling off after a rocky period caused by Covid-19. Occupancy for the company’s senior housing operating (SHO) portfolio fell about 30 basis points in the month of September, landing at about 78.4% as of Sept. 30.

“Occupancy appears to be stabilizing, with the rate falling 150 basis in 3Q20, which is in line with both management’s 125 to 175 basis points expectation, and our 150 basis points estimate,” RBC Capital Markets Director Michael Carroll wrote in an Oct. 5 investor note. “This moderating trend also marks a meaningful improvement from the 490 basis points decline realized in 2Q20.”

Welltower’s SHO portfolio posted consecutive occupancy gains during the last two weeks of September, marking the company’s first back-to-back period occupancy gains since the start of the Covid-19 pandemic — a “positive inflection given the pandemic’s damage to date,” Kim wrote. Welltower also collected 98% of rent due in its triple-net portfolio during the third quarter of 2020, which analysts viewed as a sign of resilience among the REIT’s triple-net operators.

These updates suggest to Barclay’s Valiquette that management changes were “not prompted by unexpected further deterioration in [operations].”

Welltower ended regular trading on Tuesday down 1.4%, with its shares priced at $56.66.

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