Welltower (NYSE: WELL) continued to make margin and occupancy progress in the first quarter of 2024, with a high appetite for new investments in the remainder of this year.
Among the brightest spots for the Toledo, Ohio-based real estate investment trust (REIT) was its senior housing operating portfolio (SHOP), which includes 994 properties. The company reported 25.5% net operating income (NOI) growth in the first quarter for its same-store SHOP segment, driving total portfolio same-store NOI growth of 12.9% during that time.
The company is seeing the “strongest growth we have seen in our history,” other than in the first quarter of 2022, when the company’s operating partners were still recovering from the earliest days of the Covid-19 pandemic, according to CEO Shankh Mitra.
“Despite continued uncertainty with respect to the direction of the economy and turbulence across many sectors within commercial real estate, the demand-supply backdrop for senior housing gets better with each passing day,” Mitra said during the earnings call with investors and analysts Tuesday.
Mitra noted that the company’s leaders are still scouring markets in the U.S. and U.K. for “granular opportunities,” with a near-term capital deployment pipeline that “remains robust, highly visible, actionable, and squarely within our circle of competence where we can bet with the house odds rather than the gambler’s odds.”
“In the very short term, we maintain significant dry powder, with over $6 billion of total near-term liquidity to pursue attractive capital deployment opportunities and find other near term obligations,” he said. “In the medium term, we have built significant debt capacity to take advantage of when we eventually get to the other side of the Fed cycle, and still maintain an extremely strong balance sheet.”
Vikram Malhotra, managing director of Mizuho Securities USA, wrote in an April 29 note to investors that Welltower is continuing to deliver on “strong strong external growth, with the current low leverage providing additional flexibility,” noting the company has a “very attractively priced cost of capital with implied cap rate of [around] 4% while the Fed Funds rate is [around] 5%.”
Welltower stock shed 0.55% to land at $95.28 by the time the financial markets closed Tuesday afternoon.
Senior living drives strong quarter
At the forefront of the REIT’s positive results in the first quarter of this year was its SHOP segment. The company’s SHOP operating partners made progress in the first quarter of the year, amounting to an average occupancy rate for the segment that was 340 basis points higher in 1Q24 than in the same period of the previous year.
Those results helped push the company’s average margins 320 basis points higher than the same period in the previous year.
“All three of our regions continue to show favorable same store revenue growth, starting with Canada at 9.1%; and the US and UK growing at 10.1% and 14.8%, respectively,” said Welltower EVP and COO John Burkart.
As Mitra and other leaders have previously noted, the REIT expects to continue its upward occupancy and margin trajectory given the current low rate of new senior living communities being built.
The company is continuing to deepen its regional density strategy for senior living operations, and Burkart said “we’re beginning to create efficiencies which will allow for more time to be spent on resident care, improving the customer experience [and] reducing the administrative burden and related stress on site employees.”
Mitra said that while he is pleased with the growth Welltower is seeing so far this year, he anticipates the upcoming summer leasing season could lead to even more growth and evolution.
“Even after nearly $15 billion of capital that we have deployed since the depth of Covid, and hundreds of communities undergoing operator transition, we still have our hands full to optimize location, product price point and operators on the asset side of the balance sheet,” Mitra said.
More investments and growth ahead
Since the beginning of the year, Welltower has closed or is under contract to close $2.8 billion across 23 transactions. Recent transactions include a nearly $1 billion acquisition of Affinity Living’s 25-community active adult portfolio in February.
In the first quarter of the year, the company reported completing $449 million in investments, with a breakdown that includes $208 million in acquisitions and loan funding and another $241 million in development funding.
Nikhil Chaudhri, executive vice president and chief investment officer for Welltower, told investors the opportunity to deploy capital “remains extremely compelling,” largely due to the amount of senior housing debt that is set to mature throughout the next few years.
Chaudhri added that he has sat in on several earnings calls with regional banks that have been more active in the senior housing space, and a running theme has been “a desire to reduce their exposure to it” due to poor performance on loans over the past five years.
Because of the way the market is, borrowers are left with tough choices, Chaudhri said. On one hand, he said, borrowers could lose a “significant portion or even all” of their. On the other hand, those with staying power and “the right set of incentives” can hope for a reversal of interest rates to have a better exit value over time.
The company has more than $6 billion of liquidity to deploy in the near-term, according to management. Because of that, Chaudhri said the company is the “counterparty of choice” for motivated sellers and has seen repeat sellers on transactions.
Looking ahead, Welltower is also planning on further densifying its senior housing portfolio regarding regional offerings, following up on a strategy put in place to “go deep and not go broad.”
“At the end of the day, that’s what we’re trying to do. We believe … that great customer and employee experience eventually drive great financial results, and we continue to double down on this simple strategy,” Mitra said.
