Occupancy Trends And Tech Rollout Will Optimize Senior Housing

Key Takeaways

• Strong occupancy growth and strategic investments position Welltower for increased revenue and future earnings.
  
• Operational improvements and favorable demographic trends enhance profitability and revenue growth prospects in senior living markets.
  
• Reliance on acquisitions amidst capital constraints and competition may lead to execution risks, affecting revenue growth and earnings.

Catalysts

Welltower Inc. (NYSE: WELL) an S&P 500 company, is the world's preeminent residential wellness and healthcare infrastructure company.

• Welltower's senior housing operating portfolio has experienced significant occupancy growth, with expectations for this trend to continue into 2025. This could lead to increased revenue from higher occupancy levels driving stronger rental income.
  
• The company has successfully improved its operating margins through a spread between revenue per unit and expense per unit metrics, with expectations for sustained margin enhancements due to operating leverage. This improvement in margins impacts net margins positively.
  
• Welltower's capital deployment strategy highlights the execution of large investment activities, such as closing $2.2 billion in transactions recently. This positions the company to capture growth opportunities, contributing to higher future earnings.
  
• The development and rollout of a comprehensive operational technology platform aim to optimize operations across Welltower's senior housing properties, which should lead to cost efficiencies and enhance earnings over time.
  
• The anticipated demand-supply dynamics favor Welltower due to demographic trends, specifically an increasing 80-plus age population, combined with muted new supply. This environment is expected to bolster revenue growth from increased demand for senior living.

Welltower Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Welltower compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Welltower's revenue will grow by 19.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 11.9% today to 18.2% in 3 years time.
• The bullish analysts expect earnings to reach $2.5 billion (and earnings per share of $2.81) by about April 2028, up from $951.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 72.2x on those 2028 earnings, down from 98.8x today. This future PE is greater than the current PE for the US Health Care REITs industry at 33.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.61%, as per the Simply Wall St company report.

Welltower Future Earnings Per Share Growth

Risks

• The potential impact of high interest rates and ongoing debt maturity challenges could impede Welltower's ability to fund future growth, impacting net margins and earnings.
  
• The significant reliance on external growth through acquisitions, especially in a market with constrained capital and high competition, could lead to execution risks and affect overall revenue growth and earnings.
  
• Fluctuations in regional markets and the impact of geopolitical and regulatory changes could potentially disrupt the anticipated demographic-driven demand, affecting long-term revenue projections.
  
• The reported strong performance and growth in occupancy may face headwinds if anticipated demographic trends do not materialize as expected, ultimately affecting future revenue and operating income.
  
• Operational risks related to labor costs and staffing challenges in the senior housing portfolio, despite improving margins, could squeeze profitability and impact net operating income.

Valuation

• The assumed bullish price target for Welltower is $186.04, which represents one standard deviation above the consensus price target of $165.05. This valuation is based on what can be assumed as the expectations of Welltower's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $242.0, and the most bearish reporting a price target of just $134.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $13.5 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 72.2x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $146.59, the bullish analyst price target of $186.04 is 21.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.