Despite “poor” bottom lines, Welltower (NYSE: WELL) CEO Shankh Mitra said he “couldn’t be more pleased” with the third quarter of the Real Estate Investment Trust (REIT) as a whole.
Mitra was also grateful that the impact of the COVID-19 delta variant had minimal impact on FPI operators.
“In our experience, COVID outbreaks lower revenues and increase costs, which has a significant impact on bottom line,” Mintra said during the company’s third quarter earnings call on Friday. “For the first time since the start of the pandemic, we have resisted this trend and despite a strong increase in the delta variant, we still recorded the strongest sequential revenue growth in company history. ”
Immunization rates for Welltower staff and residents are nearly 90% ahead of CMS guidelines on the federal vaccine mandate released Thursday.
“The number of cases within our portfolio was only 10% of the peak levels seen in previous COVID outbreaks and a similar trend was seen in our Canadian and UK portfolios during the same period,” Mintra added .
Genesis and ProMedica assets
Welltower CFO Tim Lordan said the REIT’s real estate position remains strong as its recovery rate remained high in the third quarter, although its long-term post-acute portfolio generated negative year-long growth. on a comparable store basis.
“During the quarter, we transferred 11 additional Genesis assets to new operators, bringing the total Genesis transitions to date to 48 properties,” he said. “We also finalized the divestiture of 21 of these transition assets, bringing the total divestitures since the start of the year to 30 former Genesis assets, including our nine PowerBack assets sold in the ProMedica joint venture in the second quarter. ”
14 other former Genesis assets are expected to be sold in the coming months.
The proceeds from the 21 transferred properties, as well as the 13 properties previously leased to ProMedica, one long-term care property and two medical buildings, totaled $ 488 million, resulting in a gain on sale of $ 120 million. dollars.
The previously announced sale of 25 assets, of which 21 have already been sold to date and the remaining four are expected to be completed in the coming months, contributed more than $ 30 million in negative EBITDA for the last 12-month period ending June 30.
The ProMedica business line saw comparable store net operating income growth of 2.8% year-on-year, with 12-month EBITDAR coverage of 2.4 times, Jordan noted.
Growing costs of Agency staff
Welltower’s bottom line suffered from a confluence of “extraordinary costs” during the third quarter, with Mitra citing agency staff as the main culprit.
“In addition, we have seen a significant increase in paid time off, as many employees have taken advantage of the relaxation of travel restrictions during the summer,” he added.
John Burkart, chief operating officer of Welltower, said the increase in labor costs was due to a multitude of factors.
“Our operators have focused both on meeting the increased demand from their communities and on refusing to compromise on the quality of care,” he said. “The use of agency work, which can cost two to three times more than permanent employees, was particularly impacting during the quarter, as employees who had COVID or who were exposed to COVID or even who had a cold had to bring in agency staff on sick leave as the only option. “
He added, however, that the “extraordinary labor expenditure” suffered in the third quarter is starting to ease.
“Our operators are making comments such as whether the peak workforce challenge has passed or that they have seen a substantial increase in demands,” added Burkart. “Our new hires outnumber the employees who leave 2.5 to one.”
Welltower is almost fully staffed today in almost all of its communities.
“The good news about overall spending is that we started to see this situation normalize in October,” Mintra added.
An expansion of the labor pool has also been observed as unemployment benefits ended and children return to school, although this has not been universal.
Burkart said there were notable differences in the impact of agency spending between states that withdrew from federal unemployment programs early compared to those that maintained supplemental benefits as early as September.
“Specifically, states that withdrew from these programs early saw about two-thirds of the incremental sequential increase in agency spending compared to states that maintained the benefits,” he added.
In Mintra’s view, the base-based wage increases will stay and they will likely be here as a unit labor cost.
“We are confident that Welltower’s operational partners will be able to overcome this hurdle through rent increases, as they offer a high-end product in a high-end micro-market,” he said. “We believe that the use of agency work will dissipate in the future.”
He expects Welltower’s post-COVID margins to be higher than his pre-COVID margins.
The third quarter was one of the busiest in the company’s history with $ 2 billion in investments closing at a significant discount to replacement costs.
“While everyone is tired of the events of the past 18 months, many of our partners are working with us to rethink how technological operational excellence, revenue optimization and data analytics can fundamentally change this business,” a Mintra said.