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4 Things Welltower’s Management Wants You to Know

By Matthew Frankel, CFP® - Mar 4, 2016 at 12:13PM

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The healthcare real estate industry is facing challenges, but Welltower wants to put investors' minds at ease.

Prior to Welltower's (WELL 1.04%) fourth-quarter earnings report, fellow healthcare REIT HCP offered disappointing guidance, and several operating partners such as Brookdale Senior Living also reported uninspiring earnings that sent shares of all healthcare real estate companies plunging. So, after the ensuing industry-wide panic, Welltower's management wanted to reassure investors that all is well with the company. Its recent share price rebound indicates they've succeeded -- at least for now.

HCN Chart

With that in mind, here are four things from Welltower's latest conference call that investors should know.

1. Don't worry so much about senior housing oversupply
While Welltower acknowledges that there are some markets where there is an oversupply of senior housing, the supply fears are a bit overblown -- especially when it comes to Welltower.

Welltower operates in markets with relatively high real estate values, and where the barriers to entry are higher than average to build new properties. In fact, Welltower's senior housing occupancy was up 80 basis points from the previous quarter, and same-store NOI in the U.S. rose by 4.3%.

2. Smart capital allocation will get Welltower through tougher times
Welltower wants investors to understand that while the market conditions were favorable in recent years, the company was aggressive in raising capital acquisitions, and built up an excellent portfolio. Now that there are industry headwinds and the public capital market isn't as great, the company is in a strong position with a significantly delevered balance sheet and the best healthcare real estate portfolio in the industry.

According to CEO Tom DeRosa, "Simply put, we've created a real operating platform, not a passive collection of assets in which success is measured only by year one FFO accretion."

The company has also delivered strong returns with asset dispositions, including the 2015 sale of its life sciences portfolio at an unlevered 15% rate of return. Welltower wants to remind investors of its strong history of using asset sales as a method of creating enhanced shareholder value, and the company plans to continue its strategy.

3. Don't underestimate Welltower's competitive advantages
Even though the healthcare real estate industry faces headwinds, Welltower's competitive advantages will allow it to deliver solid performance no matter what happens to its peers.

For starters, Welltower has built up scale in some of the most attractive real estate markets: Southern California, London, and the Northeastern U.S. Also, Welltower's properties tend to be newer and more attractive than its peers'. This superior quality in favorable markets will make a big difference if challenging market conditions continue.

According to CIO Scott Brinker: "Our history in the business tells us these markets will produce superior results. We're entering a period of increased separation among companies. Our real estate quality will stand out more than ever."

In this area, the results speak for themselves. Welltower delivered all-time highs in occupancy and tenant retention in 2015. I already mentioned the same-store NOI growth of 4.3% in the U.S. portfolio, and the Canadian portfolio delivered even better NOI growth, despite zero inflation in that economy.

Plus, keep in mind that the long-term demographic trends regarding the need for senior housing are extremely favorable, as I've written before.

4. This isn't the first time Welltower has been tested
Finally, DeRosa pointed out that this type of situation has occurred before, and that Welltower came out of it better than it went in.

"We are confident in our ability to create shareholder value in 2016 and beyond," he said. "Let me remind you that when senior housing was in disarray because of lack of capital post financial crisis or because of the oversupply in the early part of the century, our shareholders benefited tremendously and we grew exponentially by recapitalizing the industry."

He went on to say that the company is in its strongest position ever, thanks to its excellent balance sheet, strong relationships with operating partners, and large scale in top markets.

To sum up: The healthcare real estate environment is more challenging that it has been in recent years, but Welltower's management feels the company is in a position where it doesn't have to worry about this "noise" too much.

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