Despite “flatish” earning trends, driven by headwinds including inflation, interest rates and utility expenses, Welltower CEO and Chief Investment Officer Shankh Mitra said he was pleased with the real estate investment trust’s progress in the third quarter.
During a Tuesday earnings call, Mitra said he anticipates further improvement in the fourth quarter for the Toledo, OH-based REIT, which will create a “strong setup” for 2023.
“I’ll remind you that we are at the very early inning of senior housing recovery and will remain as excited as ever about the growth prospects in the coming years,” Mitra said. “And the 80-plus population growth will continue to accelerate.”
Senior housing portfolio makes gains
Welltower’s senior housing operating portfolio year-over-year same-store revenue increased 10.8% in the third quarter, driven by 390 basis points of year-over-year average occupancy growth — and 100 basis points of occupancy growth for the third quarter.
Strong pricing power, with some operators pushing rates in the 10 percent range for next year, also contributed to revenue growth, Mitra said, with 5.3% same-store rate growth “the best we have seen in our recorded history.”
Chief Operating Officer John Burkart said that all three geographic regions in the REIT’s overall senior housing operating portfolio showed strong revenue growth: the US portfolio showed third-quarter growth of 11.6%, the UK portfolio grew 18.9% and Canada grew 4.4%.
Welltower expects 9.5% year-over-year same-store revenue growth in the senior housing operating portfolio in the fourth quarter, driven by accelerating rate growth and continued occupancy gains. Pricing power remains “robust,” Mitra said, with strong renewal rate increases and improving street rates.
Third-quarter occupancy was at 79.2% in that portfolio, and it was 78.8% in the senior housing triple-net lease portfolio.
Labor challenges easing
Same store agency labor expenses represented 5.7% of compensation expenses in the third quarter, down from a high of 7.3% in the fourth quarter 2021.
Agency labor in its overall senior living portfolio represented 4.9% of labor expenses in September — the lowest level since last year’s delta surge. Those trends improved further in September and October. Welltower expects a further decline in expense growth in the fourth quarter due to lower overall labor expenses.
A significant shift in the labor market is driving positive net hiring momentum. Following a strong increase in hiring in July, net hires across the entire SHO portfolio remained positive between August and October, with nearly 4% growth in total employees since June 30.
In its UK portfolio, total same store employee hires increased nearly 6% in the third quarter, with the number of net hires in September and October more than double the preceding two months. Overseas caregiver programs boosted hiring, and are expected to further reduce agency expenses.
In its US and Canadian portfolio, total employee counts grew 3% in the third quarter. Overall, operators reported strong turnouts and increased acceptance of offers at career fairs, as well as success using dedicated recruiters to drive positive net hiring momentum.
“It’s been a full spring since the beginning of COVID, and our operators have addressed one challenge after the next,” Burkart said. “We are finally at a point where it seems like there’s light at the end of the tunnel.”
Investment activity continued into third quarter
In July, Welltower expanded its relationship with Oakmont Management Group through the acquisition of three rental communities and three entrance fee communities in California.
As previously announced, Welltower entered into an agreement with StoryPoint Senior Living in Brighton, MI, to acquire 33 communities throughout Michigan, Ohio and Tennessee. In July, Welltower closed on the second and third tranches through the acquisition of 23 communities in Ohio and Michigan. In October the REIT closed on an additional purchase of five properties in Ohio. To date, Welltower has acquired 30 properties with StoryPoint in 2022.
During the third quarter, Welltower expanded its relationships with Kisco Senior Living through the acquisition of a seniors housing property in San Francisco.
Welltower anticipates funding $263 million of development through the remainder of the year relating to projects underway on Sept. 30.
ProMedica deal transitions SNFs to Integra Health
Monday, Welltower announced agreements to transition 147 skilled nursing facilities from ProMedica to Integra Health through a new joint venture.
ProMedica will continue to lease and operate 58 private-pay senior living communities under an existing joint venture with Welltower. In a separate announcement on Monday, ProMedica said that the facilities all are Arden Courts memory care communities.
Mitra said that when Welltower invested in ProMedica in 2018, the REIT did not predict COVID-19 and the effects it would have on the portfolio, adding that Welltower was “underwhelmed” by the portfolio’s performance. He said that although ProMedica has made significant strides in reducing its operating losses through occupancy gains and lower contract labor costs, he is confident in Integra Health’s ability to execute a turnaround of the properties to their “previous glory.”
“The transition to Integra Health has a dual benefit, providing us a well-capitalized strategic partner to focus on the skilled nursing properties while also leaving ProMedica Senior Care in a substantially better financial state following the transaction,” Executive Vice President and Chief Financial Officer Tim McHugh said.
