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Is it Apt to Hold Welltower (WELL) in Your Portfolio Now?


Welltower Inc.’s WELL differentiated portfolio of seniors housing and medical-office assets positions it to capitalize on the growing demand for healthcare assets. However, rising supply of senior housing assets is likely to impair rent growth at Welltower’s properties.

In fact, per a presentation, nearly 10,000 baby boomers will turn 65 every day through 2030. As this long-awaited demographic boom is being realized, national healthcare expenditure will flare up. This is because senior citizens not only constitute the major customer base of healthcare services, but also end up spending more on healthcare services compared with the average population. This favorable demographic boom is fueling growth of healthcare REITs like Ventas, Inc. VTR, Senior Housing Properties Trust SNH and HCP Inc HCP.

As for Welltower, the company is focusing on expansion of its senior housing portfolio through strategic investments in a bid to benefit from the favorable demographics. In fact, concurrent with its second-quarter earnings, the company announced a number of transactions with operators for acquisition of healthcare properties.

Specifically, the company announced the acquisition of five seniors housing properties that were managed by Sunrise Senior Living for $285 million. Notably, the purpose-built, private pay properties had occupancy of 67% upon acquisition. Further, the infill locations of the properties in Washington, D.C., San Francisco and San Diego metropolitan areas will aid in future active leasing.

Additionally, in an off-market transaction, the company announced another acquisition of a portfolio of three infill seniors housing campuses in a joint venture with Discovery Senior Living. These assets were acquired for $216 million.

Hence, we believe Welltower has a solid upside potential, being well poised to grow on the back of these strategic transactions. The company also has a decent balance sheet position to support these growth strategies. In fact, it exited the June-end quarter with $268.7 million of cash and cash equivalents and had $1.1 billion of available borrowing capacity under its new primary unsecured credit facility.

Welltower currently carries a Zacks Rank #3 (Hold). Over the past three months, the stock has gained 11.7%, outperforming the industry’s 4.1% rise.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, the company has been aggressively disposing assets as part of its portfolio-repositioning efforts. In fact, in the first quarter and second quarter, the company accomplished total dispositions of $612 million and $14 million, respectively. Although, such efforts to improve its portfolio mix are commendable, the near-term dilutive impact on earnings from such asset dispositions cannot be bypassed.

Further, the prevalent softness in the senior housing environment is another concern for Welltower. Specifically, increase in the supply of seniors housing assets in certain markets is expected to affect the company’s performance in the near term. This is because elevated supply usually curtails landlords’ pricing power and limits growth in occupancy level. Intense competition also dents the company’s pricing power.

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