Welltower (WELL) Q1 FFO Misses, Announces Quality Care Deal

Welltower Inc. (NYSE:WELL) reported normalized funds from operations (FFO) per share of 99 cents for first-quarter 2018, missing the Zacks Consensus Estimate by a penny. Further, on a year-over-year basis, the figure declined 5.7% from $1.05.

Results highlight a choppy seniors housing market.

However, the company posted revenues of nearly $1.1 billion, which beat the Zacks Consensus Estimate of $1.07 billion. It also compared favorably with the year-ago number of $1.06 billion.

Importantly, it was announced that Welltower and ProMedica Health System would acquire Quality Care Properties (QCP) real estate in newly-formed joint venture (80/20), for $20.75 per share. Also, ProMedica entered into a definitive deal to acquire the operations of HCR ManorCare and Arden Courts, QCP's principal tenants. In addition, ProMedica would enter into a 15-year absolute triple-net master lease as a tenant-to-real estate joint venture.

Notably, this $2.2-billion Welltower investment is estimated to provide around 20 cents per share annual accretion to the company. Further, it represents an 8% initial cash yield and 1.8x
property level EBITDAR coverage, with corporate lease guarantee from a secure investment grade health system. Moreover, with this partnership, ProMedica will gain immediate scale in the rapidly growing home health, post-acute and memory-care markets. It will invest as much as $400 million in capex over the next five years.

Quarter in Detail

Total portfolio same-store net operating income (SSNOI) inched up 1.8% year over year, mainly driven by growth in seniors housing triple-net, outpatient medical and long-term/post-acute care segments.

Welltower accomplished $578 million of pro-rata gross investments in the first quarter. This included $476 million in acquisitions/joint ventures, $59 million in development funding, as well as $43 million in loans. Notably, the company completed 67% of these investments with present relationships.

On the other hand, the company accomplished total dispositions of $987 million in the quarter. This comprised loan payoffs of $92 million and property sales of $895 million.

The company exited first-quarter 2018 with $202.8 million of cash and cash equivalents, down from $380.4 million recorded at the end of the prior-year quarter. In addition, as of Mar 31, 2018, the company had $2.1 billion of available borrowing capacity under its primary unsecured credit facility. Furthermore, it extinguished secured debt of $183 million during the reported quarter.

Dividend Update

Welltower announced a cash dividend of 87 cents per share for the first quarter. The dividend will be paid on May 23 to stockholders of record on May 8, 2018. This marks the company’s 188th consecutive quarterly cash dividend payout to stockholders.

2018 Outlook

Due to timing variability associated with the completion of the ProMedica joint venture and acquisition of Quality Care Properties, the company has not included enhanced acquisition-activity guidance in its current earnings outlook. As such, Welltower affirmed its normalized FFO per share outlook of $3.95-$4.05 for 2018. The Zacks Consensus Estimate for the same is currently pegged at $4.03.

Also, the company anticipates its 2018 average blended SSNOI growth of around 1-2%. In addition, the company increased its 2018 disposition proceeds projection to $1.9 billion from the $1.3 billion guided earlier.

Our Take

Welltower’s partnership with ProMedica Health System is a strategic fit. It spans the entire spectrum of care, including wellness, post-acute, assisted living, memory care, hospice and home health, and gives the company solid scope to capitalize on the individual market dynamics.

Nonetheless, the seniors housing market remains challenging. Additionally, rate hike is a concern for Welltower due to its high exposure to long-term leased assets. Stiff competition and effects of increased dispositions on earnings add to its woes.

Currently, Welltower has a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We now look forward to the earnings releases of other REITs like Alexandria Real Estate Equities, Inc. (NYSE:ARE) , Essex Property Trust Inc. (NYSE:ESS) and Regency Centers Corporation (NYSE:REG) . Alexandria and Regency Centers are scheduled to release results on Apr 30, while Essex Property is slated to report its numbers on May 2.

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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