As I stated in my article last week, Welltower's (NYSE:HCN) sell-off appeared to be too large based on peer earnings and guidance. Welltower is now pushing higher after beating earnings and posting guidance for 2016.
Welltower increased normalized funds from operations per share by 9.7%, year over year in Q4, to $1.13, beating analyst estimates by a penny. Full year 2015 FFO/share grew by 6.1% to $4.38, also beating estimates by a penny.
Revenues also beat estimates, growing Q4 revenues by 18.4% to $1.03 billion and growing full year 2015 revenues by 15.6% to $3.86 billion.
Welltower also released their 2016 guidance this morning which fell in-line with analyst estimates. FFO/share was guided to be $4.50-4.60, growing at 2.7%-5.0% over 2015's full year FFO/share.
Same store cash net operating income is predicted to rise in the ballpark of 2.5% to 3.0%.
Welltower's guidance differs greatly from peer HCP, Inc.'s (NYSE:HCP) guidance reported last week which brought Welltower and the entire sector lower. HCP predicted their FFO/share would decrease significantly and have same store cash net operating income grow by 1.5%-2.5%.
I am pleased to have added shares of Welltower near last week's lows during the self-off, though this move is still extremely short term. I do believe this morning's earnings report is reassurance that the company is moving in the right direction for the long term.
As of yesterday's close, Welltower sells at 12.4 times the midpoint of their 2016 FFO/share guidance. This is slightly higher than their two largest Healthcare REIT peers, HCP and Ventas (NYSE:VTR), selling at 9.9 times and 12.3 times the same measure, respectively. The overvaluation relative to these two peers seems reasonable based on the projected growth rates. HCP as discussed earlier is projecting a sharp decline in FFO/share and Ventas is projecting 3%-5% growth similar to Welltower.
Welltower's dividend yield stands at 6.1% as of Wednesday's close, slightly higher than Ventas which yields 5.8% and much lower than HCP which yields 8.4%, but some are speculating HCP's dividend safety may be in jeopardy as earnings drag.
I also believe there are two macro-related reasons for owning Welltower that will help long-term economics for the company.
1. The population is aging- healthcare facilities will remain in strong demand for many years moving forward with the growth in older population.
2. Long term rates are not rising as many predicted- many investors and Fed-watchers assumed long term rates would rise in the coming year. This would be a double-whammy for REITs as alternatives such as bonds become more attractive with larger yields and also because funding costs would rise for the REIT. The Vanguard REIT ETF (NYSEARCA:VNQ) yielded over 4% last year, in comparison to ten year Treasuries currently yielding 1.8%. I believe inflationary pressures from overseas will keep a ceiling on long term rates for some time moving forward which should keep REITs attractive.
Today's earnings release was reassurance that Welltower is the place to be in the Healthcare REIT sector. I expect their strong performance and macro-factors to push shares higher relative to peers moving forward.
Disclosure: I am/we are long HCN, VNQ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.