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Welltower (WELL) Witnesses Occupancy Gains in Seniors Housing

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Welltower Inc.’s (WELL - Free Report) seniors housing operating (SHO) portfolio has been experiencing an improvement in move-in activity with manageable move-outs over the past few months. The widespread vaccination drives at assisted living and memory care facilities in the United States and the United Kingdom have reduced total resident case counts. As a result, Welltower’s communities have started to accept new residents.

The SHO portfolio has witnessed a sizeable recovery, with average occupancy levels outpacing the pre-pandemic averages. Per the August business update, while the SHO portfolio occupancy at the beginning of July was slow due to a significant holiday-driven fall in tour volume, the momentum picked up in the second half of the month, with overall July tour volume in the U.S. touching approximately 95% of the June levels.

Moreover, in the second quarter of 2022, WELL reported SHO portfolio average same-store occupancy year-over-year growth of 500 basis points (bps), primarily led by its U.S. and U.K. portfolios, which recorded occupancy growth of 640 bps and 750 bps, respectively. As a result, the SHO portfolio same-store revenues increased 11.5% year over year during the second quarter, which surpassed the previously issued guidance. Also, it compared favorably with the 460 bps occupancy growth seen in first-quarter 2022.

Furthermore, Welltower is focused on strategic portfolio optimization and synergistic collaborations with health systems to invest in the next-generation assets of health and wellness care delivery. Its near-term capital deployment pipeline remains strong.

From the beginning of the year through Aug 9, 2022, it completed nearly $2.5 billion of capital deployment activity with an initial yield of 5.2% and a stable yield of 6.6%. Moreover, Welltower's pro rata gross investments in the second quarter totaled $1.6 billion. This included $1.1 billion in acquisitions and loan funding and $448 million in development funding. It opened three development projects for a total pro rata investment of $84 million.

Management expects third-quarter 2022 performance to be robust. Seniors Housing Triple-net (NNN) portfolio continues to witness solid year-over-year same-store net operating income (NOI) growth, backed by CPI-based escalators and improvements in rent collections. NOI growth is expected to range from 5.0-6.0%.

Moreover, the total portfolio same-store NOI growth is estimated in the band of 7-9% owing to the continuation of the SHO portfolio recovery. The same-store NOI growth for the SHO portfolio is anticipated to lie between 15% and 20%, based on strong pricing power and occupancy growth.

However, management expects a reduction of 4 cents in normalized funds from operations (FFO) per share in the third quarter of 2022 compared with third-quarter 2021 due to higher interest rates on floating rate debt and the strengthening of the U.S. dollar. It projects third-quarter 2022 normalized FFO per share in the range of 82-87 cents. The Zacks Consensus Estimate for the same is currently pegged at 88 cents.

In the coming years, it is anticipated that the national healthcare expenditure will increase with the rise in the senior citizen population. This age cohort usually incurs more medical expenses compared with the average population. Welltower’s SHO portfolio is likely to capitalize on this trend. However, the hike in interest rates remains a concern for the company.  

Shares of this presently Zacks Rank #3 (Hold) stock have gained 4.6% over the past six months against the industry's decline of 1.3%.

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The Zacks Consensus Estimate for Extra Space Storage’s 2022 FFO per share has moved marginally upward in the past month to $8.30.

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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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