Welltower (HCN 1.86%) spent much of last year reshuffling its portfolio as it pivots toward where healthcare is heading in the future. Those sales have caused earnings to dip temporarily as the company applied the proceeds to repaying debt and funding higher-returning opportunities. With more asset sales planned for 2018, earnings will slip again this year.
Welltower results: The raw numbers
|
Metric |
Q4 2017 |
Q4 2016 |
Year-Over-Year Change |
|---|---|---|---|
|
Normalized FFO |
$380.3 million |
$401.5 million |
(5.3%) |
|
Normalized FFO per share |
$1.02 |
$1.10 |
(7.3%) |
|
Normalized FFO payout ratio |
85% |
78% |
Down 7 percentage points |
Data source: Welltower. FFO=funds from operations.
Image source: Getty Images.
What happened with Welltower this quarter?
Asset sales remain the main story at Welltower:
- Welltower's FFO declined versus last year's fourth quarter because the company completed asset sales or loan payoffs totaling $1.5 billion, only replacing that with $548 million of development projects. The company used the bulk of the proceeds to eliminate $1.4 billion in debt and preferred shares, which helped push its leverage ratio from 37.4% to 36.3%.
- While FFO declined, the company's retained portfolio performed well during the quarter: Same-store net operating income (SSNOI) grew 2.1%, with all its operating segments contributing toward the increase. Full-year SSNOI increased 2.7%, driven by 2.5% growth in its seniors housing operating segment.
- For the full year, Welltower delivered $1.55 billion, or $4.21 per share, of normalized FFO. While that was above the midpoint of its guidance range of $4.15 to $4.25 per share, it was down from 2016's showing of $4.55 per share.
- The company also noted that one of its tenants, Genesis Healthcare (GEN +0.00%), solidified its financial situation in early 2018 after securing financing commitments from a private equity fund and restructuring its master lease and loan agreements with Welltower. Among the changes in terms is a reduction of $35 million in the annual cash rent obligation under Genesis' master lease. Welltower also amended the annual interest rate on Genesis' real estate loans from 10.25% to 12%, with 7% paid in cash and 5% in kind. These adjustments will have a minor impact on Welltower's 2018 guidance.
What management had to say
CEO Tom DeRosa commented on the company's new partnership:
Welltower continues to redefine the role of a healthcare REIT as an active partner in driving the next generation of healthcare real estate. This is evident in our innovative outpatient collaboration with the third largest U.S. health system, Providence St. Joseph, in Mission Viejo, CA, and throughout our seniors housing portfolio, which has seen the Welltower platform deliver consistent growth through changing market environments. These settings will drive healthcare delivery to effective and technologically advanced real estate that is accessible, consumer friendly, and able to produce better health outcomes.
With a focus on the next generation of real estate assets, Welltower is partnering with a major U.S. health system to build a world-class outpatient care facility in a premier shopping, dining, and entertainment destination owned by Simon Property Group (SPG +2.50%). The 105,000-square-foot outpatient center will offer an array of health and medical services in Simon's The Shops at Mission Viejo. Welltower noted that this venture "represents the first time a major health system, a healthcare REIT, and Simon have collaborated to bring healthcare to a vibrant destination."
Looking forward
Despite all the progress in 2017, Welltower expects FFO to dip again this year, to a range of $3.95 to $4.05 per share, or down 5% at the midpoint. That's mainly because the company expects to dispose of $1.3 billion in assets this year, though the Genesis changes will also have an impact. However, that guidance could change if the company makes any acquisitions in addition to the ones it has already announced.
