Leading healthcare real estate investment trust Welltower (NYSE:HCN) reported 2016 results at the top end of its guidance as well as strong improvement in the overall financial shape of the company. However, its newly released projections call for a drop in earnings for 2017, so what will this mean for Welltower and its investors going forward?
The numbers look solid
Welltower had a solid 2016, wherein it reported FFO of $4.55 per share, a year-over-year increase of 4% and at the top end of the guidance range of $4.50-$4.56. Also, the previously announced portfolio repositioning is starting to take shape. Welltower's private-pay revenue mix improved to 92.8%, up from 89.4% before the repositioning and even better than the pro forma 92.4% mix the company had projected.
In addition, Welltower's balance sheet became stronger and its credit has improved. The net debt-to-undepreciated book capitalization ratio dropped from 39.5% to 37.4% in 2016, and the company's credit ratings were upgraded to Baa1 and BBB+ from Moody's and S&P, respectively. This gives Welltower more financial flexibility going forward, as it was able to secure an expanded, lower-cost $3.7 billion credit facility.
The 2017 guidance seems a bit low, but don't panic
In its earnings press release, Welltower announced normalized FFO guidance in the $4.15-$4.25 range for 2017. At the midpoint of this range, this would represent a 7.7% decline from the 2016 numbers.
Admittedly, this isn't great news from a shareholder's perspective. However, it's not surprising given the portfolio restructuring efforts and other 2017 projections. For one thing, this guidance includes no acquisitions whatsoever and about $323 million in development funding (historically low for Welltower). Also, the guidance calls for $2 billion in dispositions, most of which was previously disclosed.
In a nutshell, Welltower is disposing of significantly more assets that it's bringing in, so the amount of income-generating real estate in the portfolio is declining in 2017 (by a percentage not far from the projected FFO decline). So, a mild drop in FFO is expected.
It's also worth noting that the portfolio repositioning efforts are nothing new. In fact, you can see from this graphic that the company's portfolio is very different than it was in 2010 -- specifically, senior housing now makes up much more of it, and the private-pay mix has grown substantially.
Is Welltower's dividend safe?
Welltower announced a dividend increase to $0.87 per share, effective with the Feb. 21, 2017, payment.
It's important to mention that even with the lower 2017 FFO guidance, this represents a payout ratio of 83%, which is still on the low end for a REIT. The bottom line is that Welltower's dividend is safe, and I'd be surprised if the payment isn't increased further next year.
What to expect going forward
As a final thought, keep in mind that despite any short-term headwinds due to portfolio repositioning, interest rate fluctuations, or other factors, Welltower's long-term thesis remains sound. The aging U.S. population should create plenty of growth opportunities going forward, particularly in the high-barrier markets Welltower focuses on.
For example, Welltower has a project underway in midtown Manhattan, which is anticipated to be completed in 2019. The company points out that Manhattan is a highly underserved population, with assisted living availability five times lower than the national average, and the elderly population is expected to grow rapidly. This is just one example of a potentially lucrative opportunity for Welltower in the years and decades ahead.
In a nutshell, what I expect Welltower to do going forward is the same thing it's done for the past 46 years -- grow in a responsible, value-maximizing manner and deliver exceptional long-term returns for shareholders.