First, we have to applaud Welltower for being very transparent with regard to what is happening with its customers, specifically its seniors housing operating portfolio (SHOP) customers. This is very important, not only for REIT investors, but for the entire seniors housing community to better understand how this COVID-19 pandemic is impacting business, but also the general economic deterioration.
Last month, Welltower disclosed that its SHOP portfolio, which includes 612 properties with more than 73,000 units, had seen 20-basis point declines in occupancy every two weeks in March, that costs were rising and that tours and move-ins were starting to decline. This was not unexpected, but the decline has accelerated.
For just the week ended April 3rd, occupancy declined by another 60 basis points to 84.8%, and fell by another 60 basis points the following week to 84.2%. They expect this decrease in occupancy to continue as a result of restrictive move-in policies that will most likely expand to additional states. New York, New Jersey, Massachusetts and Washington have seen the most significant impact.
Interestingly, the SHOP portfolio’s operating expenses declined slightly in the first two months of February, but then they got hit with $7 million of unanticipated expenses to deal with the pandemic in March. This was driven by higher labor costs and increased expenses for PPE and other supplies. Obviously, these were expected. While there may be some cost savings associated with the decline in occupancy, management believes that overall operating expenses will rise by 5% above their original budget for the course of the pandemic. Again, no surprise here.
Probably because the full impact of the pandemic was not really known until the last two weeks of March, Welltower was able to get $400 million of acquisitions closed with a blended yield of 5.6%, and $781 million of pro rata dispositions. We suspect second quarter acquisitions will remain as slow as the first quarter, but yields on acquisitions may have to start rising given what has happened to stock values and dividend yields, plus the widening of debt spreads.
As a result of all this, Welltower has withdrawn all components of its 2020 earnings guidance, which Ventas did last month. Oddly, Welltower’s share price rose after the announcement, so investors do not seem concerned, perhaps because they expected it. We believe this was the prudent thing to do, and others may follow, especially if the shut-down continues past May. While it may be painful to provide limited, periodic results on just a part of its business, investors will not be able to complain they were blindsided when second quarter results are announced. In today’s world, transparency is key.
In other news, congratulations to Shankh Mitra on his election to Vice Chairman and COO of Welltower, while also keeping his role as Chief Investment Officer. In addition, CFO Tim McHugh has been promoted to Executive Vice President, from Senior Vice President.
