Welltower (NYSE: WELL) in the second quarter of the year continued to add more fuel to its investment engine while also rethinking the kinds of senior living units it targets.
The Toledo, Ohio-based real estate investment trust (REIT) this week announced an additional $1.1 billion in investments, bringing its total acquisition activity to almost $5 billion in 2024, according to CEO Shankh Mitra.
“Virtually all” of Welltower’s recent transactions domestically and in the United Kingdom were senior housing assets. The company has been aggressive in acquiring new properties due in large part to the “broken capital structure” of today’s current senior living capital environment, Mitra told investors and analysts during Tuesday’s second-quarter earnings call.
Thanks to those conditions, Welltower is currently on pace to beat its $5 billion record year of transactions in 2023 as opportunities remain “robust, visible, granular and actionable,” Mitra said.
The REIT also spent the quarter analyzing the different care levels among its senior living portfolio “in an effort to create greater simplification for residents and their families,” according to Executive Vice President and Chief Operating Officer John Burkart.
That resulted in a “strategic decision to focus on leasing efforts on lower acuity assisted living residents across many of our communities,” he added.
Mitra said that current trends in senior housing and elsewhere amount to “one of the most pronounced demographic shifts ever witnessed.” While there are questions about the nature of some of those trends, he added that Welltower is equipped to handle a variety of both good and bad scenarios ahead.
“Put simply, we believe that we are in the very early innings of an exceptional multi-year growth for the industry,” Mitra said. “I truly believe we have built an all-weather compounding ark that will continue to reward our owners across different environments for the years into the future.”
The company reported total portfolio same-store NOI growth of 11.3% compared to the last 12 months. The REIT’s senior housing operating portfolio (SHOP) segment led the way in that regard, with same-store NOI growth of 21.7% compared to the second quarter of 2023.
Welltower reported normalized funds from operations (FFO) of $1.05 per diluted share in the second quarter of 2024, an increase of 16.7% over the same period in 2023.
BMO Harris Capital Market Analyst Juan Sanabria wrote that Welltower’s growth in its senior housing portfolio stems from “Extremely favorable” demands even as “investment competition is likely to increase. Sanabria added that Welltower’s balance sheet was “quite well positioned and is a key differentiator.”
Welltower stock increased on Tuesday’s earnings announcement, coming to rest at $112.24, an increase of $0.48 from the previous day’s trading.
‘Torrid pace’ of investment continues
Senior living operators who are well-capitalized have had the luxury of choosing between a wealth of available properties for acquisition in the last four years. Investment activity remains at a “torrid pace” for Welltower, according to Executive Vice President and Chief Investment Officer Nikhil Chaudhri.
The company reported $1.7 billion worth of gross investments in the second quarter of the year, which includes $1.4 billion for acquisitions and loans and $251 million for development.
As of the second quarter of the year, Welltower had closed $1.6 billion of its nearly $5 billion announced transaction volume, with plans to close the remainder by the end of the year.
“The incremental $2.1 billion of investment activity announced since our first quarter call is essentially entirely made up of senior and wellness housing assets in the U.S. and U.K., and spans a total of 17 transactions with a median transaction size of $65 million,” Chaudhri said. “These transactions comprise 82 communities with nearly 7,000 units, an average age of seven years.”
Through these new transactions, Welltower is increasing relationships with operators including Legend Senior Living, StoryPoint Senior Living, Arrow Senior Living, and more.
Last year in the fourth quarter, Welltower acquired a portfolio of 10 senior living communities from Kayne Anderson Real Estate for $469 million. The company again worked with Kayne in 2024 to acquire a 1,000-unit senior living portfolio for $271 million.
“For another subset of assets, we couldn’t find alignment on the current valuation, but we were able to offer a creative debt solution,” Chaudhri added. “This $456 million mortgage loan carries a 10% yield and spans nearly 1,000 units across several newly built, marquee senior housing properties.”
Welltower also has received “direct inquiries to acquire senior housing assets from foreign counterparties who we have not transacted with before,” Chaudhri said.
“In the transactions that we’re working on with a few of these counterparties, it has been to buy them out completely, not [to form] joint ventures or anything like that,” he added. “We’re looking to do simple asset acquisitions like we have been in the U.S.”
Alongside the investment growth, Welltower converted 47 triple-net lease properties to a RIDEA structure in the second quarter through transactions with StoryPoint Senior Living and New Perspective Senior Living. After closing a credit facility of $5 billion, Welltower now has nearly $9 billion in liquidity to transact in the future.
Welltower in June announced plans to transition 89 former Atria Senior Living communities to six different regional operators, with 69 of the transitions completed and the remainder of the transitions scheduled to complete this week.
“We have plans for significant capital investments across all of these buildings,” Chaudhri said.
Burkart added that Welltower would be rolling out its self-management operating platform to properties in the third quarter alongside a new tech platform that coincides with the new system.
More broadly, Welltower is in the middle of 2,000 ongoing renovation projects with 17 different operators at 150 senior living properties.
Rethinking care levels with upside in mind
Welltower management believes there is $477 million in embedded NOI growth ahead, assuming the company can reach an average occupancy of 88.5% and operating margin of 31.2%.
But getting there has required some additional strategic thinking. Welltower conducted a review of the assisted living care levels across its portfolio over the past few months, and arrived at the conclusion that it could simplify them by focusing more on lower-acuity residents.
“While lower acuity residents pay less than a higher acuity resident for the same room, they also consume far fewer human resources and tend to stay longer,” said Burkart. “This creates healthier rent growth over a longer period of time leading to higher NOI.”
He added that the company’s operating partners already have been able to attract lower-acuity AL residents during the summer leasing season.
“We’re at the very beginning of that process, and we put a lot of work into it,” he added. “But obviously it takes time to work through all the different rent goals at all the different properties, so we have a ways to go.”
More generally, Mitra said the company’s management team has debated the long-term fundamentals of the senior living industry – specifically, if long-term tailwinds abate or become headwinds in the future.
“First, society is aging quickly in our markets – is this trend inflationary or deflationary? Second, given the current sovereign debt levels and fiscal policy, what will happen to the long end of the rate curve regardless of actions? Third, now that the anchor of global East Japan has overcome the zero lower bound, will the normal be higher for U.S. rates?” Mitra said. “We have no idea how to answer any of these questions definitively.”
By calling the aging demographic of the U.S. a deflationary force, Mitra once again noted how Welltower was not investing in middle-market assisted living options, instead entering “micro markets” with strong demand fundamentals.
“We’re sticking to AL products in micro markets, where we have conviction that we can achieve sufficient pricing power to pass on inflation and then some this is especially important to us given overall lack of growth of caregivers commensurate with an older population,” he said. “Hence, our obsession with product market fit amongst all these uncertainties we contend with on a daily basis.”
