Welltower Chairman and CEO Tom DeRosa

The pandemic, as expected, had a “pronounced” effect on Welltower’s financial results in the second quarter, especially those results related to senior living and skilled nursing, Chairman and CEO Tom DeRosa said Thursday on the real estate investment trust’s latest earnings call.

Occupancy trends are improving, but “by no means are we signaling the all-clear,” he said.

“Many questions remain unanswered as to the duration and ultimate impact of COVID-19. However, what we can say with great certainty is that the long-term drivers of our business remain firmly intact,” DeRosa said. “The population is growing older. The need for value-based healthcare is as important as ever, and addressing social determinants of health will only grow in relevance.”

“The population is growing older. The need for value-based healthcare is as important as ever, and addressing social determinants of health will only grow in relevance.”

Welltower Chairman and CEO Tom DeRosa

Occupancy was down 50 basis points (0.5%) sequentially in the Toledo, OH-based REIT’s triple-net leased portfolio. Same-store occupancy declined by 490 basis points from April 1 to June 30, but that was less than the 500 to 600 basis point drop Welltower had anticipated at the time of its last earnings call in May, when COVID cases were peaking, Executive Vice President and Chief Financial Officer Tim McHugh said.

“Looking forward to the third quarter and starting with the July data we’ve already observed, we experienced a 70 basis point decline in occupancy in July from start to finish, and we expect to finish the third quarter approximately 125 basis points to 175 basis points lower than we ended the second quarter,” he said.

COVID cases across the portfolio have decreased greatly, Vice Chair, Chief Operating Officer and Chief Investment Officer Shankh Mitra said. In the senior housing operating portfolio, cases over a trailing two-week period peaked at 510 in the first week of May, he said, adding that now, cases are down to 98, an 80% decline. “This is despite the fact that our operators tested nearly 100,000 residents and employees so far,” Mitra said. 

As of July 31, approximately 93% of SHOP communities reported no confirmed cases during the trailing two weeks, 5% have reported one or two cases, and 2% have reported three or more cases, Welltower said. 

COVID-related deaths also have decreased 92% from a peak during the last week in April.

“This remarkable improvement … has allowed our operating partners to cautiously open doors to new prospects,” Mitra said.

Whereas in the last week of April 42% of communities had admissions bans, now, 95% of communities in the REIT’s senior housing operating portfolio are accepting move-ins, DeRosa said.

Move-outs peaked in March, and occupancy loss is declining (from 60 basis points in late April and early May to 10 basis points for each of the past three weeks, for instance), but move-outs still exceed move-ins, Mitra said.

The people moving into assisted living communities in the portfolio, DeRosa said, have higher care and service needs — for instance, needs related to dementia — and “have really exhausted other options” so are not deterred by COVID-related changes to communities that might have resulted in a perceived decrease in amenity access, he said.

“If you think about it, a lot of these incoming residents, their [current] lifestyle is being shut into a room in a house. They’re living by themselves in an apartment with either family care or home healthcare,” he said. “So, in a sense, the lifestyle component doesn’t change too much for that individual, except there’s much more security and consistency around their care program than can be achieved in a conventional home, unless you’re extremely wealthy.”

Mitra said the REIT has seen a steady increase of leads, inquiries and deposits due to that need-driven nature of the business. Leads in July are approaching a pre-COVID-19 level similar to that seen in February, he said.

Deposit activity is “extraordinarily strong,” he added. DeRosa said some prospective residents or their families are delaying move-ins until visitation is permitted, and other adult children are delaying move-ins because they don’t want their parents repeatedly “poked and prodded” for COVID testing.

“They’ve secured a place with a deposit, but they’re waiting until the conditions might meet their needs a bit better if the situation isn’t desperate,” DeRosa said.

During the second quarter, Welltower collected approximately 98% of rent due from operators under triple-net leases (primarily senior housing and post-acute care facilities) and has collected 97% of rent due in July.

Once-in-a-generation opportunity’

The day before the earnings call, Welltower announced that it had sold a billion-dollar portfolio of seven senior housing communities in Florida and 27 medical office buildings located across the country to Kayne Anderson Real Estate, the real estate private equity arm of Kayne Anderson Capital Advisors.

“The valuation we achieved demonstrated the appreciation for the long-term growth prospects for healthcare real estate by astute investors and the strong liquidity which exists for our asset class,” DeRosa said.

KA Real Estate will own and operate the portfolio with operating partners MB Real Estate and Discovery Senior Living.

Executives said they are considering additional dispositions and acquisitions. For the latter, DeRosa said, the REIT is seeing more opportunities in the United States, with pricing especially favorable in assisted living and memory care, the segments where COVID has affected occupancy the most.

“We have seen some extraordinary pricing on both coasts,” he said. “We’re seeing a lot of opportunities in the Midwest. We’re seeing opportunities in Texas.”

Mitra said Welltower is working with its operating partners to identify local assets that might be suitable for them to manage “based on size, acuity, vintage, demographics and psychographic criteria.”

For instance, he said, the REIT has identified 137 communities in seven Midwest states that fit criteria for StoryPoint Senior Living. “We’re going through the list of opportunities with the StoryPoint team one asset at a time,” he said.

A similar process involved three Northeast properties for Brandywine Living and the former campus of Newbury College in Brookline, MA, that will become a Balfour Senior Living community, Mitra said.

“We have never been more excited about the opportunity to invest capital in the senior housing space, because of the pricing that we are seeing.”

Welltower Vice Chair, COO and CIO Shankh Mitra

“We have never been more excited about the opportunity to invest capital in the senior housing space, because of the pricing that we are seeing,” he said. “We are buying communities in our core California and New Jersey markets for less than $200,000 per unit, while replacement costs in these locations are in excess of $500,000 a unit. …We believe in this business long term; we also understand the near term is going to be uncertain and challenging.”

Mitra said the current environment is providing a “once-in-a-generation opportunity” before demand starts increasing, even though “supply is coming to a screeching halt” and construction is “down significantly, which is creating softness in soft and hard costs.” Land prices are starting to “show cracks,” too, he said.

See McKnight’s coverage of other earnings releases on Thursday: Capital Senior Living, Diversicare, Diversified Healthcare Trust, The Ensign Group, Five Star Senior Living, National HealthCare Corp., Omega Healthcare Investors, and Sabra Health Care REIT.