Despite “mediocre” bottom line results, Welltower (NYSE: WELL) CEO Shankh Mitra said he “could not be happier” with the real estate investment trust’s (REIT) third quarter overall.
Mitra was also thankful the impact of the COVID-19 delta variant had a minimal impact on the REIT’s operators.
“In our experience, COVID surges drive revenue down and costs up resulting in a significant hit to the bottom line,” Mintra said during the company’s third quarter earnings call on Friday. “For the first time since the beginning of the pandemic, we bucked this trend and despite witnessing a significant surge of the delta variant, we still posted the strongest sequential revenue growth in the company’s history.”
Both Welltower’s staff and residential vaccination rates are near 90% ahead of CMS’ guidance on the federal vaccine mandate issued on Thursday.
“The number of cases within our portfolio was just 10% of peak levels observed during the prior COVID surges and a similar trend was experienced across our Canadian and UK portfolios for over the same time,” Mintra added.
Genesis and ProMedica Assets
Welltower Chief Financial Officer Tim Lordan said the REIT’s real estate position remains strong as its collection rate remained high in the third quarter, though its long-term post-acute portfolio generated negative year-over-year same-store growth.
“In the quarter, we transitioned 11 more Genesis assets to new operators, bringing total year-to-date Genesis transitions to 48 properties,” he said. “We also completed the disposition of 21 of these transition assets, bringing total year-to-date dispositions to 30 former Genesis assets, including our nine PowerBack assets sold in the ProMedica joint venture in the second quarter.”
Another 14 former Genesis assets are scheduled for disposition in the coming months.
Proceeds from the 21 disposed properties, along with 13 properties previously leased to ProMedica, one long-term care property and two medical buildings, totaled $488 million — resulting in a gain sale of $120 million.
The previously announced sale of 25 assets, 21 of which have already been sold to date with the remaining four expected to be completed in the coming months, have contributed more than $30 million in negative EBITDA for the trailing 12 months period ending on June 30.
The ProMedica business line logged same-store net operating income growth of 2.8% year-over-year, with trailing 12-month EBITDAR coverage of 2.4 times, Jordan noted.
Rising Costs of Agency Staff
Welltower’s bottom line suffered due to a confluence of “extraordinary costs” during the third quarter with Mitra pointing to agency staff as the main culprit.
“Additionally, we saw a meaningful rise in paid time off as many employees took advantage of the easing travel restriction during the summer,” he added.
John Burkart, Welltower’s chief operating officer, said increased labor costs were driven by a host of factors as increased compensation in the form of wage increases, overtime bonuses and the use of agency labor were reported by its operators.
“Our operators have been squarely focused on both meeting the increased demand for their communities and a refusal to compromise on the quality of care,” he said. “The use of agency labor, which can be two to three times more expensive than permanent employees, was particularly impactful during the quarter as employees who had COVID or were exposed to COVID or even had a cold had to call in sick leaving agency staffing as the only option.”
He added, however, that the “extraordinary labor expenses” experienced in the third quarter are starting to abate.
“Our operators are making comments such as that the peak labor challenge has passed or that they’ve seen a substantial pickup in applications,” Burkart added. “Our new hires outnumber the employees leaving 2.5 to one.”
Welltower is nearly fully staffed currently at almost all of its communities.
“The good news on the expense overall is that we began to see this situation normalize in October,” Mintra added.
An expansion of the labor pool has also been seen as unemployment benefits have ended and children are returning to school, though that hasn’t been universal.
Burkart said there’s been noticeable differences in the impact of agency expense between states which withdrew early from federal unemployment programs compared to those which maintained supplement benefits as early as September.
“Specifically, states opting out of these programs early saw roughly two thirds of the incremental sequential increase in agency expense as compared to those states which maintained benefits,” he added.
In Mintra’s opinion, based wage increases will stick around and they will likely be here as a unit cost of labor.
“We firmly believe Welltower operating partners will be able to overcome this hurdle through rent increases as they offer a premium product within a premium micro market,” he said. “We believe that the usage of agency labor will dissipate going forward.”
He expects Welltower’s margins post-COVID to be higher than its pre-COVID margins.
The third quarter was one of the most active in the company’s history with $2 billion closed in investments at a significant discount to replacement costs.
“While everyone is fatigued from the events of the past 18 months, many of our partners are working with us to rethink how technology operational excellence, revenue optimization and data analytics can fundamentally change this business,” Mintra said.
