Welltower To Offload 18M SF Medical Office Portfolio, Focus On Senior Housing

Welltower is pivoting its growth strategy to focus on senior housing, a shift that includes the $6B sale of 18M SF of medical office space. 

The REIT announced the new positioning, which the company dubbed Welltower 3.0, as part of its third-quarter earnings reported Monday. As it dives into senior housing, the company said it has closed or is under contract for $14B in acquisitions of more than 700 communities across the UK, the U.S. and Canada.

Some of those deals are part of the $1.8B Welltower spent on acquisitions in the third quarter as its funds from operations rose by nearly 21% year-over-year to $1.34 per share.

The portfolio of outpatient medical buildings Welltower is selling is 94% occupied and being sold to Remedy Medical Properties in phases. Chicago-based Remedy paid $2B for the first portion of the portfolio in October, with the remaining transactions set to close through the middle of next year.

“All capital allocation decisions made at Welltower are viewed through an opportunity cost prism: evaluating the value forgone by pursuing a specific course of action while also forcing us to consider all implications of those decisions, well into the future,” Welltower CEO Shankh Mitra said in a statement. 

Kayne Anderson Real Estate is expanding an existing partnership with Remedy to buy at least some of the U.S. properties, a portfolio of 296 properties in 34 states spanning 18M SF, according to a release from the two firms. 

Once the properties are sold, Welltower’s medical office building portfolio will almost entirely have tenants on long-term, triple-net leases without a property management component.  

Remedy will pick up 170 employees from Welltower as part of the deal, boosting its overall headcount to more than 500 employees in 60 U.S. offices. The deal amounts to a nearly 60% increase in the size of Remedy's medical office portfolio, Remedy Chief Investment Officer Joe Magliochetti said in the release. 

Shares in Welltower, which has a $120B market cap, jumped by roughly 5% on the earnings report and strategic pivot. The stock is up more than 40% this year, including gains over the third quarter, in which the REIT posted more than 20% growth in net operating income.

Welltower’s portfolio was already weighted toward senior housing. Its 2,447-property portfolio included 1,625 senior housing communities, 446 outpatient medical facilities totaling 26.5M SF, and 376 long-term care facilities, according to its earnings report. 

Proceeds from the office sales, additional credit repayments, the realization of value from a senior credit note, and cash on hand are funding the new senior housing acquisitions.

The largest deal is the $6.9B acquisition of 111 UK communities from local operator Barchester Healthcare. The portfolio includes properties that are both managed and under triple-net deals, stabilized and in the early leasing stages, with a blended occupancy near 80%.

In the U.S., Welltower said it is under contract or has closed on 40 senior housing transactions totaling $4B and covering 150 communities with more than 12,000 units along the East Coast.

Outside of rebalancing the portfolio, the REIT’s Welltower 3.0 initiative includes a shift in management incentives. The company’s named executive team agreed to limit compensation through 2035 to a base salary of $110K and shares in Welltower’s operating partnership that are under lockup until 2030 and won’t become fully transferable until 2035. 

“Management is essentially further aligning the portfolio exposure to where it sees the best growth potential, and it is further aligning its incentive comp to match the opportunity,” JPMorgan Chase analysts wrote in a note following the announcements. 

Welltower is also bringing in new senior staff and shuffling others inside the technology team to expand its data science and platform development initiatives.

Demographic tailwinds, specifically the bubble of aging baby boomers, have boosted demand for senior housing and attracted a wave of public and private capital. 

Earlier this month, New York-based Clarion Partners bought its first senior housing asset in its 40-year history. With demand expected to accelerate, the private investment firm wants to spend $1B on the sector each year for the foreseeable future, Head of Healthcare Julie Robinson told Bisnow this month. 

UPDATE, OCT. 28, 6 P.M. ET: This story has been updated to include Kayne Anderson's involvement in the deal and other transaction details.