Welltower Inc. (NYSE: HCN) sees big opportunities for Medical Office and senior housing real estate.

In fact, the $2.75 billion sale of Duke Realty’s medical office building portfolio, announced this week, was a major topic of discussion Friday on Welltower’s first quarter 2017 earnings call. Thomas DeRosa, CEO of the Toledo, Ohio-based real estate investment trust, admitted that Welltower had been interested in the Duke portfolio. He called the sales process “the auctions of all auctions in the MOB space,” and elaborated on the synergies he sees between senior housing and medical office real estate.

“We were certainly interested in that portfolio—I think everyone was interested in that portfolio,” he said.

The portfolio’s ultimate price indicates there were likely several players interested in the deal, which is “a positive for our industry and this property type,” DeRosa added.

Now, Welltower isn’t “sitting waiting for some big portfolio trade,” DeRosa said.

“Not to say if one comes out we won’t be hanging around the hoop,” DeRosa said.

‘Stay tuned’

Despite losing out on the desirable Duke Realty portfolio to Healthcare Trust of America (NYSE: HTA), Welltower’s confidence in its place in the medical office building space remains unshaken. 

“It’s probably the second-best portfolio out there, after our portfolio of medical office buildings,” Welltower Executive Vice President-Business Development Mercedes Kerr said of the Duke portfolio.

Welltower also sees plenty of opportunity in for the convergence of seniors housing and medical office.

“A new generation of outpatient medical real estate, connected to senior housing, needs to be bulit,” DeRosa said. “This is a huge opportunity—perhaps the most compelling opportunity the real estate industry has seen in decades.” 

As far as DeRosa’s concerned, Welltower already has a leg up, potentially given its current holdings of both asset classes.

“No company is better positioned than Welltower to take advantage of this opportunity, so stay tuned,” DeRosa said.

Other large senior housing REITs—like Ventas (NYSE: VTR) and HCP (NYSE: HCP)—also invest in the medical office space.

Supply, demand and strategy

Welltower divested $1.1 billion of non-core assets during the first quarter of this year, executives said. When it comes to making new investments, the company plans to exercise patience.

“Today, discipline is a hallmark of our investment strategy,” DeRosa said, adding that the company hopes to model “the most successful growth companies of tomorrow, and not the bloated, inefficient structures of yesterday.”

Additionally, Welltower currently has 17 RIDEA senior housing operators in its portfolio—and it doesn’t expect to add many operators beyond this in 2017.

“I think we have a pretty strong bench,” DeRosa said. “We are focused on putting capital behind this very skilled group of operators. I would doubt that you’ll see us with 25 operators next year.”

All the while, Welltower doesn’t seem to be experiencing the same oversupply pressures as its competitors.

In fact, senior housing supply and demand “remain largely healthy, with pockets of imbalance,” Welltower Senior Vice President-Finance & Investments Shankh Mitra said during the earnings call.

About 73 million square feet of Welltower’s senior housing portfolio was impacted by new supply this quarter—but that’s down from the 90 million square feet that was impacted in the second quarter of 2016.

The REIT actually experienced a greater occupancy decline in independent living than it did in assisted living this quarter, but Mitra cautioned that “one quarter does not make a trend.”

“It depends on the particular asset in the particular submarket run by a particular operator,” he explained.

Welltower is optimistic that supply and demand will start to level out over time.

“Supply issues that have been impacting the senior housing industry may, in fact, start to moderate,” DeRosa said.

Overall, he characterized the company’s first-quarter 2017 performance as “predictable and right on track.” 

The company’s first-quarter 2017 FFO of $1.05 beat analysts’ expectations by 1 cent; the company’s first-quarter revenue of $1.06 billion, meanwhile, bet analysts’ expectations by $10 million.

At the close of the market on Friday, Welltower’s stock price had risen 81 cents to $69.80.

Written by Mary Kate Nelson

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