Welltower CEO: Debt Maturities Helping Create Best Investment Environment ‘We Have Ever Seen’

Welltower CEO Shankh Mitra has a lot on his plate at the tail-end of 2023.

Welltower (NYSE: WELL) is gearing up to launch its in-house operating platform in Canada within the coming weeks with Cogir, which recently expanded its relationship with the Toledo, Ohio-based real estate investment trust (REIT). All the while, billions of dollars worth of debt maturities are coming due in 2024, creating “the best environment for investments that we have ever seen,” Mitra said on Tuesday’s earnings call with investors and analysts.

He added that the company in the last 90 days has “made tremendous strides” building “the technology backbone of what Welltower 3.0 will look like.”

“Year-end is shaping up to be extremely busy and the [first quarter of 2024] also looks promising if we continue to have access to growth capital,” Mitra noted. “Our goal is to elevate the community experience by delighting the customer and their families, and to simplify and enhance the employee experience — all of which should lead to occupancy and NOI growth.”

Welltower reported normalized funds from operations (FFO) of $0.92 per share. The company also revised its full-year guidance up to a range of $3.59 to $3.63 per diluted share, higher than its previous guidance of $3.51 to $3.60 per diluted share.

In an Oct. 30 note to investors, Stifel Managing Director Stephen Manaker wrote that Welltower’s senior housing margins “are improving a bit better than we expected, with revenue and occupancy roughly in-line” with previous guidance. That confidence was echoed by BMO Capital Markets Juan Sanabria, who added that “WELL is in a unique position to accelerate investments, taking advantage of its cost of capital.”

Welltower’s stock came to rest at $83.62 per share, an increase of 2.13% from the previous market close.

Cogir growth, operating platform launch near

Welltower reported a total year-over-year, same-store net operating income growth of 26.1% for its senior housing operating portfolio (SHOP), with same-store revenue within the senior housing segment increasing 9.8% in the third quarter.

Occupancy accelerated in the third quarter, and in September, those gains amounted to “the highest level we have seen over the last two years,” Mitra said.

The company owns 2,017 properties overall, with 946 communities in its SHOP portfolio.

Among Welltower’s biggest ongoing initiatives is its plan to spin up an in-house operating platform for its SHOP segment in Canada with Cogir. On Monday, Welltower announced it was expanding its relationship with Cogir following a 12-property, $885 million CAD transaction.

Cogir operates 62 Welltower communities as of Tuesday.

The new in-house management platform, known as Project Transformer, will include dozens of communities in Canada by Cogir. Welltower also as part of the plan dissolved a joint-venture agreement with Revera and sold its 34% stake in Sunrise Senior Living. Sunrise Senior Living continues to manage three Welltower properties in Canada, with a fourth under construction.

On Tuesday, management outlined how the Revera joint venture dissolution would occur, coming in three distinct phases, according to Welltower Chief Financial Officer Tim McHugh.

The United Kingdom (UK) portion closed in the second quarter of this year, and the U.S. portion closed in the third quarter, resulting in $75 million in net investment, according to McHugh. The Canadian portion is expected to close by the end of this year.

On Tuesday, Mitra said the operating platform, which stems from a favorable 2022 IRS ruling over self-management of independent living communities, would be launched “in the next few weeks.”

“Going forward, we believe both of our international businesses will have significant contributions to our earnings growth in ’24 and ’25,” Mitra said. “…Our operating platform efficiencies will increase the time available for care and reduce the stress on our employees.”

Mitra said the prospect of the operating platform’s impending launch “galvanizes” the leadership team amidst the “digital transformation of the senior housing industry.” In general, Mitra has a vision for the future where senior living providers use technology and other methods to eliminate “excess” in operations.

He also added that the company’s “engine room” was “buzzing” with pilot programs and model scaling around traditional and advanced technology solutions. Through transitioning communities to operators like Cogir or Oakmont Senior Living, the company has realized strong revenue opportunities in making those strategic partnerships.

“It’s an evolution,” Mitra said. “It’s a process that we have gotten over the last few years. And I’m very, very happy that we are there.”

Welltower also made other moves to enhance its SHOP segment in the third quarter, including converting 11 communities managed by StoryPoint Senior Living to a RIDEA management structure.

Investment opportunities abound

The senior living industry is facing billions worth of debt maturities coming due in 2023, with one recent analysis putting the total dollar amount at more than $10 billion. That could result in a wave of communities being repossessed by lenders if operators cannot pay back their dues — or, it could result in cash-strapped companies seeking out well-capitalized partners such as Welltower.

“We will not be surprised if significant dilutive capital is raised,” Mitra said. “Otherwise a lot of keys will need to be returned to the lenders.”

Already the company has “never been busier” from a capital allocation standpoint, Mitra said.

The current lending environment bodes well for REITs in general, and that’s been seen as other entities in the space in recent days, with LTC Properties (NYSE: LTC) CEO Wendy Simpson noting that “conservative investment strategies” and operations-focused solutions have helped larger players survive.

Mitra declined to comment on the Healthpeak Properties (NYSE: PEAK) and Physicians Realty Trust (NYSE: DOC) merger that was announced the day prior. He noted that Welltower was focused on “one asset at a time transactions,” with an intention of “going deep in our markets rather than going broad.”

“I’m not saying I’ll never [seek out a similar merger], but frankly speaking, it’s just not of much interest to us,” he said.

After highlighting a $2.3 billion investment pipeline in the second quarter, leadership reported closing on $1.4 billion in the third quarter of which included $900 million in October. Mitra said Welltower has another $1 billion in deals “just about to cross the finish line.”

“Beyond these billion dollars of investments under contract, our pipeline remains large and near-term actionable,” Mitra said during Tuesday’s earnings call. “But the execution of these deals will depend on our access to capital.”

Welltower closed on $1.4 billion of acquisitions and loans in the third quarter, including $618 million of senior housing operating investments, McHugh noted. Also in the quarter, Welltower raised gross proceeds of $1.9 billion which McHugh said allowed Welltower to “fully fund” year-to-date investment activity.

That capital activity, along with continued growth and recovery in senior housing, helped drive net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to 5.14x by the quarter-end.

Year-to-date, Welltower has completed $900 million in gross investments and a current cash balance of $2 billion and full capacity within its $4 million revolving credit line and an expected windfall of $624 million from near-term dispositions and loan payments, bringing the company’s total near-term liquidity to approximately $6.6 billion, McHugh said.

Mitra remained pessimistic on the state of new senior living development in the U.S., and said that the “economics doesn’t make any sense.”

“I don’t even understand why there are any starts — any, like more than zero,” Mitra said. “I think any start that you’re seeing are people still playing with other people’s money. That’s closing down pretty quickly, and I think you will continue to see it’s moving down.”

With challenges abounding on the capital and debt side of the coin, Mitra said future opportunities for Welltower would remain available, with the company “selectively pursuing great opportunities” in “whole stack and mid-stack levels.” That could look like, in-part, opportunities in senior housing equity investment “across product types and geographies.”

In some insight into how Welltower views these plentiful investment opportunities, Mitra said leadership viewed investment through “a three-dimensional lens” of “risk, reward and duration.” Due to the rise of interest rates, Mitra said the company had “recalibrated” those three dimensions.

“For the same risk where we need higher returns today than we did 90 days ago or we can do deals with a similar return profile, but with a much lower risk and so forth,” Mitra said. “Our balance sheet strength and flexibility gives us the opportunity to remain on offense or provide shelter if the economic environment meaningfully worsens next week.”