The seniors housing operating portfolio was “the highlight” of the second quarter for Welltower, “with meaningful outperformance relative to our budget,” Shankh Mitra, the real estate investment trust’s senior vice president for finance and investments, told participants in a second-quarter earnings call Friday.
The healthcare REIT invests in seniors housing, which it defines as independent living, assisted living and memory care; long-term and post-acute care; outpatient and medical office buildings; and hospitals.
Welltower had earnings per share of $1.06 in the second quarter, beating projections by $0.01.
In seniors housing, Mitra said, “Occupancy trends were lower than expected; however, those were significantly offset by our pricing power, which resulted in strong rate growth, 3.9% year-over-year, and better expense trends, 1.7% year-over-year.”
Seniors housing operating same-store net operating income grew 3.5% in the quarter, leading the REIT to increase its total same-store net operating income guidance to 2.25% to 3% from 2% to 3%.
“Increasing demand for high-end seniors housing has led to pricing power and enabled Welltower to drive consistent rate growth,” CEO Thomas DeRosa said in a statement. “We are pleased to be raising guidance for our total same store portfolio as a result of our strong first half performance.”
Growth was driven by performance in core markets such as Northern California, Southern California and Seattle, Mitra said.
Labor costs remain elevated, but operators of properties in Welltower’s portfolio — among them, Belmont Village Senior Living, Benchmark Senior Living, Senior Resource Group and Sunrise Senior Living — “strike the right balance between excellent care delivery and [an] efficient staffing model, Mitra said, adding: “Our group purchasing power and other cost initiatives [are] being realized through expense savings in food, professional services, insurance, utilities and incentive management fees.”
Welltower saw “significant outperformance” in revenue and net operating income in assisted living versus independent living in the second quarter, Mitra said.
“Much has been written about the supply stats in assisted living versus independent living, which is appropriate and relevant,” he said, “but as long-term owners of both classes of real estate, we have observed greater stickiness of demand in assisted living versus independent living when new competition opens around a given asset.”
Second-quarter absorption metrics for assisted living and independent living from the National Investment Center for Seniors Housing and Care, Mitra said, are “signifying a greater acceptance of this need-based product and validating the value proposition that community-based care provides to our residents versus the alternative, receiving care at home.”
Sequentially, Mitra said, Welltower anticipates some improvement in occupancy in its U.S. seniors housing properties, but “year-over-year, you will still see a decrease.” Welltower, however, he told an analyst on the call, is “trying to maximize revenue, not occupancy. I cannot emphasize on that enough how we are thinking about this.”
Expanded relationships with operators
During the second quarter, Welltower said, investments with existing U.S. senior living partners included expanded relationships with Legend Senior Living and Sagora Senior Living.
In a joint venture, Legend and Welltower acquired two private-pay seniors housing properties — one in Tulsa, OK, and the other in Greeley, CO — for $49 million. “Since starting our initial $6 million development in 2005, we have completed $547 million of follow-on investments with Legend,” Welltower said in a press release.
With Sagora, Welltower acquired a 90-unit private-pay seniors housing property in the Houston area with a $24 million investment. “Since closing our initial $8.5 million acquisition in 2010, we have completed $460 million of follow-on investments with Sagora,” Welltower said.
In notable U.S. seniors housing development conversions, the REIT said, it expanded relationships with Brandywine Living and Kisco.
With Brandywine, $53 million was invested to complete a 120-unit seniors housing property in New York. “Since closing our initial $599 million acquisition/leaseback in 2010, we have completed $397 million of follow-on pro rata investments with Brandywine,” Welltower said.
With Kisco, $23 million was invested to develop 60 assisted living, memory care and private pay long-term/post-acute units as part of a private-pay, rental continuing care retirement community campus in Raleigh, N.C. The campus’ 165 independent living units had been completed in the first quarter. “Since closing our initial $19 million acquisition in 2012, we have completed $137 million of follow-on investments with Kisco,” Welltower said.