Welltower continues to double down on its seniors housing acquisition strategy, planning to spend another $1.3 billion to purchase four separate portfolios total 31 properties, as revealed in its Q3 earnings report. The news also came after Healthpeak Properties announced in its own third quarter earnings that it had completed its exit from the seniors housing industry. So as one “Big Three” REIT leaves, another cements its status as number one.
The largest of the deals was the $580 million acquisition of eight rental and six entrance-fee communities affluent markets in Washington, California and Virginia. It appears this is The Fountains portfolio, owned by NorthStar Healthcare Income (sponsored by DigitalBridge), which NorthStar acquired in June 2015 for $639.3 million, or $175,800 per unit (just about WELL’s average acquisition value in the last year). That deal included 15 properties, so one was not included in this current sale. NorthStar acquired the six-entrance fee CCRCs directly and purchased the rental CCRCs through a joint venture with The Freshwater Group (a 3% minority investor).
Freshwater’s affiliate Watermark Retirement Communities will be retained to manage the portfolio under a highly aligned RIDEA 3.0 management agreement, which we heard WELL Co-Head of U.S. Investments Nikhil Chaudri talk about during one of the NIC sessions. The management structure, which has already been deployed among other WELL operating relationships, varies the management based on different levels of cash flow and different levels of growth. The price supposedly represents a 40% discount to the estimated replacement cost, and the transaction is expected to generate a high single-digit unlevered IRR. We understand that CS Capital Advisors represented NorthStar in the sale.
Next was the $475 million acquisition of nine senior apartment communities, to be operated by an existing, undisclosed Welltower partner. The “Class-A” portfolio is 100% private pay and is located in attractive markets. Minimal services and labor needs should also make the senior apartment subsector an attractive investment these days.
Welltower spent another $172 million on five recently developed seniors housing communities in the Mid-Atlantic and Southeast. The operator/developer will be retained to manage the portfolio under an incentivized contract. Plus, the relationship should continue to prove fruitful for both parties, as WELL initiated a long-term, exclusive strategic partnership agreement to develop high-quality seniors housing properties across the Southeast.
Finally, for the acquisitions, Welltower acquired three senior housing properties in the Midwest for $119 million, all to be operated by New Perspective under one of those RIDEA 3.0 agreements. The portfolio has been recently developed, with an average age of two years, and there are other development opportunities.
The four deals are subject to customary closing conditions, but if they close, they would bring the WELL’s total pro rata gross investments to $5.6 billion since October 2020. That is across 49 transactions, 228 outpatient medical or seniors housing properties and 24,642 seniors housing units. The properties were also acquired at an initial yield of 6.2% and a year-three yield of approximately 8.4%, plus an average per-unit price of $175,000, or well below the replacement value of the types of properties Welltower has targeted. It helps sitting on a pile of cash and credit; $4.0 billion in cash, cash equivalents and available capacity under its line of credit, so to speak.
Welltower also reported some really good occupancy news. Across its entire seniors housing portfolio, occupancy rose 60 basis points in July, 80 basis points in August and another 80 bps in September. But across just its U.S. portfolio, those monthly rises were 80 bps, 80 bps and 100 bps, respectively. That kind of accelerating growth is greatly reassuring as we head into the holidays and flu season. WELL’s Canadian portfolio was the real drag during the quarter, with just a 30-basis point increase in census in September, while the United Kingdom portfolio rose by a whopping 120 basis points at the end of the quarter.
Move outs, as a percentage of 2019 move outs across the SHOP portfolio, creeped up during the quarter from 90% in July and August to 95% in September (from a low of 74% in April 2021), which isn’t great, but the percentage of move-ins compared with 2019 move ins bounced from 99% in July to 112% in August and back down to 104% in September, the two highest percentages since the pandemic began.
Census growth is great, but so is revenue growth, and same store REVPOR rose by 2.2% during the third quarter. But same-store, pro-rata expenses also rose in the quarter due to “higher seasonal utility costs and a rise in labor expenses resulting from an increase in the utilization of contract labor.” Plus, the REIT acknowledged that expenses should stay high in the near-term because of its reliance on contract and third-party agency staff to continue to fill units.
As such, total portfolio same store NOI declined 5.3% year over year, and 7.1% from the previous quarter. The SHOP portfolio saw the biggest decrease, dropping 14.9% year over year and 17.6% from Q2, while the seniors housing triple-net properties lost 0.8% in NOI year over year and 2.7% from the previous quarter. Its SNF portfolio NOI fell 1.0% from Q3:20 and 1.1% from Q2:21. And, not surprisingly, the same store SHOP operating margin was 21.0% in Q3:21, or 50 bps lower than Q2:21 (despite the occupancy increase) and well below Q3:20’s 24.6%. That’s what labor costs will do, and we’re sure other earnings reports will reveal the same this week.
WELL’s lease coverage across its seniors housing triple-net portfolio also continued to deteriorate, with the EBITDAR coverage dropping to 0.83x in Q3 from 0.89x in Q2, based on trailing-12-month figures ending with the quarter before the reported quarter. The REIT’s SNFs and other post-acute facilities also saw rent coverage fall slightly from 1.29x in Q2 to 1.25x in Q3. This winter may not be pretty.
