Welltower: Health Play on Senior Living

03/15/2017 7:00 am EST

Focus: REITS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Welltower Inc. (HCN) — a REIT that invests in senior living and healthcare infrastructure — reported full-year diluted EPS of $2.81, up 20.1% from last year, despite having 3.1% more shares outstanding, explains Jack Adamo, editor of Insiders Plus.

Earnings were helped by a big gain on the sale of a property, but even without that, earnings from continuing operations were up 18% on a 10.9% rise in revenues. Income taxes took a much bigger bite this year too.

Normalized Funds From Operations were $4.55 per share, up 3.9% from last year. FFO is a non-GAAP measure and "normalized" is even more so, if that's possible.

But I looked over the adjustments and was satisfied that they were not out of line for the industry. Dividends per share rose 4.2% year-over-year to $3.44.

So, it was an outstanding performance all around. I'm still trying to figure out why people didn't like this stock a few months ago. The company was selling assets? What large company doesn't do that sometimes?

But that's good for us; Joe Sixpack's loss is our gain. We have a stock with great growth prospects and 4.9% yield that's rising.

There's no cash flow statement yet; we'll have to wait for the annual report for that, but the balance sheet is very solid. The outlook is promising as well.

The company expects in-progress developments of approximately $544 million to come on line this year and generate yields of approximately 7.7%.

In addition, it has $323 million in projects in the pipeline for 2017. Earnings guidance for the year ahead is for net income in a range of $2.65 to $2.75 per diluted share, and normalized FFO from $4.15 to $4.25 per diluted share. That's a P/E of about 16, based on FFO, which is how real estate investment trusts are normally valued.

This company's stock has been fairly volatile, but with dividends reinvested it has risen 7-fold over the last 20 years while the S&P 500 has risen slightly more than 3-fold.

Moreover, with its holdings focused on healthcare and elder care, demographics are definitely on its side. I'm thinking of adding to our position, but I'm a bit gun-shy of the large run-up in the market lately. I'd like to get the best price we can. For now, I rate Welltower as a buy up to $71.50.

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