Since last March, we have been wondering what happened to Welltower’s large sale of a prominent seniors housing operating portfolio of western senior living properties. It would have been the largest deal of the year so far at the original $740 million price, but it fell apart, as we assume many deals did once the coronavirus pandemic unleashed its terror.
We had heard through the grapevine that it was still in the market, but it wasn’t until late last week that we saw in some local publications out West that a few of the pieces of the portfolio were closed, according to the local real estate filings, including identifying Merrill Gardens as the operator. That would mean the portfolio has sold.
Although we have not been able to confirm it, these local news reports described the 10-property portfolio with 1,423 units and named AEW Capital Management as the buyer. We believe there may have been an additional community involved or additions at one or more of the existing properties to take the total to approximately 1,500 units.
Word on the street is that the final price was just over $700 million, which would put the value at close to $465,000 per unit. Newmark Knight Frank confirmed that it represented Welltower and sourced the debt financing for the acquisition with a life insurance company, but didn’t provide any additional details. We hope to get more information once Welltower makes the official announcement, perhaps on the upcoming third quarter earnings call.
This portfolio is relatively young, and per Welltower’s February announcement, pre-COVID the average occupancy was 97% and net operating income was $36.7 million in 2019, which is a great position to be in going into a pandemic and recession. Based on the 2019 numbers, that would have put the pricing pre-COVID at a cap rate slightly below 5%. But we also heard that occupancy dipped below 90% once the pandemic set in, a percentage drop that seems to be about what we have seen around the country, which obviously reduced EBITDA somewhat materially. This means that with only a 5% drop in price, the cap rate at closing had to be sub-5%, and maybe sub-4.5% on in-place cash flow, maybe even lower.
We are actually shocked they were able to still command such a high price and low cap rate for a large portfolio in the middle of the pandemic, so kudos to all involved. We just didn’t think it could happen, and if it did, we would have expected the price would be cut by more than 5%.
The transaction with AEW further cements its relationship with Merrill Gardens, which has recently done a few other portfolio transactions with the PE firm. On its last several earnings calls, Welltower has been stating that it is always open to selling assets, even well-performing ones, if the unit price is high and the cap rate low, and if they can replace the assets with ones at higher cap rates and lower per-unit prices. It’s called buy low and sell high, or as they like to say, “value investing.” This is also part of their strategy to buy debt secured by high-quality properties, which was recently announced as well. We expect to see some of that over the next several quarters.
We have not heard of any other pending transactions this large, so this deal most likely will be the largest of the year. Quite an achievement in this environment, and it just may provide the market with some needed confidence to make some major investments again. It looks like some of that PE dry powder we have been hearing about has finally been put to use, which is a very healthy sign for the sector. Perhaps the deal volume will finally pick up in the fourth quarter. We certainly hope so.