Asset Sales Continue Pushing Welltower Inc's Earnings Down

By Matthew DiLallo Markets Fool.com

Welltower (NYSE: HCN) continued its strategic repositioning during the first quarter by closing the sale of a slew of assets to reduce debt and focus on its core portfolio. The impact of those sales masked the solid performance of its retained portfolio, led by the steady organic growth within its seniors housing portfolio.

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Welltower results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Funds from operations

$383.2 million

$401.0 million

(4.9%)

FFO per share

$1.05

$1.13

(7.1%)

FFO payout ratio

83%

76%

N/A

Data source: Welltower.

Image source: Getty Images.

What happened with Welltower this quarter?

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Welltower continued its portfolio purge:

  • Welltower's FFO slipped once again due to asset sales and lower leverage. The company closed $1.1 billion of dispositions during the quarter, against just $217 million of new investments. These sales enabled the company to reduce net debt by nearly $800 million, which pushed its key leverage metric from 37.4% to 35.8%.
  • The company partially offset this loss thanks to the healthy organic growth of its seniors housing portfolio. Same-store net operating income (SSNOI) grew 1.9% while same-store revenues per occupied room (SS REVPOR) was up 4.1%.
  • In addition to retiring debt, Welltower also used its cash proceeds to redeem all 11.5 million shares of its 6.5% Series J preferred stock, which reduces balance sheet complexity and improves future cash flow.

What management had to say

CEO Tom DeRosa,commenting on the results, said:

Welltower has once again delivered a strong overall quarter. Our premier seniors housing operators in high barrier to entry markets showed resiliency during a bad flu season and pockets of heightened supply nationwide, and were able to drive continued rate growth. We further executed on our strategy of deleveraging, while taking advantage of robust pricing to sell non-core assets in secondary markets at low cap rates. Our patience, discipline and the long-term nature of our decision making continues to drive shareholder value and best position Welltower for the compelling opportunities that lie ahead.

A focus of Welltower over the past year has been to take advantage of the high demand for medical properties in the marketplace by cashing in on non-core properties. That has been a noticeable trend within the healthcare REIT sector asMedical Properties Trust (NYSE: MPW) has also been selling assets to bolster its balance so it can pounce on better opportunities. In the fourth quarter, Medical Properties noted that it "capture[d] sizable gains from asset sales" last year, which it used to deleverage its balance sheet. That positioned Medical Properties Trust to pounce this year as better opportunities opened up. The company is on pace to buy $1.5 billion of higher return properties, which is well above its $500 million to $1 billion target. That's worth noting because Welltower's recent sales, as DeRosa notes, now have it well positioned to capture compelling opportunities as they arise.

Looking forward

That said, Welltower isn't guiding to make any acquisitions this year beyond what it already has in the pipeline. Because of that, the company is maintaining its full-year guidance for FFO, which it expects will be in the range of $4.14 to $4.25 per share. At the midpoint, that's down 7.8% from last year due to asset sales.

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Matt DiLallo owns shares of Medical Properties Trust. The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.