Welltower (HCN +0.85%) once again went up against a tough comparable quarter when it owned more properties. That overshadowed the better-than-expected performance from the company's increasingly senior-housing-focused portfolio. Because it expects continued growth in this segment, Welltower boosted the low end of its guidance range.
Welltower results: The raw numbers
|
Metric |
Q3 2017 |
Q3 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Normalized FFO |
$399.8 million |
$420.8 million |
(5%) |
|
Normalized FFO per share |
$1.08 |
$1.16 |
(6.9%) |
Data source: Welltower. FFO = funds from operations.
Image source: Getty Images.
What happened with Welltower this quarter?
Welltower's senior housing business continues to excel:
- Welltower's FFO declined versus the year-ago period, mainly because it has undergone a strategic portfolio transformation over the past year. The company has already sold $1.4 billion in properties since the start of this year and expects to receive another $1 billion in sales proceeds by the end of December and the early part of 2018.
- The company has been using that cash to strengthen its balance sheet and make investments into new senior housing properties.
- The reason it's investing in more senior housing properties is that they continue to perform well. Last quarter, for example, same-store net operating income from that type of properties rose 4.1% while same-store revenue per available room grew 3.9%.
- Meanwhile, Welltower's credit metrics continue improving, with net debt to adjusted EBITDA, for example, falling from 5.65 to 5.19.
What management had to say
CEO Tom DeRosa commented on the company's third-quarter results and noted that Welltower is benefiting from a change in how it makes money from its senior housing properties:
We are pleased to again report a very strong quarter, headlined by our seniors housing operating performance. Our superior real estate, concentrated in major metro markets, and our deep collaborative efforts with our operators continues to lead to exceptional results. The conversion of Sagora Senior Living from a triple-net tenant to a RIDEA operating partner illustrates the advantage and depth of the Welltower platform.
Welltower continues to take advantage of a 2007 rule change -- the REIT Investment Diversification and Empowerment Act, or RIDEA. DeRosa pointed out that the company converted properties managed by Sagora Senior Living from triple-net to RIDEA. What this means is that instead of collecting a flat rental rate where the operating tenant pays all the building's expenses, Welltower now earns a portion of the net operating income generated by the property and is thus able to participate in the growth of the income produced by healthcare facilities. As a result, Welltower can grow FFO at a faster rate.
Looking forward
The upside from those agreements is evident in the company's updated guidance. Welltower noted that thanks to "continued strong seniors housing operating performance" it now anticipates that same store net operating income from these properties will grow by 2.5% to 3% this year, up from its prior view of a 2.25% to 3% increase. Because of that, the company now expects FFO to be in the range of $4.19 to $4.25 per share, which increased the low end of its previous guidance range of $4.15 to $4.25 per share.
