While commercial real estate transactions have been down in 2020 with the uncertainty in the market, Welltower (NYSE: WELL), one of the major three real estate investment trusts (REITs) in the healthcare space, is turning heads with their recent announcement. The REIT has just announced a handful of dispositions that total $1.3 billion. Even for a REIT with a $23.41 billion market cap, that’s a lot of real estate. What will these transactions mean for investors moving forward?
What Welltower is selling
The selling off of these properties began in mid-September, when they sold a senior housing portfolio for $702 million. This portfolio was part of a joint venture with a company that managed the properties. Welltower owned 80% of this joint venture.
This deal definitely wasn’t a fire sale by any means. This sale represented a 5.1% cap rate. This sort of valuation is a good sign for the senior housing market, especially with the trouble many healthcare REITs have been facing the past several months.
Next up is a $402 million joint partnership with Invesco Real Estate, in which Welltower will retain a 15% economic interest in the portfolio and keep the management and leasing responsibilities. This transaction is for a portfolio of 20 outpatient medical buildings. In addition to this, a right of first refusal was exercised on two other properties for $25 million.
Last, but not least, Welltower is also under contract to sell a six-property senior housing portfolio for $200 million to a fund co-managed by Taurus Investment Holdings and Northbridge Asset Management at a 4.9% cap rate. Welltower currently owns 95% of this portfolio and will retain 20% interest when the sale is completed.
With the sale of 54 other properties between two other transactions this year, Welltower is at $3.1 billion in pro rata closed dispositions so far in 2020.
Why is Welltower selling?
Welltower didn’t come out and give an exact reason for the sales, or a definitive plan on what their next moves will be. However, their $1.1 billion in proceeds from the sales will have a significant impact on their cash position and balance sheet.
The REIT has been working on improving their balance sheet since they ended the second quarter with a debt/EBITDA ratio of 6.32x. Since July 1, 2020, they have paid down $860 million in debt that had maturity dates ranging from 2022 to 2024.
While there aren’t any other deals announced at the moment, Welltower’s CEO, Shankh Mitra, said in a press release that they’re looking forward to more transactions in the near future to improve their liquidity and that they’re deploying capital in deep-value opportunities.
What does this mean for investors?
Welltower has struggled through the pandemic, which has resulted in a dividend cut from $0.87 in February to $0.61 in both May and August. This is the lowest dividend rate they’ve paid since a temporary cut in in the fourth quarter of 2006 and the first quarter of 2007.
It makes sense that they would want to increase their liquidity and get their balance sheet into a position to be able to restructure their portfolio. It will obviously have an impact on their revenues short term, but I believe these sales will help them come back out on top.
I wouldn’t be rushing out to buy shares of Welltower right now, but I wouldn’t be selling them either. I’m confident that their dividend will return to its pre-COVID-19 rate and that there will be a good buy opportunity for them if you keep an eye on what moves they make next.
