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Healthcare real estate investment trust Welltower (NYSE: HCN) typically doesn't surprise the market in its earnings reports, and the numbers this time were no exception, with solid FFO and FAD figures, and a modest dividend raise for 2017. However, the company announced a major overhaul to its property portfolio that investors need to know about.
The numbers look solid
For the third quarter, Welltower reported funds from operations, or FFO, of $1.16 per share, and funds available for distribution, or FAD, of $1.04. These figures represent solid year-over-year gains of 4% and 5%, respectively, and the FFO slightly beat analysts' estimates.
Welltower updated its full-year guidance for both metrics as well. The FFO projection was narrowed to $4.50-$4.56 from a previous range of $4.50-$4.60, so based on the midpoint of the revised guidance range, this could be a disappointment to investors. However, the FAD range was narrowed in the favorable direction, to $3.99-$4.05 from $3.95-$4.05 previously, so I'd call the overall change in guidance a neutral one.
The big surprise: A major portfolio shakeup
The most notable development is that Welltower announced a major repositioning of its portfolio, which includes $3.3 billion worth of property dispositions to take place during the fourth quarter.
Welltower plans to sell $1.9 billion of long-term and post-acute care properties and over $1.2 billion of senior housing. Included in this announced figure are $1.7 billion of properties operated by Genesis Healthcare (NYSE: GEN), and the company also announced plans to sell additional Genesis properties during 2017.
So why is Welltower doing all of this? Here's what the company aims to achieve:
- Welltower's private-pay revenue mix will rise to 92.4% from 89.4%. Private-pay assets are generally more stable, and other healthcare REITs have also taken steps to increase the level of private-pay assets in their portfolio. In fact, Welltower peer HCP, Inc. (NYSE: HCP) recently spun off nearly all of its long-term and post-acute properties into a newly created REIT.
- The concentration of long-term/post-acute care facilities will drop to 13.5% from 19.9%. These facilities tend to be dependent on government reimbursements, and Welltower and peers aim to move away from this type of arrangement.
- Welltower's leverage ratio will fall from 39.5% to 34.4%. This will strengthen the balance sheet and add financial flexibility. In fact, this repositioning will increase Welltower's liquidity by $1.35 billion, and debt payoffs will reduce the company's fixed-charge coverage significantly, as most of the proceeds from the property dispositions will go toward repaying various types of debt.
With "robust" capital markets, as well as a high investor interest in healthcare real estate, Welltower felt that now was an excellent time to get maximum value for its properties.
A dividend increase is on the horizon
As you can see from the graphic below, Welltower has increased its dividend in most years throughout its 45-year history.
CAGR = Compound annual growth rate. Image source: Welltower presentation.
Not surprisingly, another dividend hike has now been confirmed for 2017. Sure, an increase of a penny to an $0.87 quarterly payout isn't a huge boost, but a raise is a raise. The new payout corresponds to a 5.2% annual yield at the current share price, and represents less than 87% of the company's FAD, so there should be room to keep the streak of dividend increases alive in subsequent years.
Is Welltower a buy?
Welltower has not only grown aggressively in recent years, but it is now taking steps to ensure that its growth and income are sustainable for decades to come. Shareholders should applaud these changes, and should also consider the fact that Welltower yields more than 5% and has dropped by more than 15% over the past three months, along with most other REITs. If you have been on the sidelines when it comes to Welltower, this sector weakness could be a good opportunity to buy one of the best healthcare REITs.
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