There were no surprises in Welltower’s fourth quarter and full-year 2021 earnings report, which we suppose is a good thing. Could the seniors housing portfolio be performing better? Yes, but so could everyone else’s portfolio.
The U.S. seniors housing owned portfolio (SHOP) has seen a slowdown in census increase, with no change in December, which followed a 50-bp rise in November and 30-bp increase in October. That results in 80 basis points of census increase in three months, compared with 260 bp in the third quarter previous and 280 bps in the second quarter. While there is some seasonality in that fourth quarter number, we also may have seen the end of the “post-lockdown” boost, or the so-called pent-up demand. Management stated that January saw a 20-basis point decline, which is typical for the first quarter, which in seniors housing has always been a down quarter for census.
Management also stated that they believe occupancy in 2022 will increase by a little more than 400 basis points compared with 2021. With the total seniors housing portfolio posting a fourth quarter average of 76.3%, that would put them just over 80% by the end of 2022. If they could repeat that in 2023, they would get close to 85% by early 2024. But an 800-basis point increase in two years can put a lot of stress on operations, particularly on labor. According to one survey late last year, 58% of assisted living providers had to limit new admissions because of labor shortages; for skilled nursing, it was 78% of providers. If this is not fixed, getting to a realistic stabilized census on a national basis may take longer than our October 2020 prediction of 2024 to 2025 to get back to normal.
Despite occupancy being at its highest level of 2021 in the fourth quarter, same community net operating income declined by 4.7% from the third quarter and by 9.3% from the fourth quarter of 2020, when census declines were about to bottom out. The culprit, of course, was labor, with compensation expenses increasing 5.1% sequentially and 12.7% year over year. Those are big increases when in many areas, market rents are below in-place rents because of competition for residents. The labor culprit was also agency expenses, which apparently could be up to six times the rate for a full-time employee. They are assuming a 10% decline in agency costs in the first quarter compared with the fourth quarter, and perhaps more after that, which combined with the forecasted 400-basis point increase in census could result in a powerful increase in net operating income for the REIT. It can’t happen soon enough.
During the earnings call, there was one very interesting question, with the answer more interesting. The CEO, Shankh Mitra, was asked how many high-quality operators there were in the U.S. with whom Welltower had no relationship. He said two, and they are talking with one of them. He said they want to go deep, not broad, which means either they are not looking to expand their operator inventory, or they don’t think what they see is worth the effort. While we believe his number is low, it is quite a statement on the quality out there.
He was also asked whether he thought there would be cap rate compression this year. He said no, especially with the inflation increases we have seen and with the expected increases in interest rates during the course of this year. We completely agree, despite the still extraordinary demand for senior care assets in the acquisition market today, and the abundant liquidity.
