With $1.2 billion in investments year-to-date and a near-term $1.5 billion pipeline, Welltower is off to a historically active start this year — and the company’s “coiled spring” recovery has only just begun.
Senior housing revenue and occupancy increased in the first quarter of 2022, and at the same time, the Toledo, Ohio-based real estate investment trust (REIT) is deepening its ties to several of its operating partners and bulking up its senior housing portfolio.
Earlier this month, Welltower made a near $5 billion cash offer for Healthcare Realty Trust Inc. (NYSE: HR), which was ultimately rejected by the medical office REIT. Even so, CEO Shankh Mitra said there will be more acquisitions yet to come as the company gears up for the remainder of 2022, which “will be one of the best years in the company’s history from an acquisition point,” he said.
Driving that view is the fact that Welltower has seen a “massive shift” in the financing market in the last 30 days, “with property level leverage down 15 points, cost doubling and interest only disappearing from the market.”
That has started to have a “tectonic impact” on asset pricing in Welltower’s favor, he said.
“To put it bluntly, I have not been this excited about our acquisition prospects since the fourth quarter of 2020,” Mitra said.
At the same time, the company expects to see its senior housing operating (SHO) portfolio NOI grow by approximately 15% to 20% in the second quarter of 2022.
All of that gives the company’s leaders that its “coiled spring” is starting to unfurl.
“We’ve started to see the spring release,” Welltower CFO Tim McHugh said.
However, the company stopped short of providing full-year guidance for 2022, with Mitra noting that the Covid-19 pandemic and its pressures are still clouding visibility into the future.
Welltower stock closed at $86.99 per share, up 1.39% on the day.
Occupancy and resident rates in the REIT’s SHO portfolio inflected upward in the first quarter of 2022, giving the company’s leaders confidence of an ongoing recovery.
SHO revenue grew 11.2% in the first quarter of 2022 compared to the same quarter one year ago, led by the company’s U.S. properties,, according to COO John Burkart.
At 76.4%, occupancy is still far below pre-Covid levels and all-time peak levels.
Higher rental rates and occupancy coupled with improving margins helped push the company’s SHO NOI 18.4% higher in the first quarter. And the company sees more growth on the way.
“Our operators continue to report very strong demand with traffic above 2019 levels, which bodes well for the peak sales season ahead,” Burkart said on the call.
Welltower’s projected SHO NOI of 15% to 20% in 2Q22 assumes occupancy growth of 500 basis points year-over-year and steady rate increases setting the stage for a multi-year recovery, according to CFO Tim McHugh. On the triple-net side, the company expects NOI growth of 7% to 8% in 2Q22.
In the meantime, the company has steadily allocated capital to “distressed, under-operated and often initially diluted properties, along with high quality development projects,” McHugh said.
“While this capital allocation has the effect of offsetting some of our core growth today, it will be sustainably amplified in the years to come,” he added. “In short, we’re working hard to keep that spring coiled, even as we start to realize the power of the earnings growth it can drive.”
Expenses grew at a rate of 9.5% in the first quarter of the year, but the expenses per occupied room – a “more insightful expense metric,” McHugh said – grew at a year-over-year rate of only 3%, which was the lowest since 2017.
Analysts who covered the company’s latest earnings period noted that the results were in line with expectations.
The company is showing “continued progress towards normalizing the operating and financial results of the portfolio,” wrote Stifel Analyst Stephen Manaker in a May 10 note to investors.
BMO Capital Markets analysts Juan Sanabria and John Kim noted that “demand remains robust, with expected occupancy above BMO Research expectations.”
“We remain positive on pricing power helping mitigate senior housing cost pressure with demand accelerating and limited supply,” the analysts’ May 10 note reads. “We see demand as defensive and well-placed in the event of a recession.”
Active acquisition year
Mitra’s prediction of a big acquisition year for the REIT in 2022 was preceded by a flurry of deals totaling about $700 million, which grew the company’s relationship with Oakmont Management Group, Cogir Management and Treplus Communities.
The REIT in March also expanded its strategic partnership with StoryPoint Senior Living with a $548 million acquisition of 33 communities.
As Welltower works to assemble a roster of “best-in-class operators” Burkart said the company will connect them with its operating platform to “greatly simplify the business for our top operators, enabling them to focus on their core strength, increasing their effectiveness and efficiency and driving increased total returns.”
One shining jewel in the company’s crown is Oakmont Management Group, which was among the first operators in the company’s SHO portfolio to hit 90% occupancy after the pandemic.
Welltower’s latest acquisition with Oakmont includes seven properties in “extraordinary locations in California,” according to Mitra. Three of the seven properties in the deal are continuing care retirement communities (CCRCs) that Oakmont previously developed and operated.
One acquisition Welltower did not make in the first quarter of 2022 was Healthcare Realty Trust, which rejected the company’s initial offer, Wall Street Journal was first to report.
On Wednesday’s call, Mitra confirmed Welltower made a bid for the company, and noted that he was “genuinely disappointed that HR’s board and management did not engage with us,” as Welltower’s offer “provided better value to HR shareholders than [Healthcare Trust of America’s] merger.”
But, he added that Welltower would not pursue a more hostile company takeover, either.
“I will guarantee you that we will not go hostile, that is not how we do business,” Mitra said.
Welltower’s short-term pipeline – which Mitra defined as transactions already under contract – totals about $1.5 billion in 20 different markets.
The REIT also has what it refers to as a “shadow pipeline,” or deals that are currently being negotiated. As for future deals in that vein, Mitra feels as though Welltower has the power to look for the best possible deals.
“While we may not eventually succeed in convincing sellers to agree to our price, please note that we don’t need any given transaction,” Mitra said. “The price is the price.”
In general, the company’s array of acquisition targets in various property types has expanded substantially, “with many owners of healthcare real estate facing pressure following a shift in macroeconomic conditions as well as over two years of Covid-19 and labor market challenges,” the company noted in earnings filings.
And looking ahead, Mitra takes the view that the company’s growth was more marathon than sprint.
“We have taken a lot of shots and suffered a lot of pain over the course of many years to finally get to the point where we believe we’re primed for long-term compounding,” Mitra said.
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