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Is it Wise to Retain Welltower (WELL) Stock in Your Portfolio?
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Welltower Inc. (WELL - Free Report) is well-poised to benefit from its diversified portfolio of healthcare real estate assets amid favorable industry fundamentals. An aging population and a rise in healthcare expenditure by senior citizens are likely to aid the senior housing operating (SHO) portfolio’s growth. Moreover, portfolio restructuring initiatives and a healthy balance sheet augur well. However, competition in the senior housing market and high interest rates pose key concerns.
What’s Aiding it?
The senior citizen population is expected to escalate in the coming years. This age cohort constitutes a major customer base of healthcare services and incurs higher healthcare expenditures than the average population. Hence, given the expected rise, they are likely to end up spending more on healthcare services in the upcoming period, poising Welltower’s SHO portfolio well to capitalize on this positive trend.
In addition, the senior housing industry is experiencing favorable demand-supply fundamentals, leading to margin expansion. Markedly, improving revenue and expense trends during the third quarter of 2023 led to a year-over-year same-store net operating income (SSNOI) margin expansion of 330 basis points. Given these underlying factors, Welltower’s SHO portfolio is well-prepared for compelling multiyear growth. For 2023, we expect a year-over-year increase of 25.3% in the portfolio’s SSNOI.
Speaking of Welltower’s outpatient medical portfolio, its efforts to leverage the favorable outpatient visit trend compared with in-patient admissions, expand relationships with health system partners and deploy capital in strategic acquisitions are encouraging. We expect SSNOI for the OM portfolio to rise 2.9% year over year for 2023.
Welltower’s strategic portfolio restructuring initiatives over the recent years have benefited the company in terms of attracting top-class operators and improving the quality of its cash flows. For instance, in August 2023, it partnered with Optima Living, a premier operator of senior residences, to manage six senior communities in Western Canada. The move is likely to aid in generating stable cash flows for this portfolio in the forthcoming quarters.
WELL’s capital-recycling efforts to finance near-term investment and development opportunities highlight its prudent capital management practices and pave the way for long-term growth. Notably, from the beginning of 2023 through Oct 30, the company 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. Pro rata property dispositions and loan payoffs during this period totaled $850 million.
This healthcare real estate investment trust (REIT) maintains a healthy balance sheet position and has $6.6 billion of near-term available liquidity as of Oct 30, 2023. It 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 rates. Therefore, with a well-laddered debt maturity schedule and enough financial flexibility, Welltower is well-positioned to meet its near-term obligations and fund its development pipeline.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have gained 9.5% compared with the industry's upside of 5%.
Image Source: Zacks Investment Research
What’s Hurting It?
Welltower faces competition from national and local healthcare operators regarding factors such as quality, price and the range of services provided. It also competes with respect to reputation, location and demographics of the population in the surrounding area, and the financial condition of its tenants and operators.
Such competition is likely to limit the company’s pricing power and ink deals at attractive rates. Also, tenant concentration in the triple-net portfolio is concerning.
Given a high interest rate environment, Welltower may find it difficult to purchase or develop real estate with borrowed funds as the cost of borrowing will likely be on the higher side. Our estimate indicates a year-over-year increase of 19.4% in 2023 interest expenses. Further, the dividend payout may seem less attractive than the yields on fixed-income and money-market accounts due to the high interest rates still in place.
The Zacks Consensus Estimate for Stag Industrial’s 2023 funds from operations (FFO) per share is pegged at $2.28, suggesting year-over-year growth of 3.2%.
The Zacks Consensus Estimate for First Industrial’s 2023 FFO per share stands at $2.43, indicating an increase of 6.6% from the year-ago reported figure.
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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Is it Wise to Retain Welltower (WELL) Stock in Your Portfolio?
Welltower Inc. (WELL - Free Report) is well-poised to benefit from its diversified portfolio of healthcare real estate assets amid favorable industry fundamentals. An aging population and a rise in healthcare expenditure by senior citizens are likely to aid the senior housing operating (SHO) portfolio’s growth. Moreover, portfolio restructuring initiatives and a healthy balance sheet augur well. However, competition in the senior housing market and high interest rates pose key concerns.
What’s Aiding it?
The senior citizen population is expected to escalate in the coming years. This age cohort constitutes a major customer base of healthcare services and incurs higher healthcare expenditures than the average population. Hence, given the expected rise, they are likely to end up spending more on healthcare services in the upcoming period, poising Welltower’s SHO portfolio well to capitalize on this positive trend.
In addition, the senior housing industry is experiencing favorable demand-supply fundamentals, leading to margin expansion. Markedly, improving revenue and expense trends during the third quarter of 2023 led to a year-over-year same-store net operating income (SSNOI) margin expansion of 330 basis points. Given these underlying factors, Welltower’s SHO portfolio is well-prepared for compelling multiyear growth. For 2023, we expect a year-over-year increase of 25.3% in the portfolio’s SSNOI.
Speaking of Welltower’s outpatient medical portfolio, its efforts to leverage the favorable outpatient visit trend compared with in-patient admissions, expand relationships with health system partners and deploy capital in strategic acquisitions are encouraging. We expect SSNOI for the OM portfolio to rise 2.9% year over year for 2023.
Welltower’s strategic portfolio restructuring initiatives over the recent years have benefited the company in terms of attracting top-class operators and improving the quality of its cash flows. For instance, in August 2023, it partnered with Optima Living, a premier operator of senior residences, to manage six senior communities in Western Canada. The move is likely to aid in generating stable cash flows for this portfolio in the forthcoming quarters.
WELL’s capital-recycling efforts to finance near-term investment and development opportunities highlight its prudent capital management practices and pave the way for long-term growth. Notably, from the beginning of 2023 through Oct 30, the company 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. Pro rata property dispositions and loan payoffs during this period totaled $850 million.
This healthcare real estate investment trust (REIT) maintains a healthy balance sheet position and has $6.6 billion of near-term available liquidity as of Oct 30, 2023. It 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 rates. Therefore, with a well-laddered debt maturity schedule and enough financial flexibility, Welltower is well-positioned to meet its near-term obligations and fund its development pipeline.
Over the past six months, shares of this Zacks Rank #3 (Hold) company have gained 9.5% compared with the industry's upside of 5%.
Image Source: Zacks Investment Research
What’s Hurting It?
Welltower faces competition from national and local healthcare operators regarding factors such as quality, price and the range of services provided. It also competes with respect to reputation, location and demographics of the population in the surrounding area, and the financial condition of its tenants and operators.
Such competition is likely to limit the company’s pricing power and ink deals at attractive rates. Also, tenant concentration in the triple-net portfolio is concerning.
Given a high interest rate environment, Welltower may find it difficult to purchase or develop real estate with borrowed funds as the cost of borrowing will likely be on the higher side. Our estimate indicates a year-over-year increase of 19.4% in 2023 interest expenses. Further, the dividend payout may seem less attractive than the yields on fixed-income and money-market accounts due to the high interest rates still in place.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Stag Industrial (STAG - Free Report) and First Industrial Realty Trust (FR - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Stag Industrial’s 2023 funds from operations (FFO) per share is pegged at $2.28, suggesting year-over-year growth of 3.2%.
The Zacks Consensus Estimate for First Industrial’s 2023 FFO per share stands at $2.43, indicating an increase of 6.6% from the year-ago reported figure.
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.