Real estate investment trust (REIT) Welltower (NYSE: WELL) has undertaken a pretty dramatic transformation of its real estate holdings over the past couple of years by jettisoning lower-returning properties and replacing them with those that have better growth potential. While these moves have caused cash flow to decline in recent quarters, Welltower's return to growth is just around the corner, especially after forming a joint venture (JV) to acquire the healthcare real estate of Quality Care Properties .
Welltower results: The raw numbers
|Metric||Q1 2018||Q1 2017||Year-Over-Year Change|
|Normalized FFO||$368.2 million||$383.2 million||-3.9%|
|Normalized FFO per share||$0.99||$1.05||-5.7%|
|Normalized FFO payout ratio||88%||83%||-5.7%|
Data source: Welltower. FFO=funds from operations .
What happened with Welltower this quarter?
Asset sales caused cash flow to decline:
- Welltower's FFO took another step backward, falling versus last year's first quarter due to asset sales completed over the past year. In the first quarter alone, the company disposed of $987 million of assets, which included a $92 million loan payoff and $895 million of property sales.
- The company put some of this capital back to work by completing $613 million of new investments during the quarter, including $476 million of acquisitions and $137 million of development projects.
- Welltower used the rest of the money to improve its balance sheet, which helped push its leverage ratio down from 39.2% in the year-ago quarter to 35.3% at the end of the first quarter.
What management had to say
CEO Tom DeRosa commented on the quarter by saying that, "In a challenging environment for seniors housing, we have delivered a quarter in line with expectations and with positive same-store growth."
Mercedes Kerr, the Executive Vice President of Business and Relationship Management, further elaborated on the challenges facing the seniors housing sector in the accompanying conference call. Kerr stated that the flu "impact[s] senior housing revenues and expenses through voluntary and mandatory additional spending, higher than average move outs due to illness or death, and also with higher costs anytime that caregivers are temporarily replaced by agency labor when they are sick."
Kerr said that the company is monitoring these trends closely given the significant increase in flu-related illnesses in the senior population compared to last year. Kerr stated that because the flu season isn't over yet, "it's hard for us to quantify the precise impact of the flu at this time."
Despite the impact from the flu, Welltower reaffirmed its full-year guidance that FFO would be in a range of $3.95 to $4.05 per share, which would be down 5% at the midpoint from last year, mainly due to the asset sales.
However, the company also announced that it has some replacement properties lined up after forming an 80-20 JV with ProMedica, a leading not-for-profit health system, to buy Quality Care Partners. Welltower will invest $2.2 billion into this JV, which should generate an incremental $0.20 per share in FFO in its first year after closing.
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