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Welltower Has Pipeline to Deploy $10B In Next Few Years, Near-Term Outlook Uncertain

Top executives with Welltower (NYSE: WELL) are not offering predictions about recovery timelines, citing uncertainties around the Covid-19 pandemic. But, while wary about near-term prospects, they are making moves to grow in senior housing and have a large pipeline in place to deploy capital as the pandemic passes.

The Toledo, Ohio-based real estate investment trust (REIT) expects it could shed as much as 325 basis points of senior housing operating (SHO) occupancy in the first quarter of 2021. Occupancy for the company’s SHO portfolio sat at 74.4% as of Feb. 5.

Uncertainty surrounding future occupancy losses, combined with the virus’s unpredictable growth pattern and the still-unclear pace of vaccine rollouts have resulted in limited visibility on expected conditions beyond the next 90 days. As a result, the company only provided financial guidance for the first quarter of 2021 during its Wednesday earnings call.

Despite the near-term pressure, Welltower’s leaders also made several moves last year and early this year that they believe will help capture future demand.

Since the start of the fourth quarter in 2020, Welltower has completed $657 million in acquisitions — mostly senior housing — and $781 million in dispositions at prices that are favorable to the REIT.

The company has also worked in the past year to deepen its relationships with senior living operators including Balfour Senior Living, Brandywine Senior Living, Clover Management, Cogir, Frontier Management, Kisco Senior Living, Oakmont Senior Living and StoryPoint Senior Living.

“We have executed more partnerships and pipeline deals in the last nine months than over five preceding years combined,” Welltower CEO Shankh Mitra said Wednesday during the company’s 4Q20 earnings call with investors and analysts. “We expect to deploy [more than] $10 billion dollars of capital in these opportunities in the next few years.”

For the fourth quarter of 2020, Welltower reported normalized funds from operations (FFO) of $0.84 per share, beating analysts’ expectations by six cents.

Welltower is among the largest senior housing companies in the U.S. with 804 properties in its triple-net and SHO portfolios as of the fourth quarter of 2020.

Analysts look ahead

Although the company’s fourth-quarter earnings results surpassed analysts’ expectations, Welltower’s immediate outlook is mixed.

In their latest investor notes, analysts agreed the company could start seeing more positive operational trends in the second half of 2021, and that Welltower’s estimate of shedding up to 325 basis points of occupancy in the first quarter of 2021 is likely conservative. But, given the state of the pandemic, there are still some unknowns that could complicate the REIT’s recovery in the near term.

“We suspect investment activity, along with the potential for improving operating conditions, could point to the beginning of a recovery for WELL in 2H21, though this likely remains hinged on the direction of the pandemic,” wrote Jordan Sadler, equity research analyst at KeyBanc Capital Markets in a Feb. 9 investor note.

That view was shared by RBC Capital Markets Director Michael Carroll, who noted in an investor note that ongoing pressure in Welltower’s SHO portfolio will likely persist, at least in the near-term.

“However, we remain optimistic on the seniors housing recovery, and currently expect occupancy will begin to rebuild in 2H21,” Carroll wrote.

Green Street Advisors Senior Analyst Lukas Hartwich highlighted Welltower’s dispositions and acquisitions in the fourth quarter of 2020, and noted the REIT is making positive progress growing its senior housing platform.

“The REIT had another active quarter, completing $500 million in acquisitions of mostly unstabilized senior housing assets and disposing of $675 million of mostly [medical office buildings],” Hartwich wrote in his note to investors. “From a cost of capital perspective, the shift towards senior housing (trades at a slight [gross asset value] premium) over MOBs (neutral) makes sense.”

Welltower is also making good progress on its vaccination clinics and new Covid-19 cases are falling, which bodes well for the future, according to BMO Capital Markets Analyst Juan Sanabria. But there are still unknowns that could affect that progress, such as the emergence of new Covid-19 genetic variants that may complicate vaccination efforts.

Welltower’s share value increased nearly 2.7%, hitting $64.83 by the time the markets closed Wednesday.

Operating fundamentals

Welltower’s occupancy losses accelerated in the fourth quarter of 2020 as Covid-19 cases again spiked throughout the U.S. and state governments renewed their shelter-in-place orders.

In January, the company’s move-in totals sat at about 50% of pre-Covid levels. That is a marked difference from the summer months in 2020, when the company’s move-ins trended closer to 70% of pre-Covid levels. But based on the company’s rate of move-outs in the fourth quarter of 2020, Welltower would have added between 90 and 110 basis points of occupancy if move-ins were still at 2019 levels.

“Hopefully that gives you an idea of [how move-ins might look] if demand really comes back to pre-Covid levels in the short-term,” Welltower CFO Tim McHugh said. “And also, where we need them to get to just see some stabilization in the portfolio.”

On the vaccine front, the company has made good progress. As of Feb. 8, more than 90% of the company’s SHO portfolio assisted living and memory care communities had completed their first vaccination clinic, with most residents opting in to get their shots. Since mid-January, Covid-19 cases have declined by about 55% within Welltower’s communities.

Although that likely won’t translate into meaningful results for Welltower’s bottom line in the short-term, it could help fuel a recovery in the second half of 2021, Mitra said.

During the fourth quarter of 2020, Welltower collected about 97% of the rent owed in its triple-net senior housing portfolio, which is made up primarily of senior housing and post-acute care providers. Welltower also received about $9 million through the Provider Relief Fund during that time, and the company has received approximately $34 million of total Provider Relief Funds so far this year.

Same-store cash net operating income (NOI) for the REIT’s SHO portfolio declined by 33.8% in the fourth quarter of 2020 compared to the same period in 2019, and by 11.3% sequentially between the third and fourth quarters of last year. For the company’s triple-net portfolio, same-store cash NOI declined 2.7% in the fourth quarter of 2020 compared with the prior year.

The company also saw a 50 basis point increase in operating costs during the fourth quarter of last year as Covid-19 cases spiked again. At the same time, the company’s operating margins declined sequentially by 220 basis points to 22.3% in 4Q20.

Welltower is working with operating partners to bring down expenses and grow occupancy. Some operating partners have said that they have implemented more efficient staffing practices that could remain in place after the pandemic; however, increased expenses in other areas could offset potential labor-related margin gains. But, a rise in occupancy alone in the coming years could expand senior housing margins potentially above pre-pandemic levels.

“As industry occupancies lift up over the next three to five years, I think you are going to see margins move above where they were pre-pandemic, even without those operating efficiencies being put in the model,” McHugh said.

Year of deals

Welltower had a busy year of property transactions in 2020, exemplified by the fact that the REIT managed to sell $1 billion worth of assets in just 43 days at the beginning of the pandemic — a company record, Mitra said. And the REIT is looking to continue that dealmaking fervor this year as more opportunities arise.

On Tuesday, Welltower announced it had acquired from Healthpeak Properties (NYSE: PEAK) a 790-unit portfolio of senior housing communities operated by Harbor Retirement Associates (HRA) for $132 million subsequent to the end of the fourth quarter of 2020. HRA, a newcomer to Welltower’s senior housing portfolio, will continuing to operate the communities under a new triple-net lease.

In the fourth quarter of 2020, the REIT acquired for $89 million a portfolio of 11 assisted living and memory care communities located throughout the Midwest. The communities will be operated by StoryPoint Senior Living under a new triple-net master lease with Welltower.

Welltower also in the quarter expanded its RIDEA relationship with StoryPoint through the acquisition of four additional communities in the Midwest, representing an investment of $147 million at a sale price of approximately $271,000 per unit.

Mitra added that the company is buying communities in core markets such as New Jersey, Seattle and California for less than $200,000 per unit, where historic replacement cost was above $400,000 or $500,000 per unit.

“We’re executing on some very significant discounts or replacement cost opportunities,” he said.

On the dispositions front, Welltower sold a six-property portfolio of SHO properties operated by Northbridge Companies for $200 million. The buyers were a joint venture of Boston-based private equity real estate firm Taurus Investment Holdings and Northbridge Asset Management.

Looking ahead, Mitra believes 2021 will be another year of growth for the REIT, which as of Feb. 8 had about $2.1 billion in cash on hand and another $3 billion in its credit facility. He did not disclose much specific information about the $10 billion pipeline of opportunities that the firm has in place, but the REIT is in growth mode.

“Our acquisition pipeline has grown meaningfully,” Mitra said. “And as I sit here today, I’m optimistic this year is shaping up to be a year of net acquisition.”

The post Welltower Has Pipeline to Deploy $10B In Next Few Years, Near-Term Outlook Uncertain appeared first on Senior Housing News.

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