Welltower's (WELL) Stock Soars 36.7% YTD: Will the Trend Last?
Shares of Welltower Inc. WELL have soared 36.7% in the year-to-date period against the industry’s fall of 5%.
The Toledo, OH-based healthcare real estate investment trust (REIT) owns a well-diversified portfolio of healthcare real estate assets in the major, high-growth markets of the United States, Canada and the United Kingdom.
The recovery in the senior housing industry has been the key driving force behind the company’s growth post the pandemic. Also, portfolio-restructuring initiatives aimed at improving operator diversification and past accretive capital deployment activity have aided Welltower in riding the growth curve so far.
Last month, the Zacks Rank #3 (Hold) company reported solid third-quarter 2023 results on higher revenues and robust senior housing operating (SHO) portfolio performance. Normalized funds from operations (FFO) per share of 92 cents surpassed the Zacks Consensus Estimate for the same of 89 cents and climbed 9.5% year over year.
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Let us now decipher the factors behind the increase in the stock price and check whether the trend will last.
The senior housing industry is benefiting from an aging population and a rise in healthcare expenditure by this age cohort, which is generally higher than the average population. Given the robust demand for this need-based asset category coupled with muted new supply, Welltower’s SHO portfolio is witnessing healthy move-in activity, driving occupancy levels.
In the third quarter, a 220-basis point uptick in average occupancy from the year-ago quarter aided the SHO portfolio’s same-store revenues, which increased 9.8%.
Also, the improvement in revenue and expense trends in this portfolio over the past few quarters has led to significant margin expansion. We expect this phenomenon to continue.
Hence, with senior citizens’ healthcare expenditure expected to rise in the coming years and improving operating trends, Welltower’s SHO portfolio is well-prepared for compelling multiyear growth. For 2023, we expect a year-over-year increase of 25% in the portfolio’s same-store net operating income.
Welltower’s strategic portfolio restructuring initiatives over the recent years have enabled it to attract top-class operators and improve the quality of its cash flows.
Earlier this month, Welltower entered into a definitive agreement to dissolve the existing joint venture (JV) with Chartwell for the 39 assets in Canada. It intends to acquire the remaining interests in 23 high-quality senior housing properties from Chartwell and other JV partners while simultaneously exiting 16 properties by selling its interest to Chartwell.
The transaction, expected to close in the first half of 2024, will likely improve operator alignment across the Canadian portfolio and drive meaningful net operating income upside, making it a strategic fit.
In a similar move, in August 2023, the company partnered with Optima Living, a premier operator of seniors residences, to manage six seniors communities in Western Canada. The move is likely to aid in generating stable cash flows for this portfolio in the upcoming period.
Encouragingly, this healthcare REIT’s accretive capital deployment activity over the years has been driving growth across its portfolio. From the beginning of 2023 through Oct 30, Welltower completed $2.8 billion of pro-rata gross investments, including $2.1 billion in acquisitions and loan funding and $776.9 million in development funding. During this period, pro rata property dispositions and loan payoffs totaled $850 million. The company expects to fund an additional $334 million of development in 2023 relating to projects underway as of Sep 30, 2023.
Welltower maintains a healthy balance sheet position with ample financial flexibility. It had $6.6 billion of near-term available liquidity as of Oct 30, 2023. It also enjoys investment-grade credit ratings of BBB+ and Baa1 from S&P Global Ratings and Moody’s, respectively, rendering it access to the debt market at favorable terms. With a strong financial footing, this healthcare REIT remains well-positioned to meet its near-term obligations and fund its development pipeline.
The REIT, expecting to continue benefiting from the recovery in the senior housing industry, raised its expectations for current-year normalized FFO per share to $3.59-$3.63 from $3.51-$3.60 estimated earlier. Analysts, too, seem bullish on the company. The Zacks Consensus Estimate for WELL’s 2023 FFO per share has moved marginally northward over the past week to $3.59.
Nonetheless, Welltower faces competition from national and local healthcare operators. This may affect its pricing power in the market and hurt top-line growth. Also, tenant concentration in the company’s triple-net portfolio is concerning.
Given a high interest rate environment, the company may find it difficult to purchase or develop real estate with borrowed funds as the cost will likely be on the higher side. Our estimate indicates a year-over-year increase of 19.3% for the company’s current-year interest expenses.
Stocks to Consider
Some better-ranked stocks from the REIT sector are EastGroup Properties EGP, Stag Industrial STAG and Park Hotels & Resorts PK, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for EastGroup Properties’ 2023 FFO per share has moved marginally upward in the past month to $7.69.
The Zacks Consensus Estimate for Stag Industrial’s ongoing year’s FFO per share has been raised 1.3% over the past month to $2.28.
The Zacks Consensus Estimate for Park Hotels & Resorts’ current-year FFO per share has moved 3.1% northward over the past month to $1.98.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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