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Welltower's Third-Quarter Earnings Show Strong Senior Housing Performance

By Matthew Frankel, CFP® - Nov 7, 2017 at 3:37PM

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Welltower beat expectations on the top and bottom lines, and increased its estimates for the full year.

Leading healthcare real estate investment trust Welltower (WELL -0.02%) reported third-quarter 2017 earnings that beat the market's expectations, highlighted by strong performance in the senior housing portfolio. As a result, shares rose by about 2% following the announcement, indicating that investors were pleasantly surprised. Here's a rundown of the numbers, and what investors can expect going forward.

The headline numbers

Welltower's $1.09 billion beat expectations of $1.04 billion, and also represents a small gain over the same quarter last year. The market was actually expecting a drop in revenue, so this is certainly a positive sign.

In addition, Welltower's normalized funds from operations, or FFO -- the REIT version of earnings -- came in $0.03 ahead of expectations at $1.08.

Senior male patient being examined by nurse.

Image source: Getty Images.

Solid growth and increased guidance

Looking beyond the headline numbers, Welltower's third-quarter results look solid all around. The senior housing operating portfolio's same-store NOI increased by 4.1% year over year, and the company increased its guidance range for that metric due to better-than-expected performance. And, the company has successfully converted some of its triple-net leased senior housing properties to operating partnerships, significantly increasing its ability to generate revenue from resident fees and services.

There have been some investor fears about oversupply issues in senior housing, and this quarter's results could certainly help to calm them.

In addition, Welltower's balance sheet has improved significantly over the past year, with net debt to undepreciated capitalization down from 39.5% to 35.5% and its debt to EBITDA down from 5.65 times to 5.19 times. Through the first three quarters of 2017, Welltower has eliminated $1.3 billion of its debt.

Perhaps most importantly, the company increased its full-year 2017 guidance range by $0.02 at the midpoint, essentially telling investors that all of this strong performance should actually translate into higher profits.

An amazing long-term opportunity

This quarter was certainly impressive, and as the largest healthcare REIT in the market, Welltower is in a strong position to capitalize on the expected growth in the senior housing industry.

The ongoing retirement of the baby boomers is expected to cause a spike in the senior-citizen population over the next few decades, especially in the oldest age groups. In fact, the 85-plus age group in the U.S. is expected to double over the next 20 years -- and this group represents the target demographic for senior housing, which makes up 70% of Welltower's portfolio.

Chart showing projected growth of 85+ age group.

Image source: Welltower.

In fact, demand growth for senior housing units, which includes assisted living, memory care, and independent living, is expected to reach 96,000 units per year by 2030.

Chart showing expected surge in senior housing demand.

Image source: Welltower.

Other trends favor Welltower's strategy of focusing on high-barrier urban markets. The majority of seniors in America's largest cities say that they want to stay, and 81% are open to living in an urban senior living community.

Also keep in mind that much of Welltower's senior housing portfolio is structured as operating partnerships, not just leased properties, so Welltower will directly benefit by the increased income generated by its properties. In fact, 64% of the company's income comes from resident fees and services. Just 33% comes from rental income.

A good quarter and lots of room to grow

Welltower's third quarter should certainly be an encouraging sign for investors that the company's long-term strategy remains on track and that the company is capable of executing even if there are headwinds (such as oversupply or natural disasters) facing the industry. The bottom line is that Welltower's excellent more than 46-year track record of dividends is safe, and the stock should continue to be a source of income and growth for its investors for decades to come.

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