Welltower (WELL -0.89%) continues to pivot its portfolio toward assets with better growth prospects by jettisoning lower-return properties. That said, this transitional period is having an adverse impact on the company's earnings in the near term, which was evident again in its second-quarter results.

Welltower results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Funds from operations (FFO)

$391.0 million

$414.4 million

(5.7%)

FFO per share

$1.06

$1.15

(7.8%)

FFO payout ratio

82%

75%

7 percentage points

Data source: Welltower.

Senior couple in room looking at moving boxes on floor

Image source: Getty Images.

What happened with Welltower this quarter? 

Welltower disposed of more assets during the quarter:

  • Welltower's FFO was down again this quarter versus the year-ago period, due in large part to closing $1.1 billion in asset sales last quarter. While the company did sell another $160 million of properties during the quarter, it offset that by placing 10 development projects totaling $273 million into service. Furthermore, the company completed $292 million of new investments during the quarter, including $110 million of acquisitions. These new additions helped boost FFO by $0.01 per share versus the first quarter.
  • The company's retained portfolio continues to perform well, led by its senior housing business. Overall, same-store net operating income (SSNOI) grew 3.5% while same-store revenue per occupied room (SS REVPOR) grew 3.9%.
  • Another benefit of Welltower's portfolio transformation is the noticeable improvement in its balance sheet and credit metrics. For example, its net debt to undepreciated book capitalization declined from 39.2% in the year-ago quarter to 35%, while its net debt to adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) improved from 5.47 times to 5.17 times over the past year.

What management had to say 

CEO Tom DeRosa commented on the company's second-quarter results:

Our core diversified healthcare real estate platform continues to drive outperformance and demonstrates the value of owning best in class real estate managed by the industry's top operators. Increasing demand for high-end seniors housing has led to pricing power and enabled Welltower to drive consistent rate growth. We are pleased to be raising guidance for our total same store portfolio as a result of our strong first half performance.

As DeRosa notes, the company's underlying portfolio is doing quite well, thanks to the strong performance in of its senior housing properties. That outperformance through the first half led Welltower to increase its full-year guidance for SSNOI from 2%-3% up to 2.25%-3%. Given the trends in senior housing amid an aging population, the company believes that this focus will pay off over the long run.

Looking forward 

That said, Welltower isn't yet ready to adjust its full-year guidance for FFO, which it still expects will be in the range of $4.14 to $4.25 per share. Furthermore, the company still anticipates disposing of $2 billion of assets this year, which leaves it with roughly $700 million of property sales and loan payoffs to complete by year-end.