Welltower (NYSE: WELL) announced $1.2 billion in acquisitions in the third quarter of 2024, bringing its total this year to a “record-setting” $6.1 billion. And the company is still adding to that amount, according to CEO Shankh Mitra.
“While 2024 is shaping up to be a record year for Welltower in terms of capital deployment, we continue to unearth compelling opportunities across all property types, geographies and capital structures, and expect a busy Q4 and Q1,” he said during the company’s third quarter 2024 earnings call with investors and analysts on Tuesday.
All told, Welltower closed on $2.4 billion in transactions in the third quarter of 2024, including $2.2 billion in acquisitions and loan funding, and $203 million in development funding. That total represented 15 deals with 13 operators and a median transaction size of $56 million. Most of those transactions were focused on the Toledo, Ohio-based REIT’s senior housing operating (SHOP) and wellness housing portfolios, which expanded by an additional 40 properties in the quarter.
At the same time, the company’s SHOP segment same-store net operating income (NOI) grew 23% in 3Q24, representing “the eighth consecutive quarter in which growth has exceeded 20%,” according to Welltower.
Looking ahead, Welltower fully plans to continue focusing its efforts on additional acquisitions and transactions rather than development due to the current costs of capital and land.
“We’re starting to see the ‘lollapalooza effect’ of cyclical, secular and structural growth driven by our operating platform, which will be further enhanced by bolt-on acquisitions and balance sheet optimization to drive meaningful per-share growth,” Mitra said during the call Tuesday.
Analysts with BMO Capital Markets noted that while competition for new investments is set to increase, the incoming supply and demand for senior housing remains favorable and Welltower’s “well-positioned” balance sheet will be a key differentiator for it in the near future.
Welltower’s stock closed at $137.34, up 5.2% from the previous close.
Active investment in 3Q with more to come
Welltower had an active investment period in 3Q24, with $1.2 billion in acquisitions completed or under contract in that time. But even that total was only a “fraction of the $15+ billion of opportunities that we considered during this time frame,” said Welltower Executive Vice President and Chief Investment Officer Nikhil Chaudhri.
As he noted, the company added 40 new properties to its SHOP and wellness housing portfolios totaling more than 5,200 units. The new communities have an average age of just over five years and an average price point of $244,000 per unit – “a significant discount for replacement cost,” Chaudhri said.
All told, Welltower’s senior housing holdings now include 312 communities in its triple-net portfolio and 1,084 communities in its SHOP segment.
The vast majority of Welltower’s investment dollar volume in the past quarter, 94%, came about through off-market transactions. That strategy has given the company more opportunities to work with “a diverse range of sellers, including six transactions from developers facing majority construction loans [and] three from foreign counterparties,” he added.
Although the U.S. Federal Reserve cut interest rates by 50 points in September, “the impact of the rate cut to borrowers – the floating rate debt – is de minimis, as they still face debt maturity challenges as bank lenders continue to reduce their senior housing exposure,” Chaudhri explained.
“That environment continues to create attractive investment opportunities for us,” he added.
The REIT is also currently engaged in bi-lateral discussions with eight of its peers to “value significant portions of their portfolios for potential acquisitions,” he said.
“We are also seeing an increase in interest from sellers requesting to take Welltower OP units in transaction consideration in lieu of cash,” Chaudhri said. “This allows those exiting their asset-level positions to have a mechanism for continuing to participate in the strong tailwind of our industry, but in a manner not constrained by an unforgiving capital structure.”
Another tailwind for companies like Welltower is the fact that development and construction remain hard to do in 2024. Although material costs have come down, insurance and labor costs have risen, making the financial math required for new projects tough in even the best of markets.
“We may not face the impact of new supply in our markets for years,” Mitra said. “In today’s construction cost and financing cost environment, it makes no economic sense to build.”
‘Sense of satisfaction’ gives way to ‘healthy paranoia’
Welltower CEO Shankh Mitra said he felt confident and pleased about the company’s positive operating results and progress in the past decade, though he believes there’s much more left to do in the company’s overall journey.
In the third quarter of the year, the company’s SHOP segment added 120 basis points of occupancy, representing among the highest sequential occupancy gains on record for the REIT. Compared to the third quarter of 2023, the company’s same-store SHOP NOI margins were also about 300 basis points higher in 3Q24, totaling 26.5%.
While total margins still remain well below what they were, pre-pandemic, the delta between revenue per occupied room (RevPOR) and expenses per occupied room (ExPOR) are at “historically wide levels, resulting in a further recovery in margins,” the company noted in its latest business update.
Occupancy for the company’s SHOP segment registered at 84.3% as of Sept. 30, according to recent financial disclosures. Occupancy for the company’s triple-net portfolio registered at 82.8%.
The majority of the occupancy growth seen in Welltower’s portfolio is largely coming from its assisted living and independent living segments along with its “highly occupied” wellness housing portfolio.
“We expect that occupancy growth will go substantially higher than where the pre-Covid is,” he said.
Welltower’s net operating income is also noted to be “significantly higher” than it was before the pandemic despite having a generally lower occupancy, in part because resident rent has grown at a faster rate than expenses.
In 2Q24 and 3Q24, Welltower has reached agreements with operating partners to convert another 52 triple-net leased properties to RIDEA structures, “allowing us to directly participate in the underlying cash flow growth of the communities,” the company noted.
Welltower is also in the process of a technology operating platform rollout that it believes will lead to lower expenses and additional revenue.
“We want to try to make people’s lives easier,” Mitra said. “Or tech suite roll out, it’s saving about five hours of effort per move-in from an executive director’s perspective. This is not just a question of cost.”
Since becoming CEO more than four years ago, Mitra has led Welltower as it has grown its senior housing results and invested in new platforms and processes. For the first time since joining the company, Mitra said he recently felt a “sense of satisfaction” about what he and his team have accomplished. The feeling did not last long as he thought about the road ahead.
“I felt a sense of satisfaction in that the compounding of our efforts over the course of many years are beginning to pay off – not because of the strong results we posted in the quarter, but because of a feeling that our audacious dream of transforming this industry is finally coming together, and what that may portend for next few years,” Mitra said. “This feeling lasted for about five minutes, as my usual healthy paranoia set in. We have a long journey ahead, and frankly, that our pursuit of dogged and continuous progress will never be over.”