The coronavirus is having a major impact on the world medically, socially, and economically. Most of the changes that COVID-19 has engendered are not positive, with a recession a highly likely outcome of the social distancing efforts used to slow its spread.
One of the hardest-hit areas has been senior housing, which is also one of the biggest segments of Welltower's (NYSE:WELL) property portfolio. In just a few short months, this diversified healthcare real estate investment trust (REIT) has gone from focusing on growth to trying to ensure its own survival. Here's what it has been doing.
This is a big issue
COVID-19 is obviously very bad -- a quick look at the news is all you need to see that. However, there are material second-order effects when it comes to real estate investment trusts. While businesses shutting down isn't a major issue for Welltower, since it owns senior housing and other necessity medical properties, that doesn't mean it isn't being impacted. Worse, the hit it is taking could actually linger well after the efforts to contain the virus are curtailed.
With roughly 63% of its net operating income tied to senior housing and another 8% coming from nursing homes and other acute-care settings, Welltower's properties serve the older customers that appear to be most at risk from COVID-19. Worse, these facilities specifically bring these high-risk individuals into a group setting where the coronavirus has proven it can easily and rapidly spread. In early April the REIT announced that it already had 45 facilities with at least one case.
There are a number of problems. First, since COVID-19 has proven to be extremely dangerous for seniors, Welltower's facilities are likely to see an increase in "move outs" -- a term the senior housing industry uses to signify both people moving and people dying. At the same time, people who might have moved in will also be dying, reducing demand. Physical distancing requirements, meanwhile, have reduced, if not eliminated, facilities' ability to give tours to potential customers. And a lingering issue will be the fact that people are likely to think twice before deciding to move into group facilities for an extended time in the future because of COVID-19.
All in all, occupancy pressure is likely to increase at the very least in the near term, if not for much longer. To put a number on this, between March 27 and April 10, occupancy declined from 85.4% to 84.2% at properties that Welltower owns and operates (it hires others to actually run the facilities), known as a senior housing operated portfolio, or SHOP in industry lingo. It expects to see further declines.
Meanwhile, the costs to operate a senior housing facility or nursing home are rising. Increased cleaning costs and higher supply expenses are obvious issues as facilities look to ensure residents and staff are safe. But staffing costs are also heading higher, since employees can no longer move between properties and staff illnesses have to be dealt with. So at the same time that senior housing deals with top-line pressure, it is also dealing with rising costs. At this point, Welltower expects its SHOP portfolio to see a 5% expense increase directly related to COVID-19. This is not a great situation, and it's unlikely to resolve quickly.
Taking major steps
One of the first things that Welltower is doing is to ensure it has the liquidity it needs to keep operating through this period. To that end, it sold $588 million worth of stock and used the proceeds to pay down outstanding borrowings on a revolving credit facility. It also inked a new $1 billion term loan. The REIT believes it has around $3.5 billion of liquidity available to it.
Like many companies, it has withdrawn its 2020 financial guidance. At this point it is focusing on helping its facilities cope with the impact of COVID-19. That has included working to ensure operators have the necessary healthcare supplies, which entailed opening a distribution center in Texas. It has been connecting operators with medical experts via its industry relationships to ensure best practices are being employed across its portfolio. And Welltower has helped to set up telemedicine systems so the residents of its properties can get the medical attention they need without having to leave their facilities.
Welltower, meanwhile, has been working through its preexisting acquisition and disposition plans. Ample liquidity will help with that, so there's no particular reason to worry. However, it has reportedly started to pull back on its growth plans. Notably, it had been in the early stages of a roughly $3 billion acquisition attempt for British senior housing assets. According to news reports in England, that effort has fallen to the wayside. Adding as many as 200 properties in the middle of a pandemic is obviously not a great use of funds.
That's doubly true when you consider that roughly 28% of the REIT's rent roll comes from leases for senior housing or nursing homes. While Welltower will see the direct expenses from its SHOP portfolio, which accounts for 43% of rents, the financial impact on lessees from COVID-19 will be lower profitability, and perhaps increased difficulty paying rent. Although Welltower hasn't provided any news on this front, peers are already working with tenants on rent concessions. Welltower is highly likely to be having similar discussions, or will be soon.
A major change of direction
At the start of 2020, Welltower was talking about slow and steady growth. It was projecting net operating income to increase between 1.5% and 2.5%, with funds from operations (which is like earnings for an industrial company) advancing by as much as 3%. Not incredible, but still pretty respectable.
However, COVID-19 has upended those plans in a material and perhaps lasting way. So far, Welltower appears to be taking appropriate action to ensure its survival and help its lessees and residents. Still, until this difficult period is over, or at least more clearly defined, risk will remain elevated. Welltower is highly likely to muddle through the COVID-19 impact, but it may take a long time before the business gets back to a normal state.