Welltower (NYSE: WELL) is continuing to gain occupancy in its senior housing operating (SHO) portfolio, and CEO Shankh Mitra is especially heartened by the return of lifestyle-driven consumers.
“I honestly thought you were going to see more needs-based residents coming first and probably lifestyle residents would wait another six months,” Mitra said Wednesday at the RBC Capital Markets Global Healthcare Conference, held virtually.
As for why these lower-acuity residents are moving into senior living now, Mitra believes that their isolation during the pandemic has motivated them to seek out a more socially connected way of living. This is translating into census gains “much faster than I expected,” he said.
In April, Welltower posted the first occupancy gains in the SHO portfolio since the start of the pandemic, according to a business update issued Wednesday. Occupancy rose 50 basis points from March, reaching 74%. That’s down from 85.6% in January 2020.
Mitra is also bullish on the prospects for senior housing over the next decade.
The past 10 years were marked by rapid senior housing supply growth but relatively anemic demand growth. Now, the large baby boomer generation is beginning to age into senior living, while supply is being constrained by several factors.
“That gives me a lot of hope that the decade ahead of us will be a flip of the last decade,” Mitra said.
Notably, construction costs are up between 20% and 35%, Mitra estimated, with the biggest increases in places where the housing market is hottest, such as parts of Texas and Florida.
Furthermore, construction financing is more difficult to come by, as lenders have tightened up their standards.
The current environment reminds Mitra of the 1990s, when several senior living companies went public and created a supply boom — but those companies began to struggle, and banks were left with troubled loans. Subsequently, they pulled back on lending and supply decreased in the early aughts.
Deal flow in senior housing is also strong, and current high construction costs make certain acquisition opportunities even more attractive when considering what replacement cost would be for a given asset, Mitra said. On average, he estimated that Welltower is acquiring senior housing at a 20% to 30% discount on what the assets were built for.
“It’s sizable, it’s significant and it’s under contract,” Mitra said of the deal pipeline, most of which involves equity ownership of senior housing real estate.
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