Healthcare REIT Welltower (NYSE:WELL) had a good year in 2016. FFO increased by about 4%, and shareholders received yet another dividend increase. However, its biggest win was not a matter of growth. The smartest move Welltower made in 2016 was its recently announced portfolio repositioning, which includes the sale of billions in properties.
Welltower's portfolio repositioning
Concurrent with its third-quarter earnings report, Welltower announced it would undertake a major repositioning of its portfolio. Most notably, this includes $3.3 billion worth of asset dispositions during the fourth quarter alone.
The dispositions include $1.9 billion of long-term/post-acute care properties, $1.2 billion of leased senior housing properties, and smaller amounts of operating senior housing properties and loan payoffs. $1.7 billion of the total planned dispositions for the year are Genesis Healthcare-operated properties, which will be sold in three separate transactions.
Welltower also outlined how it plans to use the $3.3 billion in expected proceeds -- primarily for financing the company's fourth quarter acquisition and development activity, paying off $1.35 billion of a credit line, and more than $1.4 billion of other types of debt reduction.
Why this is good news for investors
There are a few reasons Welltower's investors should applaud this move:
Obviously, debt reduction is good news. As a result of the dispositions, Welltower expects its leverage ratio to fall from 39.5% to 34.4%. This will increase its liquidity, strengthen its balance sheet, and add financial flexibility. It will also reduce the company's fixed-charge coverage from 3.4 times to 3.6 times, meaning that Welltower will pay out less of its earnings as interest, giving it more to pay out in dividends to shareholders.
In addition, Welltower's private-pay revenue mix will rise to 92.4% from 89.4% once the transactions are completed. Private-pay healthcare facilities, as opposed to those reliant on government-reimbursement programs such as Medicare, tend to be more stable and predictable as far as income goes. This is consistent with industry trends. In fact, fellow healthcare REIT HCP (NYSE:PEAK) recently spun off most its non-private-pay properties into a newly created REIT to accomplish the same goal.
Finally, it is typically a negative factor when any REIT is too reliant on a single tenant. Don't get me wrong, Genesis Healthcare is a solid operator, but too high a concentration of properties operated by one company creates an additional risk factor, should something go sour with the tenant's business. Since the repositioning will reduce the Genesis concentration in Welltower's portfolio by nearly half, to 7.1%, this is a positive development, and smart risk management.
It's also important to mention that Welltower plans to sell an additional $120 million worth of Genesis properties in 2017, and has given Genesis the option to buy back an additional $500 million of properties, so the concentration could potentially be reduced further.
What to expect going forward
Welltower, like most equity REITs, aims to deliver consistent, growing income to shareholders by maintaining a high-quality portfolio of properties and a rock-solid balance sheet. The company's 2016 portfolio repositioning will go a long way toward ensuring it can continue to achieve that goal.