Leaders with Welltower (NYSE: WELL) are optimistic that steep senior housing labor expenses will moderate while strong demand will continue in 2022, driving a recovery after nearly two years of pandemic-related challenges.
“The labor disruption has been much greater than the demand disruption, particularly over the last two waves [of Covid-19], and omicron was a significant labor disruption,” Welltower EVP and COO John Burkart said Wedesday on the real estate investment trust’s Q4 2021 earnings call.
The sustained consumer demand enabled senior living operators to wield pricing power while bucking seasonal trends to keep growing occupancy, resulting in one of the company’s strongest quarters ever for revenue growth. The senior housing operating (SHO) portfolio’s revenue grew 4.8% year-over-year, which was the first year-over-year increase since the start of the pandemic.
However, the omicron-induced labor disruption caused a spike in costs for agency workers, which weighed on overall financial results. Although CEO Shankh Mitra expressed disappointment in the lackluster bottom line, Welltower’s normalized funds from operations of $0.83 per share beat analysts’ consensus expectations. Welltower shares rose 3.36%, ending regular trading on Thursday at $83.88.
Mitra and Burkart expressed optimism about opportunities for value creation in the year ahead, not only through occupancy recovery but operational enhancements. Such enhancements will be enabled by the expanded team at Welltower, which added a net 51 team members in 2021 and will likely add another 80 people this year.
Indeed, while the REIT continues its run of historically robust acquisition activity, the company essentially has assembled an ideal operator base and now will be “going deep,” according to Mitra.
“Instead of going broad — which you have seen over the last, let’s call it 18 to 24 months — you’re going to see us go very deep,” he said.
An accelerating recovery
Welltower’s leaders described how senior living providers were hit by a labor triple-whammy as 2021 came to an end. The rise of omicron caused a spike in Covid-19 infections while a large number of workers were taking well-deserved time off around the holidays, Burkart observed. In addition, larger Covid-related disruptions — including the so-called “Great Resignation” — continued to weigh on labor markets.
As a result, senior housing providers were forced to rely on agency labor, in some cases paying surge-pricing that was up to six times higher than usual rates, Burkart said. Overall, Welltower logged $30 million in agency labor costs for Q4 2021, contributing to an 8.8% year-over-year increase in expenses.
The good news is that agency usage has declined through January and should continue to moderate, with a “substantial decline” expected in the second half of the year, Burkart said.
Omicron also put the brakes on occupancy recovery, with tours canceled due to staffing shortages and prospects testing positive for Covid-19. Still, Welltower was able to build occupancy through the quarter, with SHO portfolio spot occupancy ending at 77.7%.
“Occupancy increased 145 bp during 4Q21, 5 bp ahead of guidance, and continues to outpace typical seasonality,” Raymond James Analyst Jonathan Hughes wrote in a note on the earnings.
As omicron has receded to start 2022, senior housing operators now are reporting a strong bounceback in sales activity. Welltower executives shared operator observations, including:
— “Digital inquiries were up 36% over 2019 in the fourth quarter and continued strong in January.”
— “We are seeing week-over-week growth in deposits of 10% in the last four weeks running.”
— “We are experiencing the strongest January for inquiries in several years.”
Welltower’s same-store SHO net operating income (NOI) declined 9.3% in the fourth quarter, but this was an improvement over the third quarter’s 14.9% decline. And going forward, Welltower’s leaders expect the current positive momentum to result in NOI improvement. The REIT is forecasting 15% same-store NOI growth for SHO assets this quarter.
Continued pricing power will be a key factor, and Welltower’s operators have been successful in shifting away from concessions and reinstating community fees. Market rents are beginning to catch up with or overtake in-place rents.
“What we’re seeing is a lot of strength in the marketplace and a recognition that costs have come up, and it takes a certain amount of money to provide great care, and that’s what people want,” Burkart said.
A coiled spring
Uncertainty still hovers over 2022, with threats such the possibility of another highly infectious Covid-19 variant, and Welltower has not issued full-year guidance.
Still, the company’s executives believe that results likely will reflect a combination of improved market conditions and operating practices. In terms of market conditions, the delivery of new supply will be greatly reduced compared to previous years, while demographics continue to become more favorable as the population ages.
On the operating side, Welltower’s leaders tout that they are working with best-in-class partners, and that the REIT will bring its own considerable resources to bear in helping these provider companies further raise their games.
Since his hiring last year, Burkart has been building out an operational excellence and asset management team, with a focus on helping realize the full value of the REIT’s platform.
Staffing is one area of focus, with Welltower’s operating partners uniformly focused on new workflows to improve recruitment and retention.
“Recruiting has become a sales machine, with KPIs [key performance indicators] for the recruiters,” Burkart said.
Operators are learning how to enhance the employee experience, including through changes in scheduling to help workers more easily meet child care and other responsibilities.
Furthermore, Welltower has observed variations across particular markets, with some communities operating without any agency labor and others relying heavily on agency. Omicron outbreaks and other factors explain some — but not all — of this variation. Poor leadership also is to blame in some cases, Burkart said.
“That’s partly what gives me great optimism in moving forward in solving this, because the leadership issues are solvable,” he said. “… This, frankly, helps us identify some situations that will, as we make adjustments, improve things going forward dramatically.”
In addition to Burkart’s team, Welltower has expanded capabilities and personnel in a variety of areas, including business intelligence, Mitra emphasized.
“The people side of our business is … a coiled spring today,” he said. “You are only seeing them in the G&A line, but their full contribution to the revenue line will be seen in 2023 and beyond.”
Capital deployment strategy
Welltower completed more than $1.5 billion in investments in Q4 2021, bringing the total investments for the year to $5.7 billion.
This 11% asset base expansion is “very impressive given WELL’s massive size,” Hughes noted. And this year has continued the trend, with $600 million in deals already done and a near-term pipeline of more than $1 billion.
In about the last 45 days, the dealmaking landscape has changed, Mitra noted. The Federal Reserve has indicated a potentially accelerated timetable for interest rate hikes; with most construction loans being variable rate loans tied to LIBOR, this will cause “hard pressure” related to financing costs.
But with regard to the pace of investments in 2022, Mitra stressed that Welltower does not measure success by the growth of the enterprise but the creation of shareholder value. The company will maintain that discipline going forward.
However, he did explain that he is not enthusiastic about new development at the moment, due to rising financing costs combined with uncertainty over where labor-cost adjusted rents ultimately will land.
Welltower is therefore highly selective about development projects, investing only in extremely compelling opportunities, which tend to be expensive projects in markets with enormously high barriers to entry — examples include the Coterie projects in San Francisco and New York City with Atria Senior Living and Related Cos., and the Brookline project with Balfour Senior Living in Massachusetts.
As for recent transactions, Mitra on Wednesday singled out a new relationship with Quality Senior Living (QSL), describing this deal as “perhaps the most exciting investment of the quarter.”
The transaction involved the $172 million acquisition of a five-property portfolio of Class-A communities in the Mid-Atlantic and Southeast; four are under triple-net leases and the other is under a RIDEA contract. Welltower also entered a long-term, exclusive development agreement with QSL.
“Despite all the labor challenges that I’ve highlighted, QSL have used virtually no agency labor and their buildings are well occupied,” Mitra said.
Glenn Barclay, CEO of QSL Management and principal of parent company QSL, gave some insight into how the company accomplished this — for instance, through the use of “retention specialists,” — when speaking on SHN’s Transform podcast last fall.
Among other notable recent deals, Welltower is poised to expand the Avery Healthcare platform in the United Kingdom through a new joint venture with Reuben Brothers.
Welltower’s unprecedented pace of capital deployment in the last two years has resulted in a bench of strong operating partners, Mitra emphasized; although, he can think of two U.S. operators that the REIT wants as partners, and he teased that a relationship already is in the works with one of those operators.
“We generally have the operator base, the platform that we wanted to build,” he said.