Welltower Is A Sell: Market Has Priced In Return To Pre-Pandemic Occupancy Too Soon

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Dear readers/followers,

Last week I wrote an article connected Sabra Health Care (SBRA) - a REIT specializing successful elder lodging and skilled nursing accommodation and while location look to beryllium galore tailwinds for nan manufacture arsenic a whole, I only gave SBRA a HOLD rating, chiefly owed to its debased occupancy and a precocious information of assets successful Skilled Nursing. Still, I for illustration to person astatine slightest immoderate vulnerability to healthcare REITs and since presently I only clasp a mini position successful MPW, I proceed to look for opportunities wrong nan sector.

Today I want to person a look astatine Welltower (NYSE:WELL), a REIT chiefly focused connected elder housing, and find whether it makes a bully finance based connected our accustomed criteria.

Recap of tailwinds

I described nan tailwinds facing nan manufacture successful item successful my Sabra article so if you want a elaborate thesis connected nan manufacture make judge you person a look. Here I conscionable want to summarize nan main points and stock immoderate absorbing charts that Welltower provided successful their presentation.

1. With Baby Boomers ageing, request will apt pick-up. In particular, we are adjacent nan inflection constituent and organization maturation of complete 80 year-olds is expected to prime up to 4.4% per year.

2. There has been a important alteration successful caller proviso of elder lodging complete nan past 5 years.

1. and 2. mixed should yet lead to an summation successful occupancy and eventually, unless proviso picks up, to an unbalanced marketplace pinch not capable inventory, which would thrust prices higher (similar to what we person successful nan residential market. Though frankly, I deliberation nan process will return galore years truthful for now I would conscionable attraction connected expanding occupancy to 90% and beyond.

3. Senior lodging REITs could person important pricing power, arsenic rents person not accrued astir arsenic overmuch arsenic wealthiness (for nan older generation), starring to nan highest affordability since 2008. Personally, I return this past floor plan pinch a atom of salt, because I deliberation nan wealthiness facet is very skewed by a very mini group of highly able group and don't deliberation nan mean American feels that rents are nan astir affordable ever.

Welltower Presentation

Senior lodging resilient successful a crisis

Welltower besides shows that elder lodging is reasonably resilient successful crises owed to its needs-based nature. This makes consciousness for 2 reasons - firstly, it is simply a needs-based work and group often person obscurity other to spell and secondly, nan older procreation is apt to beryllium little affected by a awesome crisis, because they're economically not arsenic progressive - they person nary occupation to suffer and often unrecorded connected fixed income which is unaffected by nan banal marketplace fluctuations.

This is illustrated by what hap during nan Great Financial Crisis. While location prices plummeted by almost 50%, elder lodging occupancy arsenic good arsenic rents remained reasonably stable. I don't expect nan perchance upcoming recession which we've been talking astir for complete a twelvemonth to beryllium astir arsenic bad arsenic nan GFC, but nan statement that elder lodging should beryllium reasonably resilient makes consciousness to maine and is yet different logic to adhd this assemblage to a portfolio.

Welltower presentation

Welltower basics

The institution operates astir 2000 properties chiefly located successful awesome cities successful nan US (87%) pinch immoderate vulnerability to Canada (7%) and nan UK (6%). The portfolio has go progressively concentrated successful Senior Housing (SHO + SH Triple-Net) accounting for 65% of NOI and has shifted distant from Long-Term/Post-Acute Care (LT/PAC) and Medical Offices (MOB). I really for illustration this arsenic nan shorter long leases successful SHO portfolio let for much predominant mark-to-market of rents. In position of operators, nan REIT is highly good diversified pinch only 2 operators accounting for much than 5% of full NOI (Sunrise Senior Living accounts for 8.2% and Integra Healthcare Properties for 7.8%)

Welltower presentation

Of these 4 segments that Welltower operates in, Senior Housing has nan lowest occupancy of astir 79%, followed by semipermanent attraction astatine 81% and aesculapian agency buildings astatine 94%. The Senior Housing occupancy levels are rather debased crossed nan manufacture (Sabra has 78%), partially still because of Covid arsenic group are reluctant to spell into these facilities. However, pinch President Biden announcing recently that nan nationalist wellness emergency will extremity connected May 11, things could amended going forward.

Welltower presentation

Financials

Though occupancy is still low, it is up from past twelvemonth (up 2 percent points from past twelvemonth for Senior housing) resulting successful a coagulated full portfolio YoY aforesaid shop NOI maturation of 12.9%. This translated into a akin maturation successful their reported FFO which stood astatine $3.35 per share. For 2023 management has guided to an FFO of $3.35 to $3.53 per stock (0-5% maturation YoY).

Dividends for 2022 stood astatine $2.44 per stock (payout ratio of 73%, compared to 81% for Sabra). At nan existent price, investors tin expect a dividend output of 3.3% which is rather debased for a healthcare REIT.

Welltower has a BBB+ rated equilibrium expanse pinch $14.5 Billion successful semipermanent debt, 84% of which is fixed-rate debt. The indebtedness maturities are dispersed complete time, but location are important repayments owed successful 2023 and 2024 of $700 Million and $1.8 Billion. With yearly FFO of astir $1.5 Billion, nan institution will apt not beryllium capable to repay each of this indebtedness from rate from operations resulting successful immoderate refinancing risk. However pinch a coagulated standing and $5.1 cardinal successful near-term disposable liquidity ($700 Million successful rate and $4.0 Billion of nether nan revolving statement of credit) I deliberation nan institution will beryllium capable to woody pinch this comparatively easily. Also nan near-term indebtedness already has comparatively precocious liking rates of 4.98% and 4.03%, respectively. This intends that erstwhile nan institution refinances this twelvemonth and adjacent year, liking disbursal will not summation that much.

Welltower presentation

Valuation

WELL presently trades 22.4x FFO which is measurement supra their semipermanent mean of 17.0x. The mean takes into relationship nan play aft 2010, if we were to see nan full history of nan stock, it would only guidelines astatine 14.3x. Personally I spot nary logic why nan institution deserves a higher aggregate than this, particularly erstwhile peers are trading overmuch little - Ventas (VTR) is trading astatine 17x FFO. This screams overvalued, particularly erstwhile mixed pinch an net driblet post-Covid (see nan driblet successful nan bluish statement aft 2019) and guidance fundamentally expecting 2023 to beryllium level successful position of growth.

And though analysts are expecting maturation to prime up to double-digits successful 2024 and 2025 pinch a target FFO of $4.55 per stock successful 2025, this apt won't beryllium capable to make it an charismatic investment. Even if FFO increases to $4.55, astatine a 17x aggregate we are looking astatine a value target of $77 per share, level from today. Combined pinch a debased dividend of conscionable 3.3%, nan banal seems apt to present sub-par results and underperform nan market.

Fast graphs

Frankly nan logic nan institution trades astatine a premium could partially beryllium justified by nan fact, that contrary to different REITs, it generates nan mostly of its gross from their Senior Housing properties successful a shape of resident fees and services, which are importantly much cyclical fixed their short long quality (compared to semipermanent organization lease). Currently we are astatine FFO lows, truthful a somewhat supra mean aggregate could beryllium justified.

The only measurement that nan valuation makes consciousness is if you judge that Welltower tin summation nan occupancy of its Senior Housing Portfolio to pre-pandemic levels. That would make a 60% NOI summation for nan company's largest conception and apt warrant nan existent valuation. Personally though I deliberation this is acold from guaranteed and surely will not hap immoderate clip soon.

Welltower presentation

Takeaway

I for illustration nan elder lodging assemblage arsenic it will apt look superior tailwinds complete nan adjacent decade. Most of nan companies wrong nan assemblage person been deed very difficult by Covid and are still recovering. Welltower is connected a way to betterment arsenic they managed accrued their occupancy by 2% successful 2022 and posted coagulated results. The institution is successful a bully style financially, but personally I judge that a return to pre-pandemic levels (additional 10% summation successful occupancy) will return years.

The market, however, seems to beryllium reasonably definite that worst is complete pinch nan banal trading astatine a important premium to some its humanities mean and peers. With level guidance for 2023, moreover if nan institution manages to turn by double digits successful 2024 and 2025, I don't spot imaginable for important value gains from today's levels - not until occupancy reaches 85-90%. And pinch a dividend output of conscionable 3.3% location is nary alpha here, I complaint WELL arsenic a "SELL" present astatine $75.00 simply because of overvaluation and because I spot amended opportunities successful this market.

I americium a worth and dividend investor pinch a existent property backstage equity background. Looking for sectors that are apt to outperform to rotate into those and hunting for dividend paying, undervalued gems wrong those sectors.Right now focused connected REITs and Financials. Stay tuned for in-depth analysis.Disclaimer: I americium not a financial advisor and nary of nan contented provided connected this website is financial advice. Content is provided for acquisition purposes only.