Welltower (NYSE: WELL) CEO Shankh Mitra believes there are some “green shoots” emerging in the company’s U.S.- and U.K.-based senior housing portfolios — but he is also wary of predicting a timeline for pandemic recovery.
Still, the real estate investment trust (REIT) released a “Path to Recovery” that identifies $480 million in embedded NOI growth, based on pre-pandemic occupancy and margin levels.
Mitra also elaborated on the company’s decision to participate in the recapitalization of the largest care home provider in the United Kingdom, saying this was a strategic decision that will open up Welltower to a new part of the market. Namely, HC-One is a “value option,” which will supplement Welltower’s existing investments in higher-end U.K. operators.
Over the past six weeks, the Toledo, Ohio-based company’s senior housing operating (SHO) portfolios in the U.S. and U.K. have gained 90 and 120 basis points of occupancy, respectively. And at the same time, operators working with the real estate investment trust (REIT) are reporting positive momentum irrespective of product type, location or acuity level.
“This is the most optimistic tone I’ve heard from our operating partners for a long time,” Mitra said during the company’s first-quarter 2021 earnings call on Thursday. “We’re even seeing the lifestyle-driven customers are starting to come back, which frankly, surprised me in a positive way.”
During the first quarter of the year, some senior living executives — including Belmont Village CEO Patricia Will — noted that needs-based demand was returning most quickly. Belmont Village is a Welltower operating partner.
Welltower’s projections currently show the company gaining 130 basis points of SHO occupancy between March 31 and June 30.
But despite the more upbeat tone than in previous quarters’ calls, Welltower’s leaders held off from providing financial guidance for the full year or speculating when the senior housing recovery might fully take hold. As of April 23, SHO portfolio average occupancy sat at about 73.8%, meaning the company’s operators still have a hill to climb before they’re back to pre-pandemic levels. And there is always the chance that Covid-19 cases could tick back up in the coming weeks or months.
“This is a highly uncertain environment. We’re just not going to … try to guess how things might or might not play out,” Mitra said. “Seasonally, we’re seeing things improving, but we’re not ready to go out and tell you that things will successively get better every week.”
The company reported normalized funds from operations (FFO) of 80 cents per share in the first quarter of 2021, beating analysts’ expectations. Welltower is among the largest owners of senior housing in the U.S., with a SHO portfolio totaling 649 properties and a triple-net portfolio of 337 communities.
Analyst reactions
Analysts covering the REIT’s earnings period noted its forward progress, but with a dose of caution about the road ahead.
While the company beat its guidance for the first quarter of 2021, senior housing occupancy was still “soft” for the quarter, according to a note prepared by BMO Capital Markets analysts Juan Sanabria and John Kim. But the analysts also expect the REIT’s “green shoots” to continue sprouting, barring any surprises.
“March leads were 86% of 2019 levels and showed continued improvements with pent-up demand unclear,” Sanabria and Kim’s note read.
The quarter marked another milestone in the REIT’s ongoing recovery, in the view of Jordan Sadler, equity research analyst at KeyBanc Capital Markets. In particular, he noted there appears to be correlation between the company’s growing rate of vaccinations and occupancy gains.
“WELL’s SHOP occupancy has meaningfully inflected from its pandemic low of 73.2%, gaining 60 bps of occupancy since its bottom on March 12,” Sadler wrote in a note to investors. “Reflecting the recent improvement and the pace of gains, management guided to a 130 basis point increase in SHOP occupancy in 2Q21, which sharply contrasts with flat occupancy in March and a 310 basis point decline in average occupancy in 1Q21.”
The senior housing sector might be reaching the bottom for occupancy losses, and Welltower’smost recent occupancy gains are encouraging signs for investors, noted Green Street Senior Analyst Lukas Hartwich. He also believes Welltower’s just-announced recapitalization of U.K. operator HC-One could drive returns for the REIT.
“Welltower announced a $750M (2% of assets) secured loan investment in U.K. senior housing operator, HC-One,” Hartwich wrote in a note to investors. “While details are limited, the investment appears attractive at first glance.”
Welltower’s share price gained less than a percent, reaching $76.08 by the time the markets closed Thursday.
‘Path to recovery’
While the future is still hazy, Welltower’s leaders see a potential roadmap for the company’s recovery.
Assuming the company’s SHO portfolio occupancy returns to its pre-pandemic level of 87.3% with an operating margin of 30% in the coming years, leaders with the REIT believe it will see an additional $480 million added to its net operating income (NOI) — perhaps even more depending on the level of rent growth and new supply in that time.
But he also cautioned that Welltower is not committing to a specific time frame for that gain due to the uncertainty of the road ahead.
Some of the pieces of that recovery appear to be moving into place.
For instance, the company grew its move-ins by 81% between January and March of this year. Welltower’s level of move-ins in March amounted to about 86% of what they were during that time in 2019 — a sizable increase over January, when they sat at only 54% of 2019 levels.
Thanks to vaccination clinics, new cases of Covid-19 are also down 98% on a trailing 12-week basis compared to what Welltower’s communities saw at the peak of new infections in January. That has resulted in many of the REIT’s communities returning to “pre-Covid conditions in terms of lead generation and resumption of in-person tours, indoor visitation, communal dining, and social activities,” the REIT noted in its earnings release.
The REIT is also making moves now to position its SHO portfolio and balance sheet for the future. Recent transactions include the $750 recapitalization of HC-One, the largest care home operator in the U.K.; its decision to substantially exit its operating relationship with nursing home giant Genesis HealthCare (NYSE: GEN); and an acquisition of eight communities operated by Harbor Retirement Associates (HRA) for $132 million.
The investment in HC-One, in particular, “fills a true strategic hole that we have in our portfolio [in the U.K.],” Mitra said. “We think this will be our platform.”
As Mitra alluded, there are still some potholes on Welltower’s road to recovery. Although its U.S. and U.K. SHO properties gained ground on occupancy in recent weeks, the company’s Canadian SHO assets still shed about 50 basis points since March 12.
“While most residents within our Canadian senior housing properties have been vaccinated, the rollout to the broader population has lagged meaningfully due to lockdown in certain areas,” Mitra said. “Within Ontario and Quebec, move-ins, tours and visitation have been highly restricted, which has ultimately led to an occupancy loss.”
Labor costs — a lingering headache for senior living providers in recent years and through the pandemic — are also expected to weigh on the company’s SHO portfolio. However, Mitra believes those costs may be offset by gains elsewhere, and that the REIT won’t see the kind of labor cost inflation that certain other industries are.
“Will you see labor cost inflation? Absolutely. But I think you will also see margin expansion,” Mitra said.
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