Company Reports

Welltower reported first-quarter results that were slightly better than our expectations, leading us to reaffirm our $107 fair value estimate for the no-moat company. Senior housing same-store occupancy fell 10 basis points sequentially to 83.4%, the first quarter-over-quarter decline since the first quarter of 2021, though we will note that the first quarter is usually one of the hardest quarters to increase occupancy and that year-over-year occupancy was still up 340 basis points. Rental rates increased by 4.8%, leading to same-store revenue growth of 10.3% that was slightly ahead of our 9.6% estimate. Operating expenses were not up quite as much, increasing 5.7% in the quarter, so same-store net operating income, or NOI, increased 25.5% for the segment, ahead of our 21.2% estimate. Welltower also reported same-store NOI growth of 3.8% for the triple-net segment, 3.1% for the skilled nursing segment, and 2.0% for the medical office segment. Combined, total company same-store NOI was 12.9% in the first quarter, better than our expectations of 9.8% growth. As a result, Welltower reported normalized funds from operations of $1.01 per share for the quarter, which was five cents better than our $0.96 estimate and 16 cents better than the $0.85 figure reported in the first quarter of 2023.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Fourth-quarter results for no-moat Welltower were better than we anticipated, giving us confidence in our $103 fair value estimate. Senior housing same-store occupancy improved 110 basis points sequentially to 83.3%, ahead of our 82.6% estimate. Rental rates increased 5.3% year over year, slightly below our estimate of 6.0% rate growth, leading to same-store revenue growth of 9.7% that was in line with our 9.6% estimate. However, fourth-quarter senior housing operating expenses were only up 5.7%, below our estimate of 6.9% expense growth, so same-store net operating income, or NOI, for the senior housing portfolio grew 23.7%, which was higher than our 19.5% estimate. Same-store NOI growth in the fourth quarter was 2.2% for the triple-net senior housing portfolio, 2.8% for the medical office portfolio, and 5.2% for the skilled nursing portfolio. As a result, total same-store NOI growth was 12.5%, which was better than our estimate of 9.2% growth. Welltower reported normalized funds from operations, or FFO, of $0.96 per share in the fourth quarter, four cents better than our $0.92 estimate.

Welltower reported third-quarter results that were slightly better than we anticipated, giving us confidence in our $103 fair value estimate for the no-moat company. Same-store occupancy for the senior housing segment improved 120 basis points sequentially to 81.7%, in line with our estimate of a 110-basis-point improvement. Rental rates increased 6.9% year over year, leading to same-store revenue growth of 9.8% for senior housing that was near our estimate of 9.6% growth. Meanwhile, same-store operating expenses only grew 5.1%, lower than our estimate of 6.8% expense growth, leading to senior housing same-store net operating income growth of 26.1% that beat our estimate of 19.6%. The company’s other segments also performed well, with the triple-net senior housing segment producing 3.9% same-store NOI growth, the medical office portfolio producing 3.4% same-store NOI growth, and the skilled nursing segment producing 5.3% same-store NOI growth. Combined, total company same-store NOI growth came in at 14.1%, ahead of our 10.1% estimate. As a result, Welltower reported normalized funds from operations of $0.92 per share in the third quarter, better than our $0.89 estimate and better than the $0.84 figure the company reported in the third quarter of 2022.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Second-quarter results for no-moat Welltower were relatively in line with our expectations, leading us to reaffirm our $98 fair value estimate. Same-store occupancy for the senior housing portfolio sequentially increased to 80.2%, better than our estimate of 79.9%. Rental rates increased 7.5% year over year, leading to second-quarter same-store revenue growth of 9.9%. Meanwhile, senior housing same-store operating expenses only increased 5.8%, so Welltower reported same-store net operating income growth of 24.2% for the senior housing segment that beat our estimate of 20.8% growth. The company's triple-net senior housing segment saw 3.1% same-store NOI growth, the medical office portfolio reported 3.2% same-store NOI growth, and the skilled nursing segment grew same-store NOI by 6.1%. Combined, Welltower reported total company same-store NOI growth of 12.7%, which was better than our estimate of 9.2% growth. Normalized funds from operations grew 4.0% year over year to $0.90 per share, in line with our estimate.

After seeing significant occupancy declines in 2020 due to pressures created by the coronavirus pandemic, occupancy in the senior housing industry has steadily recovered over the past two years. Senior housing fell from around 88% at the end of 2019 to a low point around 79% in the first quarter of 2021, but that figure has since recovered to 83% as of the end of 2022. Industry utilization has fully recovered to prepandemic levels with approximately 7.5% of all the over 80 population in the US living in a senior housing facility as of the end of 2022 despite dipping to 7.0% at the nadir of the pandemic. Therefore, the reason occupancy has not fully recovered to prepandemic levels is due to continued supply growth, with newly developed buildings contributing 3% additional units per year in 2020 and 2021 despite the decline in demand those years.

Welltower reported first-quarter results that were slightly better than we anticipated, leading us to reaffirm our $98 fair value estimate for the no-moat company. Same-store occupancy for the senior housing portfolio only improved 10 basis points sequentially to 79.4%, though that is relatively in line with our estimate of a 20-basis-point sequential improvement. Rental rates improved 6.8% year over year, leading to same-store revenue growth of 10.0% in the first quarter. Same-store expenses only grew 6.7%, leading to operating margins improving 240 basis points to 22.4% and same-store net operating income growth of 23.4% that was slightly better than our estimate of 21.3% growth. The triple-net senior housing portfolio only saw same-store NOI grow 0.6% in the first quarter, below our estimate of 2.4%, though same-store NOI for the medical office portfolio grew 1.6%, in line with our estimate, and the skilled nursing segment grew 4.2%, above our estimate of 2.5% growth. Combined, same-store NOI for the whole company grew 11.0% in the first quarter, above our 8.8% estimate. As a result, normalized funds from operations came in at $0.85 per share, a penny better than our $0.84 estimate for the first quarter.

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Fourth-quarter results for no-moat Welltower were mixed relative to our expectations, though we didn’t see anything in the quarter that would materially change our $97 fair value estimate. Same-store occupancy for the senior housing portfolio rose only 20 basis points sequentially, far below our estimate of a 130-basis-point increase, to 79.1% in the fourth quarter, though that is up 200 basis points year over year. However, senior housing rental rates grew 7.5% year over year, the largest single-quarter increase in the company’s history. As a result, senior housing same-store revenue grew 10.3%, beating our 9.4% estimate. Meanwhile, operating expenses grew 6.0%, below our estimate of 7.2%, leading to same-store net operating income growth of 28.1% that beat our estimate of 19.0%. The triple-net senior housing portfolio saw same-store NOI growth of 4.3%, and the medical office segment saw same-store NOI growth of 2.1%; both were relatively in line with our expectations. As a result, total company same-store NOI growth of 12.9% came in well ahead of our 9.1% estimate. Normalized funds from operations came in at $0.83 per share in the fourth quarter, slightly below our $0.86 estimate as the company issued more shares than we anticipated in the quarter.

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long-term, the best healthcare companies are well-positioned to take advantage of these industry tailwinds.

No-moat Welltower reported third-quarter results that were mixed compared with our expectations, though we didn’t see anything in the quarter that would materially change our $97 fair value estimate. Same-store occupancy improved 110 basis points sequentially and 390 basis points year over year to 79.7%, which was ahead of our estimate of 78.9%. Welltower reported that revenue per occupied room increased 5.3% year over year in the third quarter, the largest rental rate increase in the company’s history. As a result, same-store revenue for the senior housing portfolio were up 10.8% and same-store net operating income increased 17.6%, beating our estimate of just 9.1% growth. However, same-store NOI for the triple-net senior housing portfolio only increased 1.6%, slightly below our estimate of 2.5% growth, and same-store NOI for the medical office portfolio increased just 1.4%, below our estimate of 3.5% growth. Combined, Welltower reported total company same-store NOI growth of 7.2%, which was in line with our estimate of 6.9% growth for the third quarter. Welltower reported normalized funds from operations of $0.84 per share, which missed our $0.88 estimate but beat the $0.80 figure the company reported in the third quarter of 2021.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

Second-quarter results were relatively in line with our expectations, leading us to reaffirm our $97 fair value estimate for no-moat Welltower. Same-store occupancy in the senior housing portfolio sequentially improved 100 basis points, in line with our estimate, to 78.8% and is up 500 basis points year over year. Same-store revenue growth was 11.5% for senior housing in the second quarter, in line with our estimate, while same-store expense growth was 10.5%, slightly better than our estimate of 12.7% growth, which lead to same-store net operating income growth of 15.4% for senior housing. Same-store NOI growth for the triple-net senior housing portfolio was 9.9%, better than our 7.9% estimate. However, same-store NOI growth for the medical office portfolio was 2.5%, which was slightly below our estimate of 4.2% growth. Still, total company same-store NOI growth came in at 8.7% for the second quarter, slightly better than our 6.1% estimate. Welltower reported normalized funds from operations of $0.86 per share in the second quarter, in line with our $0.87 estimate and ahead of the $0.79 reported in the second quarter of 2021.

Welltower reported first-quarter results that were slightly better than we anticipated, though we didn’t see anything in the quarter that would materially alter our $97 fair value estimate for the no-moat company. Occupancy for the same-store senior housing portfolio sequentially improved 30 basis points to 78.0%, slightly below our estimate of a 50-basis-point improvement. Still, the recovery in senior housing fundamentals is well underway with same-store revenue up 11.2% year over year, slightly better than our 9.8% estimate. While same-store expenses were up 9.4% in the quarter, net operating income margins improved to 20.9% and same-store NOI grew 18.4%. Welltower’s other segments also produced solid same-store NOI growth with triple-net senior housing up 6.9%, medical office up 2.7%, health systems up 2.8%, and skilled nursing up 1.8%. Combined, Welltower produced total company same-store NOI growth of 8.9% in the first quarter that beat our estimate of 6.6% growth. Welltower also produced normalized funds from operations of $0.82 per share that beat our estimate for the first quarter by a penny.

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long-term, the best healthcare companies are well-positioned to take advantage of these industry tailwinds.

Fourth-quarter results for no-moat Welltower were slightly ahead of expectations, leading us to reaffirm our $90 fair value estimate. Occupancy for the senior housing same-store portfolio improved 140 basis points sequentially to 77.9%, in line with our estimate. With three straight quarters of sequential occupancy improvement, same-store revenue growth for the senior housing portfolio finally turned positive again, up 4.8% in the quarter. However, with labor costs increasing 12.8%, same-store expenses grew 8.8%. As a result, same-store net operating income fell 9.3%, though that is better than our estimate of a 16.4% decline and better than the double-digit declines the company reported over the prior six quarters. The rest of Welltower’s portfolio saw better same-store NOI performance with the skilled nursing portfolio down 0.8%, the medical office portfolio up 2.4%, the health system portfolio up 2.8%, and the triple-net senior housing portfolio up 4.2%. Combined, Welltower reported a same-store NOI decline of just 1.5% for the total company. The small decline in portfolio operations led to normalized funds from operations falling a penny year over year to $0.83 in the fourth quarter.

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long-term, the best healthcare companies are well-positioned to take advantage of these industry tailwinds.