There is an old saying in the real estate business that location is the most important thing about a property. That's largely true but it gets more complicated when you start to look at multitenant properties like senior housing. Industry giant Welltower (WELL 1.63%) has a plan to deal with that, which will be driven by big data. Here's what you need to know.
A special asset class
Welltower is a real estate investment trust (REIT) focused on health care. It owns properties like health systems (think hospitals), outpatient medical centers, and nursing homes, but the biggest piece of the business is senior housing, at 62% of rents. That's split into two different categories, with 23% of rent tied to net-lease relationships and 39% tied to so-called SHOP assets (senior housing operating portfolio), which the company both owns and operates.
The net-lease properties are simple enough, because Welltower's tenants are responsible for most of the operating costs of the properties they occupy. So they both pay rent and deal with the normal headaches of property ownership. And regardless of what's going on, the rent has to be paid at the contractual level.
The SHOP portfolio is very different. Although Welltower actually hires third parties to handle the operating bit, the performance of these assets flows right through to the company's top and bottom lines. So when a property is struggling, Welltower's funds from operations (FFO) will take a direct hit. But when a property is doing well, FFO will get a quick boost. In other words, Welltower has a vested interest in making sure that its SHOP properties maximize the income they generate.
Location, location, location
One of the ways that Welltower tries to ensure the success of its SHOP portfolio is by buying senior housing properties in regions with limited supply and a generally affluent population -- think places like California, London, New York, and Washington D.C. That's a great start and positions the company well. But management thinks it can do even better.
Chief Operating Officer John Burkart discussed this issue during Welltower's third-quarter 2021 earnings conference call in November. He noted that certain room locations in a property will generally fetch higher rental rates. Consider a New York facility in which one room looks out over a park and another's view is basically a brick wall. Clearly, the park view would fetch higher rents. This is relatively easy to see on the scale of a single property but harder to get a handle on when you start looking at things across a portfolio.
But if you could start to get a better read on what a view is worth from a big-picture perspective, you could start to add material value to the portfolio. This is where big data comes in, because with the ability to analyze the history of each property and, perhaps more importantly, each room within a property, Welltower believes it can set specific room prices with more accuracy and thus, increase profit margins.
Burkart gave a pretty shocking example:
We looked and saw on a high-rise substantial variations in demand versus pricing, and we're talking, in some cases, $1,000 a unit, really dramatic change in how we're going to price that product based upon what the market has told us.
Essentially, the company had been underpricing some units by as much as $1,000. Clearly, that's likely a select list of units in a much larger property, but if this type of information can be teased out of every property, the numbers will start to add up.
The next logical step
Here's the really notable thing: SHOP is a major focus for Welltower. SHOP assets have grown from 13% of the REIT's portfolio a decade ago to 39%. So getting the pricing right at these properties is very important and the time is right to start making use of the valuable tools that technology has to offer.
Pricing is one key piece of that, but not the only one, as Welltower is also looking to optimize labor usage in its facility as well, again using big data. So the real takeaway here is that Welltower is digging in and really getting into the nitty-gritty of its SHOP portfolio to make sure it's making the most money possible for investors. And that will flow right through to the REIT's top and bottom lines.