Welltower hopes Brookdale gets 'back to the basics'

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Mercedes Kerr
Mercedes Kerr

Welltower executives said that they hope Brookdale Senior Living can focus on fundamentals now that the company has completed its strategic review.

The comments came during the real estate investment trust's fourth-quarter and full-year 2017 earnings call on Thursday, the same morning that the country's largest senior living operator announced turnaround plans that included a management shake-up in the wake of the rejection of a buyout offer.

Brookdale represents 7.6% of net operating income in Welltower's combined senior housing operating and triple-net lease senior portfolios, according to information the REIT released in conjunction with its earnings call.

“We hope that their decision to end their strategic review process, which has been the focus of much of management attention for a protracted period, will now allow them to get back to the basics,” said Mercedes Kerr, Welltower executive vice president of business and relationship management. “As we've said before, we're satisfied with our portfolio holdings with Brookdale, and we will continue to collaborate with them going forward, just as we have before.”

New ticker symbol

The ticker symbol for Welltower's common and preferred stock listed on the New York Stock Exchange will change from HCN to WELL, effective with the opening of trading on Feb. 28.

“Wellness is at the center of what we do, and by changing our ticker symbol to WELL, we're able to further align our brand with our mission of providing effective real estate settings that promote wellness for the aging population as well as helping the broader healthcare delivery system drive toward the goal of improving health outcomes while lowering the cost of care,” Welltower CEO Tom DeRosa said.

The new symbol, he said Thursday on the earnings call, “speaks to the strategy, W-E-L-L. Now WELL will bring wellness to the attention of the global financial markets as well as Welltower.”

Kerr said that Welltower has three leases with Brookdale that expire later this year and has discussed extending them as well as moving some of the properties to different operators. “We don't feel like there's any sort of friction that would come of it, if we had to move them to somebody else,” she said.

Optimism for 2018

Overall, Welltower executives expressed optimism for its financial outlook for this year.

“Despite headlines of oversupply and flu, our seniors housing operating portfolio continued to deliver solid growth throughout 2017, and the outlook for 2018 remains positive,” CEO Tom DeRosa said.

Welltower, he said, is not a “passive owner” of seniors housing real estate. “We see ourselves truly as an operating partner, and that drives better results,” DeRosa said.

Additional reasons for the optimism, Kerr said, include the quality and location of the REIT's senior housing properties, in high-barrier-to entry-markets.

“But it's also, of course, having to do with the operators that are in the trenches and that are also willing to collaborate with us and the initiatives that we are trying to source for their benefit and for the benefit of the residents who live with them,” she said.

The flu can affect revenues and expenses due to higher-than-average move-outs and deaths and the need to temporarily replace caregivers with agency workers when workers become ill, Kerr noted. And “this year's flu season has been the subject of headlines due to its severity and widespread nature,” she added.

“We monitor these trends closely, and we know of individual cases where flu has impacted our communities,” Kerr said. Because the flu season is not over, however, it's difficult to predict the exact effect it will have on Welltower's portfolio, she added.

“Having said this, we're satisfied with the work our operating partners are doing to care for their residents and staff and also to minimize the financial impact the flu may have on our communities,” Kerr said.

Shankh Mitra, senior vice president of investments, said that a decline in occupancy in the fourth quarter was due to the flu and affected the REIT's financial performance. “This has tempered our outlook for 2018, despite that we believe we will have a year of positive same-store NOI growth in that business, representing a significant relative outperformance due our best-in-class assets in affluent markets run by premier operators,” he said.

John Goodey, executive vice president and chief financial officer, said the REIT expects average blended same-store NOI growth of approximately 1% to 2% in 2018, including 0% to 1.5% NOI in the senior housing operating portfolio, 2.5% to 3% in the senior housing triple-net lease portfolio, 2% to 2.5% in the long-term / post-acute care portfolio, and 2% to 2.5% in the outpatient medical portfolio.

Warm words for Sunrise

Welltower executives praised Sunrise Senior Living for being ranked No. 1 in J.D. Power's 2018 Senior Living Satisfaction Study, the first study of the industry it had conducted.

U.S. holdings of Sunrise make up 27.2% of the REIT's seniors housing operating portfolio and represent 12.1% of its combined seniors housing operating and triple-net lease portfolio.

“It's great to see them recognized for their hard work,” Kerr said.

Mitra noted that Sunrise ranked at the top of five of six subcategories in the satisfaction study. “The one they didn't rank number one in was price, which means they're probably a little bit more expensive than others,” he said.

The rankings reflect positively on Sunrise, Mitra said, because “you've never seen J.D. Power, the most respected research house for consumer research, every rank senior housing operators, and it's pretty extraordinary that Sunrise was by far the number one name in the business.”

Welltower recently expanded its relationship with Sunrise, Kerr said, mentioning the previously announced purchase of four rental continuing care retirement communities for $368 million.

The REIT also recently expanded relationships with New Perspective Senior Living, Sagora Senior Living, Ascension and the Florida Medical Clinic, she said.

Regarding New Perspective, Welltower paid $33 million to acquire a 100% ownership interest in a 121-unit private-pay senior living community in Wisconsin that is owned by a third party.

Regarding Sagora Senior Living, Welltower acquired a 38-unit private-pay senior living community in Oklahoma through an existing joint venture with Sagora. The purchase price, based on a 100% ownership interest, was $10 million, the REIT said.

Still committed to skilled nursing

Welltower executives also discussed a restructuring of Genesis that DeRosa said “has significantly enhanced the credit quality and sustainability of the Genesis business model.”

“Three years ago, we made the strategic decision not to abandon the post-acute sector,” he said. “This is a critical component of the healthcare delivery continuum, and we see a role for Welltower in reinventing how this sector operates and is capitalized. From here, Genesis has a stronger capital structure and a refocused business strategy on its core markets, to effectively participate in value-based care.”

Changes involving Genesis “needed to happen years ago,” DeRosa said, “but the industry kicked the can down the road.”

Major regional health system CEOs, he said, “all say they need a viable post-acute care option. The problems that the REIT sector have been dealing with were capital structures that were not sustainable given some of the changes that occurred in reimbursement.”

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