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Morningstar | Despite Headwinds, Welltower Continues to See Positive Senior Housing Growth in Third Quarter

Welltower produced better same-store growth than we anticipated and funds from operations in line with our expectations in the third quarter, its first full quarter after acquiring Quality Care Properties in a joint venture with ProMedica Health System. As a result, we are maintaining our $72 fair value estimate for the no-moat healthcare REIT. Same-store net operating income growth for the total portfolio came in at 1.6% for the third quarter, well above our estimate of flat growth. The senior housing operating portfolio saw occupancies only drop 10 basis points despite supply growth remaining above 3%. Same-store revenue growth remains healthy at 2.9% driven by rate growth, but wage growth of 5.1% drove 4.1% same-store expense. As a result, same-store net NOI for the sector was up only 0.3%, but this was still above our estimate and the results reported by other senior housing peers. Despite the weakness in senior housing, Welltower's internal growth is supported by the rest of its diversified portfolio. The company saw triple-net senior housing NOI growth of 4.2%, medical office NOI growth of 2.1%, and skilled nursing NOI growth of 2.1%, all above our estimates for the quarter. While the company had a little bit higher interest expense and share count than we estimated, the normalized funds from operations came in at our estimate of $1.04. Additionally, Welltower raised its 2018 normalized FFO guidance by 2 cents at the midpoint to $4.045 from $4.025, which is now on top of our 2018 estimate. We are pleased to see that Welltower continues to lead the industry in generating internal growth in the senior housing sector despite the near-term weakness felt in the sector.

Welltower announced two separate acquisitions of medical office assets that should close in the fourth quarter. The first is to acquire a 160,000-square-foot, 100% leased medical office building on the campus of the Johns Hopkins Howard County General Hospital for $80 million at a 4.9% cap rate. While the cap rate is a little expensive for just the building, we like the long-term prospects of this acquisition as the deal comes with 10 acres of land and a development agreement to build more assets linked to the hospital. Given that Welltower has been delivering development yields on existing medical office properties in the high-6s to low-7s, we like the long-term return potential from this deal. Welltower also announced a $400 million medical office portfolio of 23 properties with 979,000 square feet at 94% occupancy. While Welltower declined to provide additional details as negotiations are still ongoing with the seller, it did indicate that the cap rate was north of the 4.9% price paid for the Johns Hopkins asset and that the portfolio would generate at least a 7% unleveraged IRR. Both deals seem to be at least in part sourced by new Senior Vice President of Outpatient Medical Business Keith Konkoli, so we may see Welltower utilize the connections Konkoli made in his 20 years at Duke Realty to pursue more medical office acquisition and development deals.