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Morningstar | Third-Quarter Senior Housing Numbers Lower Our FVE but also Uncertainty for Welltower

We are reducing our fair value estimate for no-moat healthcare REIT Welltower to $72 from $74 after reducing near-term senior housing growth estimates, incorporating the HCR ManorCare acquisition into our model and making additional adjustments to our model ahead of the company's third-quarter earnings call. However, we are also reducing our uncertainty rating for Welltower from high to medium as our concerns over senior housing supply have waned over the past few quarters. The National Investment Center for Seniors Housing & Care reported that the national average for seniors housing occupancy was down to 87.9%, the lowest level since the second quarter of 2011. Inventory growth continues to outpace absorption, which suggests that occupancy will continue to decline further into 2019. Additionally, senior housing margins are likely to come under pressure as rent growth has fallen below national labor cost growth. We have reduced our growth assumptions for seniors housing in 2018 and 2019 to reflect the continued slowdown of this sector.

However, we continue to be positive about this sector's long-term outlook. The third-quarter NIC report also showed that construction as a percent of inventory has fallen for the third straight quarter. Companies are reporting that construction starts this year have been less than half of the volume seen in the peak year of 2015. The reduction in starts should lead to lower inventory growth in the next two years, at which point the absorptions should be increasing due to the aging Baby Boomer population. Seeing multiple quarters of declining construction starts and rising construction material prices gives us greater confidence that senior housing will be positioned to potentially produce several years of strong growth. With Welltower's strong position in the senior housing sector, we think that there is less risk for the company today then there was at the peak of senior housing supply a few quarters ago.