Welltower CEO’s Disappointment — and Optimism — Show Need for Senior Living Mindset Shift

Over the past two weeks, executives of publicly traded senior living companies shared quarterly earnings results. I was particularly struck by the words of Welltower (NYSE: WELL) CEO Shankh Mitra, who called the company’s second-quarter results “mediocre at best.”

We’re used to CEOs taking pains to stress the positives in earnings, and there were positives for Welltower, including senior housing NOI approaching pre-Covid levels.

But Mitra was taking pains to emphasize that the company’s latest earnings results, relatively decent as they were, still don’t reflect the potential long-term value of the REIT’s senior housing holdings. As he put it:

“… I’m not happy with these results, which I would characterize mediocre at best. Why? Because the size of our portfolio is much bigger today, given the significant amount of capital deployment over the last 18 months and yet our quarterly results are not reflecting the cash flow that this portfolio is capable of generating.”

That theme — tension between a short-term and a longer-term focus — shone through in executives’ comments on other earnings calls, such as those of National Health Investors (NYSE: NHI) and The Pennant Group (NASDAQ: PNTG).

I think, as Mitra said, this indicates the latest inflection point for the industry since the pandemic first hit in 2020.

In this week’s members-only SHN+ exclusive, I analyze these and other themes, including:

• Why now is the moment for a shift in mindset for senior living leaders and investors
• How public senior housing REITs and operators are gearing up for strategic growth

Filling the box with jewels

Mitra’s comments about “mediocre” earnings results were not the only quote that piqued my interest during the company’s second-quarter 2022 earnings call last Wednesday.

Mitra revealed that about 120 senior living communities owned by Welltower are cash-flow negative. While Welltower isn’t the first REIT to have a large number of underperforming senior living communities — or the first to publicize that fact — it is notable that Mitra mentioned them.

He didn’t mention these properties to explain away a bad quarter, but rather to illustrate the dramatic upside that the company’s management team sees for them ahead.

Mitra noted that many of those communities were recently redeveloped or are currently going through an operator transition, and thus wouldn’t be good candidates for dispositions. But his larger point was that the company now needs some more time to realize upside after reshaping its portfolio through a massive investment in a “Covid class” of operating partners and communities, and seizing chances to offload or transition persistent underperforming assets — such as the Vintage communities recently handed over to Oakmont, Cogir and Kisco.

I heard similar sentiments among other executives of public companies during the earnings period, too.

In recent years, CEO Eric Mendelsohn and the rest of the company’s management team have endeavored to retool the NHI senior housing portfolio into a “jewel box” that now includes operators such as Discovery Senior Living and Merrill Gardens.

Last week, Mendelsohn triumphantly declared the portfolio optimization efforts largely complete, and said the Murfreesboro, Tennessee-based company was ready to return to strategic growth. Getting there was not easy, and NHI spent the better part of the last 12 months deferring and abating rent for a small handful of operators, including Bickford Senior Living.

Like Mitra, Mendelsohn is focused on the longer-term value of holding on to communities with a long runway, and in preserving relationships with top operators. That is a big reason why the company decided to move its 15 legacy Holiday communities — now operated by Discovery and Merrill — to a new senior housing operating portfolio (SHOP).

In making these portfolio moves, leaders like Mitra and Mendelsohn have been taking a long-term view. But the industry as a whole has been in a short-term mindset since 2020, due to the Covid crisis. Predicting the future was impossible, and as providers hunkered down and tried to get through moment-to-moment and day-to-day, public owners and operators yanked guidance and started issuing regular updates on infection rates, occupancy and other key metrics.

Now, the industry is in a sort of middle ground. Companies — including Welltower — have reinstated guidance, with the important caveat that Covid surges could scuttle expectations. This occurred last quarter, with a surge constraining move-ins during a key period for typical seasonal occupancy growth.

So, investors and market watchers are caught between the Covid-driven focus on the immediate situation on the ground, and the longer-term outlook that is now possible thanks to widely available vaccines and other methods of keeping Covid largely in check.

But Mitra and other leading executives made the case that the tendency toward short-term thinking, ingrained in the last two years, is no longer appropriate. In other words, there will be some “noise” created by Covid infection rates ebbing and surging, and this might complicate guidance and extend the timeline for recovery and shareholder gains, but it’s time to ignore that noise.

That’s because many of those leaders believe — as Sabra CEO Rick Matros argued on that company’s earnings call — Covid now has become endemic rather than pandemic. And as Mitra stressed, the bounceback from Covid surges now is happening much more rapidly than in the past.

I think this message is important not only for investors but for operators; I’m sure it’s still easy to become mired in the day-to-day challenges related to Covid, but they must not become distracted by this noise, and focus on making strategic decisions to drive longer-term success — and be patient and steady if results don’t materialize as quickly as hoped for, as Covid-era challenges persist.

Ready for growth

Another notable trend — and sign of an inflection point in the industry — is a shift in the M&A market.

With portfolios sufficiently pruned and optimized, public senior housing companies including NHI are turning their eye back to strategic growth.

Part of the reason why is that the acquisition market seems to be becoming more favorable for buyers of senior living communities. And NHI CFO Kevin Pascoe said as much during the company’s second-quarter earnings call last week.

“We have seen several deals that we have previously passed on come back to the market, which suggests that balance may be tipping back towards buyers,” he said.

Specifically, Pascoe said the REIT is seeing many “RIDEA-type” deals coming to market, and that could be a lever for future growth down the road.

Although Pascoe noted that the REIT still needs to make some operational improvements before looking to expand the platform, the fact that a larger shift toward RIDEA is even in the cards for NHI is notable, given Mendelsohn’s previous skepticism.

NHI wasn’t the only senior housing REIT eager to expand. While the senior housing portfolio of LTC Properties (NYSE: LTC) is still evolving, the company put $110 million toward senior housing and care in the first half of 2022 — a total that is higher than the entirety of the REIT’s investments in 2021.

CEO Wendy Simpson gave a glimpse into the company’s thinking when she noted that the management is “continuing to identify additional strategic investments, and have been busy touring sites and building relationships.”

That theme of growth continued in the second-quarter earnings call of The Pennant Group. During the call, CEO Brent Guerisoli said the company was looking to get back to a “brisk pace of strategic acquisition that will propel our growth over the next several years and beyond.”

He continued that the company was seeking communities in which it could boost revenue through occupancy growth, new care capabilities, higher resident rates and better cost discipline.

“Acquisitions are part of the DNA of our leaders … and we’re ready to put more capital toward strategic growth,” Guerisoli said.

On Tuesday, the company revealed a chess move in that strategy in the off-market acquisition of home health and hospice agency Ardent Hospice and Palliative Care. While not a senior living community or operating business, I suspect that kind of growth will not be far behind, either.