Welltower’s (NYSE: WELL) senior housing portfolio performance continued to pace strong earnings in the second quarter of 2019 — a period marked by a flurry of transactions.
Leadership of the Toledo, Ohio-based real estate investment trust put those deals in greater context during Wednesday’s earnings call. They were approached by a buyer who offered attractive terms for the Benchmark Senior Living portfolio, resulting in the $1.8 billion sale announced this week. They also shed some light on the decision to transition 20 Silverado memory care communities to a new operator, and weighed in on their position on building versus buying senior housing, given recently inked development partnerships.
In terms of the financial results for the quarter, Welltower reported total revenue of $1.32 billion, a 14.7% increase over Q2 2018. Rental income grew 10.1% to $385.6 million.
The strong performance allowed Welltower to report normalized funds from operations (FFO) of $1.05 per share, up from $1 per share a year prior.
Welltower’s strong first half of 2019 come against the backdrop of persistent headwinds across the senior housing landscape. A supply glut in certain markets has placed pressures on occupancy. The occupancy rate for U.S. senior housing communities declined slightly in the second quarter, according to data from the National Investment Center for Seniors Housing & Care (NIC).
Last week, executives with another major senior housing REIT — Chicago-based Ventas — acknowledged that supply and operational headwinds in its senior housing operating portfolio (SHOP) tempered an otherwise solid Q2 earnings report. Welltower leaders noted it is dealing with the same upward pressures as other REITs, but that a markedly revamped asset portfolio is allowing for growth that is exceeding expectations.
“These results demonstrate once again the resilience of owning the highest quality senior housing and medical office portfolio in the industry, as well as a management team that had the conviction to make a series of tough decisions over the past few years that are clearly benefiting our shareholders today,” CEO Tom DeRosa said during an earnings call on Thursday.
Senior housing continues to outperform
Welltower’s overall same-store net operating income (NOI) increased 3.1% in Q2, led by 3.7% growth in its seniors housing triple-net portfolio (NNN) and a 3.1% increase in seniors housing operating portfolio (SHOP) growth. That performance was driven by 4.1% revenue growth, while same-store SHOP NOI grew 3.3% year-over-year.
Chief Investment Officer Shankh Mitra called these the strongest base fundamentals he has seen in years.
“We came into this year expecting a slow and steady recovery in our SHOP segment,” he said. “However, I have to admit, for two quarters in a row, our SHOP results have exceeded expectations.”
SHOP NOI growth has been consistent and broad-based, and Welltower has seen stronger performance in assisted living versus independent living and in major markets over smaller markets.
Sequential revenue per occupied room (RevPOR), meanwhile, increased 3.3% and outpaced compensation per occupied room by 50 basis points — the first time in five years that has happened.
On the expense side, Welltower’s UK properties have seen an uptick in contract labor and benefits as operators chase occupancy increases, while insurance costs are applying pressure to growth across the portfolio, and will continue to do so moving forward.
A packed transaction period
While Welltower was excited about the earnings, executives saved their most effusive praise for its second quarter transaction activity. The REIT completed $2.4 billion of proportionate real estate acquisitions across eight separate transactions in the quarter — at a blended yield of 5.4% — along with $152 million in development funding with an expected stabilized yield of 7.2%.
Welltower announced a blizzard of transactions on Wednesday, highlighted by its $1.8 billion disposition of 48 senior housing communities operated by Waltham, Massachusetts-based Benchmark Senior Living.
Benchmark declined to name the buyer in a statement to Senior Housing News, but Mitra called the deal a win-win for all parties. Benchmark and the new ownership will have an opportunity to drive rate growth while reinvesting in the portfolio. Welltower, meanwhile sold the portfolio at a price that generated solid returns for shareholders and allows the REIT to use the sale proceeds to bringing leverage back in-line with 2019 guidance.
“We received an offer we could not refuse,” Mitra said.
Welltower expanded its relationship with Jupiter, Florida-based Discovery Senior Living via a $237 million acquisition of three senior housing campuses in the Dallas-Fort Worth and Texas markets. It also signed an exclusive, $1 billion development deal with Discovery.
Welltower’s other senior housing activity included the $237 million acquisition of a 6-property Balfour Senior Living portfolio, and exclusivity on Balfour’s future acquisition and development pipeline.
The development options with Discovery and Balfour are not a sign that Welltower prefers building new communities over buying them, Mitra said. It is purely dependent on the pricing, as each comes with a set of risks, and Welltower ultimately considers the rate of return in its decision.
Mitra believes there are ample opportunities for Welltower to be strategic with its development and acquisition options, and noted the latter may provide a wider range of opportunity moving forward.
“There has been a lot of overbuilding in the market by people who are unfamiliar with the space and its intensive operational component,” he said.
The second quarter also saw Welltower enter into a new RIDEA relationship with Buffalo, New York-based Clover Management, and the REIT purchased the remaining 66% interest in a five-property Sunrise Senior Living portfolio.
These deals epitomized the work Welltower has done to reshape its senior housing portfolio, Mitra said. Whether through acquisitions, entering into operating partnerships or inking development deals, the REIT is looking to strategically add or remove assets from its ledger by studying what he calls “micromarkets.” Welltower is prioritizing the best locations and demographic trends in its target markets, and using those trends to predict where demand will be over the next 5-10 years.
“Markets and submarkets do not tell the whole story,” he said.
Welltower also offered context behind its decision in June to transition management of 20 memory care properties from Silverado to Frontier Management. The majority of those properties — 11 — are located in Texas, with the remainder spread across Arizona, Illinois, Utah and Wisconsin. But the properties were about two-thirds occupied when the deal was announced, according to Welltower.
Welltower believed that Frontier had the necessary expertise to effect a turnaround, raise occupancy and increase cash flow, Mitra said. Silverado, meanwhile, can focus on driving operations and revenues in its core California portfolio.
“We’re a performance-driven organization,” he said.
Analyst reaction to Welltower’s Q2 earnings varied. Its SHOP portfolio — which accounts for 50% of its total assets — continues to outperform the industry due to a favorable supply backdrop, Green Street Advisors Senior Analyst Lukas Hartwich said in a note to investors.
Conversely, BMO Capital Markets Managing Director John Kim was cautiously optimistic in his analysis. Kim called Welltower’s second quarter performance a mixed bag, beating consensus on normalized FFO by $0.01 and supported by the strong same-store cash NOI growth.
Kim’s optimism was tempered, however, by the Silverado-Frontier transitions, the removal of 47 assets from its SHOP same-store pool, and by Welltower’s lowering of full year 2019 FFO guidance by 0.6% to $4.15 at the midpoint.
Welltower stock closed trading Thursday up 0.7%, to $83.70 per share.
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