We figured that Welltower’s seniors housing operating portfolio (SHOP) would continue to improve after the second quarter, but let’s just say the improvement was better than we thought it would be, and probably better than most everyone else thought as well. On a same-community basis, SHOP occupancy surged by 120 basis points sequentially to 81.7%, and by 220 basis points year over year. The always-strong third quarter was good to them.
Occupancy, however, was not the highlight. Same-community SHOP revenues increased year over year by 9.8% while operating expenses increased by just 5.1%. It makes sense that the spread between RevPOR and ExPOR should widen as census grows above 80%. This resulted in a 26.1% year-over-year increase in net operating income for the same-community SHOP portfolio. Shazam! Same-community RevPOR increased 6.9% year over year, which reflects solid rate growth.
And with expenses getting under control, especially with labor, which increased by 5.4% over the past 12 months, the operating margin jumped by 330 basis points in the past year to 25.6%. Management is still not happy with that margin and believes that as census continues to move forward, the incremental cash flow will be at a very high margin, which it should be. And we are glad they are not declaring victory. All this news initially pushed Welltower’s share price up by 4.6% before settling down a bit. It also helped to push most of the other healthcare REIT share prices up.
The company has also been on an aggressive acquisition spurt, which has continued into the fourth quarter with $900 million closed in October and another $1 billion expected to be closed soon. Management has bumped up full year 2023 earnings guidance again and the confidence level was high, even though they acknowledged they had more work to do.
An interesting comment came on the earnings call, when CEO Shankh Mitra said that operators are calling from everywhere to join the Welltower team. That is not what we have heard, and we have actually heard that some operator “partners” are not happy with Shankh. Is it sour grapes, or legitimate issues? Most likely a little bit of both. Shareholders don’t care as long as the financial performance improves and the share price rises.
