Welltower’s (NYSE: WELL) senior housing portfolio is rebounding from its pandemic lowpoint, and the company continues to ink investments in senior housing and other asset classes. In fact, after investing nearly $1.4 billion in Q2 2021, CEO Shankh Mitra predicted that Q3 could be another record quarter.
But while the company is making progress on that front and seeing encouraging results, it is still too early to signal the all-clear or predict future trends, given the uncertainty of the delta variant and other factors at play, Mitra said Friday on Welltower’s second-quarter earnings call.
At the same time, Welltower’s core operating partners are showing a strong performance amid the industry’s Covid-19 recovery period.
For instance, Oakmont Senior Living — a growing player in Welltower’s senior housing portfolio — was the first operator working with the REIT to hit the 90% occupancy watermark this year. For reference, Welltower reported a spot occupancy rate of 75% for its senior housing operating (SHO) portfolio as of July 23.
The company has worked to grow its list of quality operators in recent quarters. Welltower has invested nearly $4 billion acquiring properties with 24 operating partners across 37 transactions to create a “Covid class” of operators, which Mitra defines as any acquisition the company has made since “turning to offense” in the fourth quarter of 2020. Recent examples of that trend in action include Welltower’s $1.58 billion, 86-property acquisition in conjunction with Atria Senior Living’s acquisition of Holiday Retirement.
And that is the start of what Mitra hopes to accomplish in terms of bulking up the company’s senior housing portfolio.
“The second quarter was one of the best quarters from a capital deployment perspective, having closed approximately $1.4 billion of growth investments,” Mitra said on the company’s second-quarter earnings call Friday. “Q3 will likely top Q2, and we have anticipated that it will be another record quarter of investment activity for the company.”
Welltower also has a new executive on its leadership team in the form of John Burkart, who joined the REIT last week as its new COO after working for 25 years at multifamily REIT Essex Property Trust (NYSE: ESS).
Given the progress made so far and the opportunities for more growth ahead, Mitra believes Welltower is positioned to exit the pandemic with the wind at its back. At the same time, when that will happen is unclear, and the company is still holding off from providing full-year guidance given that uncertainty.
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“We’re cautiously optimistic about the fundamental environment and excited about our opportunities to acquire and develop talent with new relationships and attract quality partners,” Mitra said. “We’re emerging as a partner of choice, an employer choice and investor of choice on the other side of this pandemic.”
Welltower reported normalized funds from operations (FFO) of about 79 cents per diluted share, beating analysts expectations by two cents.
Welltower’s stock price shed less than 1% by the time the markets closed Friday, ending the day 81 cents lower per share at $86.84.
SHO on a roll
Analysts who covered the quarterly earnings report noted that Welltower’s SHO portfolio is making good progress in the industry’s ongoing recovery period.
“[Welltower’s] SHOP is recovering after a Covid-led decline. While the timing and the magnitude remain uncertain, the increasing demographic of older Americans will fuel the recovery,” read a July 29 note to investors from Stifel. “We believe occupancy recovers to pre-Covid levels in 3-5 years, margins slightly longer.”
BMO Capital Markets analysts Juan Sanabria and John Kim also noted the positive momentum in occupancy and operations. But they also wondered how much rising labor costs would weigh on the REIT’s margins in the future.
“Impressively, SHOP same-store expenses were modestly down quarter-over-quarter as Covid costs are moderating,” the BMO Capital Markets note read. “But questions remain about margin upside from rising wages with labor availability an issue. Positively, pricing power is holding firm.”
Jordan Sadler, equity research analyst at KeyBanc Capital Markets, said that Welltower’s SHO portfolio recovery was “on a roll.”
“WELL’s 2Q21 report demonstrated the durability of the ongoing recovery in SHOP portfolio fundamentals, as the occupancy recovery accelerated through the quarter, pricing power returned, and expenses moderated further,” Sadler wrote. “This dynamic contributed to an 11% sequential ramp in same-store SHOP net operating income (NOI) and drove better-than-expected FFO for the quarter.”
And Green Street Advisor Senior Analyst Lukas Hartwich wrote that Welltower had posted “results that were slightly ahead of expectations” for the quarter, with recent moves teeing up future growth opportunities.
“The new news in the quarter was the REIT’s deepening partnership with Oakmont, a well-respected senior housing operator,” Hartwich wrote. “Importantly, the partnership will give Welltower exclusive access to Oakmont’s development pipeline.”
A barbell approach to senior housing
A key theme in Welltower’s latest earnings period was that the REIT has made some significant moves to position itself for the future, chief among them the deal with Atria and Holiday.
Of the 86 Holiday Retirement communities Welltower is acquiring, Mitra said the company has identified at least 10 “significant expansion opportunities which we expect will generate a double digit return on invested capital.” Five of the acquired communities are candidates for “better and higher uses” according to Mitra — and on at least two of them, the proceeds might be so significant that they can potentially offset much of the REIT’s plan to invest about $1.5 million to $2 million per community in CapEx for the portfolio. The portfolio also has an underwritten rent growth of 2.5% despite those plans.
“If we are successful in this effort, we will have a completely renovated portfolio at roughly our going-in basis, which will enhance our [internal rate of return] materially,” Mitra said.
Welltower’s leaders also touted Sunrise’s recent announcement that it would leave the UK market to focus on North America as a positive step forward. Welltower recently acquired a community in the Philadelphia metropolitan area that represents the REIT’s first acquisition initiative with Sunrise in several years.
Mississauga, Ontario-based Revera owns a majority stake in Sunrise, and Welltower is a 34% owner in the company.
Acquiring management of the 46 former Sunrise communities across the pond are Signature Senior Lifestyle and Care UK. Both companies inked new “RIDEA 3.0” management contracts with Welltower. In particular, Welltower’s leaders are hopeful that the new relationship with Care UK will drive more external growth and portfolio optimization opportunities.
More generally, Welltower takes a “barbell approach” to investing in senior housing properties.
“We want to be at a high price point [with] high-service products in high barriers-to-entry markets,” Mitra explained. “Or we want to be at the lower price point [with] low service.”
And that is an approach the company hopes to take in the U.K., as well.
“The barbell approach to portfolio construction that we have taken in the U.S., which we always aspired to be in the U.K., is beginning to take shape,” Mitra said.
Two other recent projects with growth potential for the REIT are the company’s new relationship with Chicago-based Pathway to Living and its newly expanded relationship with Oakmont.
“Fun fact, Oakmont is our first operator in our portfolio to return to the 90% occupancy mark, post-Covid — a reflection of Oakmont’s operating acumen and market strength,” Mitra said.
In total, the company has formed 50 new relationships with operators and developers since the beginning of the pandemic, and Mitra teased there are “a handful more in the works.” And with every new operator added to the company’s portfolio, Welltower is able to strengthen its data-collection and analytics capabilities.
“Needless to say, these relationships are a great foundation for significant capital deployment opportunities, as each one of them are attractive growth vehicles in their own right,” Mitra said.
Looking ahead, Welltower has “started Q3 with a bang,” with already about $230 million in gross investments and more on the way.
Future remains hazy
Though encouraged by Welltower’s progress, Mitra noted there are still some big unknowns that make predicting the future harder.
For one, the circulation of the delta coronavirus variant threatens to derail the senior living industry’s ongoing recovery, especially if case counts continue to surge and local officials reimpose mandates and restrictions that put a damper on tours or move-ins. So far, the company’s communities haven’t been subject to the kind of restrictions or lockdowns enacted last year.
While the delta variant is currently surging in the U.S., it tore through the U.K. earlier this year without much effect to Welltower’s senior housing holdings there.
“We have seen very little impact to the portfolio so far, as U.K. case counts more broadly appear to be decreasing rapidly after a recent spike,” Mitra said.
The REIT’s U.K. properties might give a preview of what’s in store for its communities in the U.S., according to Sadler.
“While the delta variant of Covid-19 could cause a further rise in cases, the experience within the Company’s U.K. portfolio suggests that vaccinated residents will remain protected,” he wrote in his investor note.
New supply and inventory growth is another potential challenge ahead, especially if the industry returns to sky-high levels of new construction as it had in previous years.
New inventory constrained occupancy growth on an industry-wide basis in the second quarter of this year, according to NIC MAP Vision data. However, new construction starts have declined since the onset of the pandemic. And Mitra thinks that in the years to come, “supply will chase demand instead of demand chasing supply, like you’ve seen in the last decade.”