Welltower Defends Genesis Moves Despite ‘Bumpy’ Outlook

Welltower Inc. (NYSE: HCN) is upbeat about one of its most troubled tenants, even though the road ahead looks bumpy.

CEO Tom DeRosa spent a good portion of Thursday’s fourth-quarter earnings call talking up one of the real estate investment trust’s (REIT) largest post-acute operating partners, Kennett Square, Pa.-based Genesis HealthCare (NYSE: GEN).

Welltower’s wholly-owned Genesis portfolio consists of four senior housing properties and 82 long-term and post-acute care properties. Welltower also owns a minority stake in a joint venture which owns 28 long-term and post-acute care properties.


Genesis is the nation’s largest skilled nursing facility (SNF) and post-acute operating company. Like others in the skilled nursing industry, they’ve encountered financial challenges linked to a tough operating environment. The operator’s stock prices have also fallen sharply over the past year.

Welltower recently helped Genesis secure a $555 million credit facility with MidCap Financial, a wholly owned subsidiary of alternative asset manager Apollo. This follows dispositions of Genesis assets. Some investors might have been hoping for more aggressive actions to limit Welltower’s exposure, DeRosa said, but he staunchly defended the REIT’s decisions.

“The public markets were screaming at us to have taken a different approach with Genesis. I think we took the right approach,” DeRosa said. “We did the responsible thing for Genesis and our shareholders, and I think that will prove out versus other roads we could have gone down.”


That cash infusion, paired with the provider’s ongoing restructuring efforts, could be what Genesis needs to ride through uncertain times for the post-acute care landscape, DeRosa claimed — and Welltower plans to stay in the industry.

“The road ahead will be bumpy, but we think now with the restructuring of Genesis, we have the right coverage and credit profile to withstand choppiness,” DeRosa said.

Some market-watchers, like Mizuho analyst Rich Anderson, are taking a wait-and-see-approach.

“GEN has had false starts in the past, and we don’t want to lose sight of that,” Andeson wrote in a note Thursday. “So, we remain cautious, admittedly with a dose of optimism, as we monitor events with an open mind.”

Investors, however, seemed more cautious than optimistic. Genesis’ share value had fallen 21.25% to $1.26 by the time the markets closed Thursday afternoon.

Tale of the tape

The REIT’s normalized funds from operations (FFO) per share for the fourth quarter of 2017 was $1.02 per share, which missed analyst expectations by $0.03. However, its revenue of $1.1 billion, a 1.9% year-over-year increase, beat analyst projections by $30 million.

Overall, Welltower’s same-store net operating income (SSNOI) grew 2.7% in 2017. For the year ahead, the REIT set its SSNOI growth guidance to just 1%-2% in anticipation of a roughly 3% rate growth, 50 to 100 basis points in occupancy decline, and a 3%-4% growth in operating expenses.

Regardless of the challenges implied by the anticipated occupancy decline, and the cautious notes sounded by other REITs recently, 2018 should present nothing dire, according to DeRosa.

“Despite headlines of oversupply and flu, our senior housing operation portfolio continued to deliver solid growth through 2017, and the outlook for 2018 remains positive,” DeRosa said.

Welltower’s stock price fell 0.25% to $53.74 by the time the markets closed Thursday afternoon.

The Toledo, Ohio-based real estate investment trust (REIT) is a sizable owner of senior housing and care properties in the U.S., with a combined portfolio of more than 1,110 properties.

Written by Tim Regan

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