A private letter ruling by the Internal Revenue Service will provide Toledo, OH-based Welltower with “significant flexibility” in operating its approximately 45,000 independent living units, the real estate investment trust said last week.
Welltower received the letter Nov. 7 in response to a written request submitted by the REIT, Welltower announced in a presentation produced in conjunction with an appearance this month at Nareit’s REITworld annual conference. The written statement from the IRS interprets and applies tax laws to a taxpayer’s represented set of facts.
According to the ruling, Welltower said, some of the REIT’s independent living communities are not classified as “healthcare facilities” under the REIT Investment Diversification and Empowerment Act, which would require them be leased to a third party or to a taxable REIT subsidiary. This ruling, the company said, will provide Welltower with “significant flexibility” in operating its approximately 45,000 independent living units, which are located primarily in the United States and Canada.
Stifel analyst Tao Qiu told the McKnight’s Business Daily on Wednesday that he has not been granted access to the letter but spoke with Welltower management at the Nareit conference. Qiu said the letter will allow the REIT to streamline operations by operating its own independent living communities. Welltower will take over operations of some communities while still working in partnership with third-party operators at others. He estimated that Welltower might take over as operator of about half of the independent living units beginning next year.
More than just cost savings, Qiu said, Welltower has an analytics platform capable of operating the independent living units. Additionally, he noted, Welltower Chief Operating Officer John Burkart comes from an apartment-management background.
“So they really want to try to run the senior housing space efficiently and more profitably, and they can do a better job than some of the operators that are running these communities today. They wanted to create more value,” Qiu said. “From their perspective, I think their goal is to replace the less-profitable, less well-run operators but keep the partnership going with the more well-run operators.”
Welltower may not be the only entity looking to obtain a similar PLR, he said. Ventas, for example, might pursue this type of ruling, but likely would start small on the operating platform.
Although this is a big opportunity for Welltower, Qiu said, he said he would expect Ventas to be less aggressive. The Chicago-based REIT “will be more cautious and see where it goes,” Qiu predicted.
Welltower had not responded to a request for comment from the McKnight’s Business Daily before the production deadline.
