Rising interest rates and continued expense pressures are complicating the future visibility of Welltower’s (NYSE: WELL) fourth quarter earnings.
Welltower management noted in a business update Tuesday that the company’s expected fourth-quarter 2022 funds from operations (FFO) per share are expected to see a new headwind of roughly three cents per diluted share headwind as compared with the third quarter of 2022. Those headwinds are resulting from higher interest rates and the stronger U.S. dollar, management noted.
Company leadership also noted that it is trending below its initial 3Q22 FFO guidance of $0.82 to $0.87 per share due to the delayed disbursement of funding from the U.S. Department of Health and Human Services (HHS).
Broad-based inflation pressures continue to impact “several key expense items,” including maintenance and repairs, utilities, food and labor costs, the company’s management said in the company’s latest business update.
The Toledo, Ohio-based real estate investment trust (REIT) expects approximately $2.4 million in HHS Provider Relief Fund dollars during the quarter, compared to the $7 million allotment assumed in its initial 3Q22 guidance.
Higher interest rates and a strengthening U.S. dollar in the third quarter of 2022 could result in an added headwind to normalized FFO of $0.005 per share, versus about $0.03 and $0.04 in 2Q22 and $0.04 in 3Q21 compared to 2Q2022 and 3Q2021, respectively. Welltower’s update states the impact was mainly driven by fluctuations in foreign exchange rates.
Despite the new headwinds to FFO, the company’s operating partners are on pace to realize an average increase of about 400 basis points. Welltower leadership also expects the company’s pricing power to remain “robust,” as evidenced by renewal rate growth and interim price increases by various senior housing operators.
In the third quarter of this year, Welltower completed nearly $850 million in gross investments. The company’s liquidity registered at about $2 billion as of the quarter’s end.
The REIT’s growth strategy is exemplified by major acquisitions, including the deal to buy 86 Holiday Retirement communities for $1.6 billion and a 33-community, $548 million deal with StoryPoint Senior Living. On top of those major transactions, Welltower has formed over two dozen new relationships with new senior housing operators since the beginning of the pandemic, priming the company for over $30 billion in potential capital deployment opportunities over the coming decade.
Welltower has so far reported $1.36 billion in net operating income (NOI) as of 2Q22.
Looking ahead at its future growth, Welltower expects to continue to take a “barbell approach” to senior housing investment, as previously reported by Senior Housing News.
“We want to be at a high price point [with] high-service products in high barriers-to-entry markets,” Welltower CEO Shankh Mitra said in July 2021. “Or we want to be at the lower price point [with] low service.”
Future growth in senior housing for Welltower is focused on the “luxury-end of affluent micro markets,” the business update stated, along with a focus on meeting unmet demand for wellness and social-focused rental housing “primarily in non-coastal U.S. markets.”
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