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Welltower (WELL) Rallies 15% in Past Three Months: Here's Why

Shares of Welltower Inc. WELL, carrying a Zacks Rank #3 (Hold), have gained 15% in the past three months, outperforming the industry’s growth of 5.7%.

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.

The company’s third-quarter 2022 results reflected improvement in the same-store revenues of the seniors housing operating (SHO) portfolio. The total same-store net operating income (NOI), too, increased year over year.

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Zacks Investment Research

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Let us decipher the factors behind the surge in the stock price.

Over the recent years, Welltower has undertaken restructuring initiatives that have enabled it to attract top-class operators, while its dispositions have 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, Integra Health entered a master lease with Welltower for the entirety of the 147-property skilled nursing portfolio. The move was part of Welltower’s efforts to transition the nursing portfolio.

In addition, ProMedica surrendered its 15% interest in the 85/15 joint venture (JV) that owned the nursing portfolio earlier.

Simultaneously, Welltower sold 15% interest in 54 skilled nursing assets to Integra for around $73 million. This represented the initial tranche of the earlier announced 85/15 JV between the two entities. Welltower is anticipated to carry out the sale of its 15% ownership interest in the remaining 93 assets to Integra over the next 12 months.

Integra intends to execute a business plan, which involves entering sub-leases with 15 regional operators with proven records in their respective fields. Given the extensive skilled nursing sector experience of Integra and its affiliates, Welltower’s recent move seems prudent.

Further, relative to the total current contractual rent from the prior ProMedica JV, Welltower's combined cash rent will increase to more than 4% as a result of a master lease agreement between Welltower and Integra.

Going forward, the company’s SHO portfolio 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 third-quarter 2022, the SHO portfolio’s same-store revenue increased 10.8% year over year to $707.8 million, backed by a 390 basis points uptick in average same-store occupancy from the year-ago quarter. Also, a 5.3% year-over-year rise in same-store REVPOR, which reached an all-time high, was a contributing factor.

WELL’s capital-recycling efforts have enabled it to finance near-term investment and development opportunities, which bode well. Notably, from the beginning of the year through Nov 7, 2022, the company completed $2.9 billion of gross investments with an initial yield of 5.2% and a stable yield of 6.7%.

Welltower’s robust balance-sheet position enabled it to capitalize on long-term growth opportunities. It had $5.6 billion of total near-term liquidity as of Nov 7, 2022. 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 rising interest rates are key concerns for the company.

Stocks to Consider

Some better-ranked stocks from the REIT sector are VICI Properties VICI, Equity Commonwealth EQC and Service Properties Trust SVC.

The Zacks Consensus Estimate for VICI Properties’ current-year FFO per share is pegged at $1.92. VICI carries a Zacks Rank #2 (Buy) at present.

The Zacks Consensus Estimate for Equity Commonwealth’s 2022 FFO per share stands at 33 cents. EQC sports a Zacks Rank #1 (Strong Buy) currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Service Properties Trust’s ongoing fiscal year’s FFO per share is pegged at $1.44. SVC currently carries a Zacks Rank #2.

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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