Back to top

Image: Bigstock

Here's Why Welltower (WELL) Shares Gain 10.5% in Past 6 Months

Read MoreHide Full Article

Shares of Welltower Inc. (WELL - Free Report) , carrying a Zacks Rank #3 (Hold), have gained 10.5% in the past six months against its industry’s fall of 8.4%.

This Toledo, OH-based healthcare real estate investment trust (REIT) has a diversified portfolio in the major, high-growth markets of the United States, Canada and the United Kingdom, which poises it well for growth.

Earlier this month, WELL reported first-quarter 2023 normalized funds from operations (FFO) per share of 85 cents, surpassing the Zacks Consensus Estimate of 82 cents. Its results reflected a year-over-year increase in total same-store net operating income (SSNOI), mainly driven by SSNOI growth in the seniors housing operating (SHO) portfolio. The company also raised its guidance for 2023 FFO per share.

Zacks Investment Research
Image Source: Zacks Investment Research

Let us now decipher the factors behind the rally in the stock price.

Welltower’s SHO portfolio has been experiencing healthy operating performance as this segment has been benefiting from an aging population and a rise in healthcare spending by this age cohort, which is generally higher than the average population.

In the first quarter of 2023, the SHO portfolio’s same-store revenues increased almost 10% year over year to $965.2 million, backed by a 240-basis point uptick in average occupancy from the year-ago quarter. Also, same-store revenue per occupied room improved 6.8%, contributing to the rise.

Consequently, the SHO portfolio recorded SSNOI growth of 23.4% year over year in the quarter, aiding total portfolio SSNOI growth of 11%.

Moreover, to enhance its SHO portfolio, Welltower has carried out various strategic acquisitions and recycled capital on the back of dispositions. This has helped it improve the SHO portfolio operator diversification and expand its geographic footprint in high barrier-to-entry urban markets.

Welltower’s "triple net" leases, where the tenant pays all taxes, insurance and maintenance for the properties in addition to rent, and long-term tie-ups with experienced healthcare management companies or operators insulate it from short-term market swings and drive steady top-line growth.

In addition, restructuring initiatives over the recent years have enabled it to attract top-class operators, while its dispositions helped improve the quality of its cash flows. Also, these efforts have added to its balance sheet strength, poising it well to capitalize on growth opportunities.

In December 2022, as part of the transition of the 147-property skilled nursing portfolio originally owned by Welltower and ProMedica in an 85/15 JV, Welltower and Integra Health entered into a master lease for the entire portfolio. As a result, ProMedica surrendered its 15% interest in the JV and was released of all its lease obligations for the entire portfolio.

In the same month, Welltower sold its 15% interest in 54 skilled nursing assets to Integra for around $73 million. Additionally, in January 2023, it sold 15% interest in 31 skilled nursing assets to Integra for nearly $74 million. This represented the second tranche of the 85/15 joint venture between Welltower and Integra. The remaining tranches are expected to close later this year.

As a result of the master lease agreement between Welltower and Integra, the formers’ combined cash rent will increase to more than 4% relative to the total current contractual rent from its prior JV with ProMedica, making the move a strategic fit.

WELL’s capital-recycling efforts have enabled it to finance near-term investment and development opportunities, which bode well. Notably, in the first quarter of 2023, the company completed pro rata gross investments of $785 million, with $529 million of acquisitions and loan funding at a blended initial yield of 7.7% and development funding of $257 million.

Welltower’s robust balance-sheet position and well-laddered debt maturity schedule poise it well to capitalize on long-term growth opportunities. It had $4.6 billion of total near-term liquidity as of Mar 31, 2023. Also, investment-grade credit ratings of BBB+ and Baa1 from S&P Global Ratings and Moody’s, respectively, allow it to access the debt market at favorable terms.

Nonetheless, intense competition from other industry players in the healthcare services sector and a high interest rate environment are key concerns for the company.

Stocks to Consider

Some better-ranked stocks from the REIT sector are Iron Mountain (IRM - Free Report) , Rexford Industrial Realty (REXR - Free Report) and Stag Industrial (STAG - Free Report) , 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 Iron Mountain’s 2023 funds from operations (FFO) per share is pegged at $3.96.

The Zacks Consensus Estimate for Rexford Industrial’s current-year FFO per share is pegged at $2.19.

The Zacks Consensus Estimate for Stag Industrial’s ongoing year’s FFO per share is pegged at $2.25.

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.

Published in