Welltower has decided to focus its leasing efforts on the lower-needs assisted living residents across many of its communities, Chief Operating Officer John Burkart said Tuesday on the Toledo, OH-based real estate investment trust’s second-quarter earnings call.
The REIT spent the past few months reviewing the various care and service levels offered across its assisted living portfolio to simplify them for residents and their families, Burkhart said.
“While a lower-acuity resident pays less than a higher-acuity resident for the same room, they also consume far less human resources and tend to stay longer,” he said. “This creates a healthier rent roll over a longer period of time, leading to higher NOI.”
The initiative is paying off, Burkart said, as Welltower has attracted substantially higher numbers of lower-needs assisted living residents during the summer leasing season.
Excited about fundamentals
Meanwhile, Welltower CEO Shankh Mitra said Tuesday that, overall, he was pleased with the REIT’s results in the second quarter, but he added that he is more excited about the fundamentals that could improve dramatically in 2025 and beyond.
With senior living demand remaining robust, new supply diminishing, favorable economics driving substantial margin expansion, and a fast-growing population of older adults, he said during a second-quarter earnings call, the stage is set for multi-year occupancy gains for the REIT.
“While the beta of the senior housing business remains extraordinarily attractive, what truly sets us apart are our efforts to generate outsized alpha for our existing owners,” Mitra said. “This is reflected by the difficult but important steps that we continue to take to further amplify our long-term growth trajectory.”
Those steps, he said, include building out Welltower’s operating platform, and “capital-light” transactions in the form of operator transitions, and conversion of triple-net to RIDEA leased structures.
SHOP growth
The company reported total-portfolio, year-over-year, same-store net operating income growth of 11.3%, driven by 21.7% growth in the senior housing operating portfolio, or SHOP. The second quarter marked the seventh consecutive one in which the SHOP posted same-store NOI growth of more than 20%, according to Mitra, who called it a “truly remarkable feat” fueled by a combination of revenue growth and moderating expenses.
Burkart said that same-store occupancy increased 280 basis points, the highest level of year-over-year growth that the REIT has achieved in the second quarter of any year outside of 2022, when the industry was coming out of the COVID-19 pandemic.
Holiday by Atria transitions continue
The company completed several transactions, including triple-net lease-to-RIDEA restructurings and operator transitions. Also, as previously announced, the company moved to transition 89 Holiday by Atria-operated properties to six other companies already represented in Welltower’s portfolio. The REIT has transitioned 69 of the 89 properties, with the final move of 20 properties to Cogir USA expected to occur in August.
As part of the Holiday transitions, Chaudhri said, Welltower negotiated triple-net-to-RIDEA conversions of 26 communities with StoryPoint and Sagora.
Mitra said the REIT has experienced “tremendous success” with operator transitions in recent years and expects similar outcomes with the former Atria properties. More importantly, he said, Welltower hopes to see more than $70 million of additional net operating income when the new operators stabilize the properties.
Chaudhri said that Welltower has plans for “significant” capital investment across the former Atria properties, with 65% of those projects either completed or underway and the remaining on track to start soon.
“While we have been disappointed with the results achieved to date, we remain optimistic that we’ll soon recognize significant operational upside in this portfolio through our focused regional density strategy,” Chaudhri said of the properties.
During the second quarter, Welltower completed or reached agreements to convert 47 triple-net leased properties to RIDEA structures; 11 transitions occurred during the second quarter, with the remainder expected to be completed during the third quarter. Those conversions took place in four different transactions with existing operators, including StoryPoint and New Perspective.
The company also reported acquiring a portfolio of 12 senior living communities for $271 million.
Capital investments ramp up
Welltower also announced the creation of a “cap team,” enabling the REIT to directly complete capital, renovation and facility projects on its sites via partnerships with its operators. The strategy is reducing costs 20% to 50% while improving processes and value to customers, according to Burkart.
Since the start of the year, Welltower has completed or is working to complete 2,000 separate projects with 17 operators at more than 150 sites in three countries, the REIT said. Success has allowed the company to expand its work beyond its original plans, which has resulted in thousands of units being taken offline. Although this process will result in some near-term disruption, Burkart said, it has the potential to “meaningfully” contribute to Welltower’s growth in 2025 and beyond.
“This tremendous amount of work requires the highest level of collaboration ever attempted and accomplished at Welltower between our operating partners, our vendors and our corporate employees,” Burkart said.
Investments at ‘torrid’ pace
Welltower characterized its investment activity year-to-date as occurring at a “torrid” pace, with the REIT closing on $4.9 billion in transactions so far; the company closed on $200 million of transactions in the first quarter and announced additional transaction activity of $2.6 billion on its first-quarter earnings call. Welltower subsequently announced another $1 billion of transactions in June, and on Monday announced an incremental $1.1 billion of acquisitions, according to Chief Investment Officer Nikhil Chaudhri.
Welltower closed on $1.6 billion of those transactions at the end of the second quarter, and is working to close the remainder of the announced transaction activity by end of year, Chaudhri said. The $2.1 billion of investment activity announced since the first-quarter call is entirely made up of seniors and wellness housing properties in the United States and the United Kingdom, spanning 17 transactions affecting 82 communities.
Chaudrhi said he has noticed an emerging trend of inbound inquiries from Asian and European investors who own senior living properties in Welltower’s target markets.
“Our investment teams remain busy as ever as the opportunity to acquire senior housing assets continue to expand, largely from results of the broken capital structure and other debt driven situations,” Mitra said. “Notably, while 2023 was a record year for us with $5 billion of investment, we have achieved this level of transaction activity in just the first seven months of 2024.”
Mitra added that the pipeline remains “robust, visible, granular and actionable.”
Technology platform launching
Meanwhile, Welltower said it is going live with its technology operating platform in the third quarter, which the company said will streamline the business, integrating and digitizing the flow of information from the website through the customer relationship management, enterprise resource planning and the care modules.
“Our communities will be able to eliminate most paperwork and materially reduce administrative time and simplify many processes, including the onerous move-in process,” Burkart said. “Our objective of leveraging technology to improve the overall resident experience and enabling employees to focus more of their time on residents is being realized.”
