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Despite “mediocre” bottom line results affected by a perfect storm of extraordinary labor, insurance and utility costs, Toledo, OH-based Welltower posted its strongest revenue growth since the pandemic began during the third quarter, CEO and Chief Investment Officer Shankh Mitra said Friday during a third-quarter earnings call.
That growth was highlighted by a Thursday announcement of real estate investment trust’s acquisition of four senior housing portfolios for $1.3 billion, as well as a long-term strategic partnership with Kisco Senior Living.
“Since pivoting to offense 13 months ago, Welltower is pleased to have executed on its value-driven investment thesis, largely through granular and off-market transactions completed at a significant discount to estimated replacement cost,” Mitra said, adding that he has observed a “meaningful uptick” in potential investment opportunities as seller motivation increases, coinciding with industry disruption by the COVID-19 delta variant and the challenging labor environment.
The seniors housing investment:
- The $580 million acquisition of a 14-property seniors housing portfolio — eight rental and six entrance fee communities in Bellevue, WA; Data Point, CA; and Alexandria, VA. Watermark Retirement Communities will manage the portfolio.
- The $475 million acquisition of nine seniors apartment communities.
- The $172 million acquisition of five seniors housing properties across the mid-Atlantic and southeastern United States.
- The $119 million acquisition of three seniors housing properties.
Welltower also announced a long-term strategic partnership with Kisco Senior Living that includes the groundbreaking on two senior living communities — The Carnegie at Washingtonian Center in Gaithersburg, MD, and phase two of The Cardinal at North Hills in Raleigh, NC — for a $325 million total investment.
“Welltower’s cutting-edge data analytics platform, combined with Kisco’s focus on the resident experience, will create a powerful platform to expand our existing partnership and improve the health and wellness of our residents,” Kisco Senior Living President and CEO Andy Kohlberg said in a statement.
Welltower and Kisco’s existing portfolio surpassed pre-COVID occupancy levels, reaching 97% in September.
The REIT completed $2.2 billion of pro rata gross investments during the third quarter — $4.1 billion year to date — including the previously announced acquisition of a Holiday Retirement portfolio of 85 seniors living properties for $1.58 billion, for which Atria Senior Living assumed operations.
Also during the third quarter, Welltower acquired eight senior living communities previously operated by Holiday, and now Atria, for $115 million. The REIT also acquired four senior living communities for $44 million.
As previously announced in August, Welltower completed the acquisition of six senior living communities in Ohio and Tennessee for $141 million, and an additional property in Wisconsin for $19 million. These seven communities will be operated by StoryPoint under a triple-net master lease.
With almost all residents in the communities of its senior living portfolio vaccinated against COVID-19, and staff vaccination rates approaching 90%, Mitra said that prospective residents and families “recognized that our communities are much safer environments than alternative settings.”
Virtually all of Welltower’s communities are accepting new residents, resulting in increased move-in activity and occupancy rates. Spot occupancy for August was 75.9%, up from 75.2% in July.
Seniors housing operating portfolio expenses were significantly higher than expected in the third quarter, according to the REIT. The rates were driven by higher seasonal utility costs and elevated labor costs resulting from the use of contract labor to the tune of $19 million due to increasing occupancy and a challenging labor market.
Third quarter property-level pandemic expenses totaled $1 million in the third quarter — $25 million year to date — compared with $17 million in third quarter of 2020 and $64 million for the first nine months of 2020. Those costs included higher labor expenses, coupled with expenditures related to personal protective equipment and other supplies.
Seniors housing operating portfolio occupancy increased 210 basis points (2.1%) during the third quarter, to 76.7%. During the quarter, the U.S. seniors housing operating portfolio reported spot occupancy gains of 260 basis points (2.6%).
Move-in activity remains “robust,” Welltower said, increasing 9% in the third quarter compared with the second quarter. August and September move-ins “meaningfully exceeded” those in 2019, despite a national rise in COVID-19 cases.
Chief Operating Officer John Burkart said that occupancy improvement reflects the needs-based nature of senior living and a recognition that Welltower portfolio communities are “active, safe and social,” which he called key elements to quality senior living.
Rental rates across its asset classes remained healthy in the third quarter, according to the REIT, which expects rate growth to accelerate in 2022. Mitra said that the industry, overall, is talking about substantial rate increases.
Increased labor costs during the quarter were driven by a temporary labor shortage affecting virtually all industries, Burkart said. Increased wages, use of overtime and agency labor, and bonuses were necessary to meet the increased demand for senior housing.
Although “extraordinary labor expenses” are starting to abate, Burkart said he expects that the REIT will continue to see wage pressures for several months. Mitra added that he believes the use of agency labor will dissipate in the future.