Welltower Inc. 's WELL repositioning efforts that include strategic acquisitions and non-core dispositions will enable the company to strengthen its portfolio in high-barrier-to-entry affluent markets. However, accretive acquisitions and developments require significant upfront costs, dragging profit margins, while large-scale dispositions are likely to result in earnings dilution.
Most recently, the company partnered with developer company - Hines - for building a 17-story luxury senior living facility, spanning 140,000 square feet of space at the Upper West Side of Manhattan. For this, the companies have acquired a development site at 2330 Broadway, at the corner of 85 th Street, for $61 million. (Read more: Welltower to Build 2nd Seniors Housing Facility in Manhattan )
Further, demographic tailwinds are expected to drive the company's growth over the long term. In fact, the national healthcare expenditure may increase in the coming years, thanks to senior citizens incurring higher medical expenses compared to the average population.
Hence, with solid financial strength, the company has immense opportunities to increase investments in healthcare properties and bank on this trend.
Notably, the company is focusing on transformational joint ventures for its acquisitions. In July, this healthcare real estate investment trust closed the acquisition of Quality Care Properties, Inc. jointly with ProMedica Health System, in a $4.4-billion deal. In addition, operator transitions and innovative deal structures will likely drive long-term sustainability and cash-flow optimization.
Year to date, shares of this Zacks Rank #3 (Hold) company have outperformed its industry . The company's shares have rallied 10.3% compared with the industry's growth of 2.2%. Moreover, the stock has seen the Zacks Consensus Estimate for current-year funds from operations (FFO) per share being revised marginally upward in a month's time.
However, high supply of senior housing properties remains a concern for Welltower. This is because elevated supply usually curtails landlords' pricing power and limits growth in occupancy level.
For the nine-month period ended Sep 30, 2018, it disposed 84 assets for $1.4 billion, and expects disposition proceeds to be nearly $2.2 billion for 2018. Though such asset-pruning efforts aim at portfolio optimization, the dilutive impact on near-term earnings from such asset dispositions cannot be bypassed.
Also, rising interest rates is a risk for Welltower as it has substantial exposure to long-term leased assets. The properties under long-term triple-net leases generally have fixed rental rates, which are subject to annual escalations. Additionally, the cost of financing acquisitions and development projects flares up, affecting returns on such investments.
Stocks to Consider
A few better-ranked stocks from the same space are Cousins Properties Incorporated CUZ , PS Business Parks, Inc. PSB and Alexandria Real Estate Equities, Inc. ARE . All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Cousins Properties' FFO per share estimates for 2018 has been revised marginally upward to 62 cents in 30 days' time.
PS Business Parks' Zacks Consensus Estimate for 2018 FFO per share has been revised marginally upward to $6.42 over the past month.
Alexandria's Zacks Consensus Estimate for the current-year FFO per share remained unchanged at $6.61 in the last month.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportAlexandria Real Estate Equities, Inc. (ARE): Free Stock Analysis ReportPS Business Parks, Inc. (PSB): Free Stock Analysis ReportCousins Properties Incorporated (CUZ): Free Stock Analysis ReportWelltower Inc. (WELL): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research