Why Should You Retain Welltower (WELL) in Your Portfolio Now?
Welltower WELL is well-poised to benefit from its diversified portfolio of healthcare real estate assets. Rising healthcare spending and an aging population are likely to aid its senior housing operating (SHO) portfolio. Portfolio-restructuring efforts and a healthy balance sheet also augur well. However, competition in the senior housing market and tenant concentration in the triple-net portfolio raise concerns. High interest rates add to its woes.
The senior citizen population is expected to rise in the years ahead. As a result, the national healthcare expenditure by senior citizens, who constitute a major customer base of healthcare services and incur higher healthcare expenditures than the average population, is likely to increase in the upcoming period. Muted new supply has added to the positives for this industry. Hence, given these circumstances, Welltower’s SHO portfolio remains well-poised to capitalize on this positive trend.
With senior citizens’ healthcare expenditure expected to rise in the coming years and improving revenues and expense trends, Welltower’s SHO portfolio is well-prepared for compelling multiyear growth. For 2023, we expect a year-over-year increase of 23.1% in the portfolio’s same-store net operating income.
Given the continued strength of its SHO portfolio, aided by favorable demographic trends, healthy demand-supply fundamentals and robust and accretive capital deployment activity, the company recently amped up its current-year normalized funds from operations (FFO) per share guidance to the $3.51-$3.60 band from the $3.48-$3.59 band. We expect the metric to exhibit year-over-year growth of 14.9% in 2023.
Leveraging the favorable outpatient visit trend compared with in-patient admissions, Welltower’s efforts to optimize its outpatient medical portfolio, expand relationships with health system partners and deploy capital in strategic acquisitions seem encouraging.
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. In August, it partnered with Optima Living, a premier operator of senior residences, to manage six senior communities in Western Canada. Given that, Optima Living achieved more than 90% occupancy rates in its senior communities during the pandemic, the move seems prudent and is likely to aid in generating stable cash flows in the upcoming period.
This healthcare REIT’s accretive capital deployment activity over the years has been driving growth across its portfolio. Per its September Business Update, the company’s capital deployment from the beginning of the third quarter of 2023 through Sep 11 aggregated to around $1.3 billion. The transactions were carried out across the company’s senior housing, wellness housing, outpatient medical and skilled nursing property types.
Welltower maintains a healthy balance sheet position with ample financial flexibility. It had $6.7 billion of available liquidity as of Jul 28, 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.
Shares of this healthcare REIT have soared 22.6% over the past six months against the industry’s fall of 4.5%.
Analysts also seem bullish on this Zacks Rank #2 (Buy) stock. The estimate revision trend for 2023 FFO per share indicates a favorable outlook for the company as it has increased 1.4% over the past two months to $3.55. It also suggests a 6% increase year over year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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However, Welltower operates in a competitive market and competes with national and local healthcare operators regarding factors such as quality, price and the range of services provided, and reputation, location and demographics of the population in the surrounding area, along with the financial condition of its tenants and operators. This limits the company’s power to significantly raise its top line and ink deals at attractive rates. Also, tenant concentration at WELL’s triple-net portfolio is concerning.
Moreover, elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. The company has a substantial debt burden, and its net debt as of Jun 30, 2023 was approximately $13.7 billion.
Our estimate for 2023 interest expenses indicates a year-over-year increase of 19.1%. Further, the dividend payout might become less attractive than the yields on fixed-income and money-market accounts due to high interest rates.
Other Stocks to Consider
Some other top-ranked stocks from the REIT sector are SBA Communications SBAC and Americold Realty Trust COLD, each carrying a Zacks Rank #2.
The Zacks Consensus Estimate for SBA Communications’ current-year FFO per share has moved marginally northward over the past month to $12.90.
The Zacks Consensus Estimate for Americold Realty Trust’s ongoing year’s FFO per share has been raised 2.4% upward over the past month to $1.26.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Welltower Inc. (WELL) : Free Stock Analysis Report
