Welltower (NYSE: WELL), the nation’s largest owner of senior housing properties, will not be changing its strategic direction under its recently named CEO, Shankh Mitra.
“Many of you have asked me if our strategy will change going forward — the answer to that question is an emphatic no,” Mitra said Thursday during the Toledo, Ohio-based real estate investment trust’s Q3 2020 earnings call with investors and analysts.
One aspect of Welltower’s long-term strategy is to make the REIT into what Mitra called a “wellness infrastructure company,” by building closer relationships between large health systems and senior living communities. His predecessor Tom DeRosa was a “visionary” in putting Welltower on this path, he said, and the Covid-19 pandemic has only strengthened the case for this type of integration.
In the more immediate future, low acquisition prices for senior housing communities, particularly recently built properties, have Welltower’s leaders “salivating,” Mitra said. And, anxiety over his “biggest concern” from last quarter has eased, as consumers appear to be less hesitant to make the move into senior living.
Surges in Covid-19 infections are creating uncertainty, but Welltower is in a good position based on its Q3 performance, which included a faster pace of move-ins and lower operating expenses in senior housing, several analysts noted. Welltower’s funds from operations (FFO) of $0.84 a share beat analysts’ consensus estimate of $0.80 a share, RBC Capital Markets analyst Michael Carroll wrote in a note released Wednesday.
“WELL delivered a healthy report with FFO surpassing our expectations, but more importantly, highlighted continued troughing in the seniors housing operating trends,” he wrote.
Staying on the ‘bleeding edge’
Earlier this month, Welltower announced that Mitra would be succeeding Tom DeRosa as CEO, effective immediately. While Mitra was the anticipated successor to DeRosa, the transition was not expected to occur so soon. Mitra on Thursday spoke highly of DeRosa’s mentorship, as well as his impact on Welltower and the senior housing and health care industries.
“Tom has trained me for the job over many years, and definitely I’ve been very influenced by how he saw the world,” Mitra said.
Specifically, DeRosa pushed the REIT’s leaders to think beyond the disparate aggregation of real estate assets, about how to position the platform on the “bleeding edge of health and wellness trends.”
Mitra assured investors and analysts that he will continue to lead Welltower with these principles in mind, while remaining laser-focused on smart capital allocation and executing day-in and day-out to increase value per share.
“The goal is to maximize cash flow and value per share, not to become the biggest or the most revolutionary,” he said.
Along with Mitra’s promotion to CEO, Welltower made other leadership changes durng the third quarter, including naming Kenneth Bacon as the new board chairman and adding Philip Hawkins to the board.
Additional promotions and new roles will be announced in the coming weeks and months to further define the leadership team, Mitra said Thursday.
Attractive acquisition opportunities
The Covid-19 pandemic has scrambled the senior housing acquisition market in ways that are benefiting Welltower, executives said.
New assets typically trade for higher prices than older assets, due largely to the difference in capital expenditure demands relative to a building’s vintage, Mitra noted. In today’s environment, different factors are at play.
“Given what is happening today in the marketplace, you are seeing exactly the opposite,” he said. “New assets are trading at a discount purely because they can’t get financing.”
The main issue is that these newer properties do not have historical net operating income (NOI) to underwrite against. This lack of financing opens the door for Welltower to execute cash transactions and bring in a high-quality operator from its stable of partners to drive results.
And, due to the influx of new supply over the last several years, there are plenty of new communities around the country that might not have leased up prior to the pandemic, and now are acquisition targets.
“We’re salivating [at] the prices that we see today in the marketplace,” Mitra said.
Given these dynamics, senior housing is the current focus of acquisition activity. Welltower’s total pipeline of potential acquisitions is in excess of $1 billion, representing more than 6,500 units at an average price-per-unit of $165,000. Potential deals run a wide gamut, with Mitra flagging a $10 million redevelopment on the low end and a $188 million core portfolio of new assets on the high end. Many deals are being identified by working with existing operators and leveraging Welltower’s data analytics platform, and the REIT is also exploring buying out operators’ other capital partners.
At the same time that Welltower is looking to “buy low,” the company has been able to command attractive pricing on dispositions during the pandemic. The REIT has completed a total of $1.4 billion in dispositions at a blended yield of 5.3%.
In September, Welltower sold a portfolio of Merrill Gardens communities for $702 million, or $466,000 per unit. Following the end of the third quarter, the REIT sold most of its ownership interest in a portfolio of Northbridge-operated properties for $200 million, or $395,000 per unit.
There has never been a wider gap between the low acquisition prices seen in the pipeline and the high prices on dispositions that are transacting, Mitra said.
Welltower is positioned to “play offense,” with leverage at 6.0x, BMO Capital Markets analysts John Kim and Juan Sanabria noted. They also flagged that the REIT’s “war chest” includes $2.2 billion in cash, $3 billion undrawn from a revolver and $214 million of proceeds expected from assets held for sale but not yet closed.
Senior housing occupancy has declined across the country to historical lows due to Covid-19. For Welltower, occupancy in its senior housing operating (SHO) portfolio dropped about 150 basis points during Q3, with spot occupancy of 78.4% in September. That quarterly occupancy decline was in line with the company’s outlook.
But, Welltower’s leadership is encouraged by move-in trends. Although move-in activity declined 39% on a year-over-year basis in the third quarter, activity increased 104% sequentially.
In the second quarter, Mitra was concerned about customers who were delaying moving even after putting a deposit down.
“As communities resumed visitation, we have seen a significant improvement in this area … which was my biggest concern as described in last quarter’s call,” he said.
Looking at five large national and regional operators with buildings in various parts of the country, the average delay between deposit and move-in was 17 days in March 2020. That increased to “a whopping” 41 days in June, but was back down to 18 days in October. That’s slightly quicker than this time last year, when the average delay between deposit and move-in was 19 days.
Assisted living operators are reporting that the lag time is getting shorter because older adults cannot defer moves any longer, as their health conditions continue to deteriorate. Hesitation remains more of an issue in active adult and independent living communities, given that these are less needs-based products.
With Covid-19 surging again, Mitra believes it would be “foolhardy” to project forward based on these current numbers. But, he thinks the move-in numbers do indicate the fundamental resiliency of senior living as a needs-based offering.
“This accelerated pace of move-ins tells you that our customers need our product; they moved in as soon as they could,” he said.
While move-in velocity might be more of an issue in independent living than assisted living, occupancy at the lower-acuity communities has held up better during the pandemic. This helps explain Welltower’s 1% year-over-year drop in revenue per occupied unit (RevPOR) during the third quarter, given that a greater share of revenue is now coming from the lower-rent IL and active adult communities.
Assisted living and memory care communities in fact clocked a 1.4% year-over-year increase in RevPOR, while independent living and active adult communities experienced a 20 basis point year-over-year decline, CFO Tim McHugh said.
Rent concessions are appearing in some markets, but rates on the whole have held steady despite occupancy declines, he added. Concessions generally are taking the form of discounted community fees; assisted living providers are not discounting care.
Also helping to buoy the Q3 financial results, senior living operators were able to rein in operating expenses, which were down 1.1% year-over-year and 3.3% sequentially. This occurred as lower occupancy translated to adjusted staffing levels and reduced labor costs. Furthermore, expenses related to Covid-19 decreased from $33 million in Q2 2020 to $15 million last quarter. More normalized pricing on equipment and supplies was one helpful factor.
Welltower executives expect less dramatic declines in OpEx in the fourth quarter, with total expenses and RevPOR being flat on a sequential basis. This outlook does not include any benefits from federal funds that are starting to flow to assisted living providers. Welltower operators are expected to receive about $45 million in Phase 2 funds released by the Department of Health and Human Services (HHS), the company stated in a press release announcing the earnings results.
On the whole, Welltower’s results demonstrate both the deep impact of Covid-19 on senior housing and offer some reason for optimism, according to Green Street analyst Lukas Hartwich.
“The senior housing sector continues to face significant operating headwinds due to elevated expenses and unfavorable move-in/move-out trends related to the Covid-19 pandemic,” he wrote in an Oct. 28 note. “Despite these challenges, Welltower’s high-quality SHOP portfolio (~50% of assets) is showing signs that these headwinds are easing.”
Welltower’s stock ended regular trading up 4.54% on Thursday, at $54.63 per share.