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Morningstar | Welltower Beats on Fundamentals for All Segments and Misses Bottom Line Only Due to Timing in 1Q

Fundamentals have recovered faster then we expected in the first quarter of 2019 for no-moat Welltower. Same-store net operating income growth was 3.1% for the total portfolio this quarter, well ahead of our 1.8% assumption. The beat came across the board, though the focus will be on the strong results from the senior housing portfolio. Same-store occupancies were up 60 basis points to 87.8% and revenue was up 3.7% for senior housing. Even though expenses grew 4.0%, same-store NOI growth was 3.0%, significantly higher than the weak 2018 numbers and above our 2.2% assumption. The senior housing triple-net portfolio saw NOI growth of 4.0% and the skilled nursing triple-net portfolio was up 3.2%, both coming in above our 2.4% growth assumption. Medical office was lower than the rest of the portfolio but still beat our estimate with a 2.3% NOI growth rate in the first quarter.

While the same-store portfolio outperformed our expectations, Welltower executed more of its planned 2019 dispositions and issued more shares during the quarter than we expected. Normalized funds from operations came in 2 cents below our estimate at $1.02 for the quarter as a result of these items. We are encouraged by the strong fundamental results this quarter though note that the company did not updated its guidance for 2019. Given that we are in the middle of guidance for Welltower's NOI guidance for each segment and the company's normalized FFO range, we do not currently anticipate any material changes to our $77 fair value estimate for Welltower.

One thing that we are keeping an eye on is the EBITDAR coverage in the triple-net portfolio. This coverage is the EBITDA of the operator before paying rent to Welltower, so if the coverage ratio drops below 1.0 times then the operator will not be able to sustain rent payments at the continued levels. Falling coverage ratios have forced many healthcare landlords, including Welltower, to reduce rents to reestablish proper coverage ratios. The coverage ratio for both the senior housing and the long-term/post-acute care portfolios fell this past quarter. While management explained that part of the drop is due to the sale of the StoryPoint portfolio that was at 1.7 times EBITDAR coverage, the lower-end of the portfolio is also worsening. The percent of the portfolio trading below 0.95 times has grown to 26% of the senior housing portfolio and 18% of the long-term/post-acute care portfolio from 13% and 11%, respectively, at the end of 2018. If the strong performance seen by the senior housing operating portfolio can be replicated and sustained by the triple-net portfolio, then we should see the coverage ratios start to trend up over time. However, any further weakness may be a sign that rent will once again be written down in the future.