Welltower's Improving Occupancy Rates Strengthen Dividend Outlook

The onset of the pandemic in 2020 ignited a number of negative trends, including a dramatic decline in demand for senior housing, given the increased risks of COVID-19 for older generations.

Senior housing residents began to move out of these facilities and into the homes of family members, where they believed they were less likely to contract the coronavirus.

Some would-be residents postponed moving into senior housing, while others permanently altered their plans. Many facilities implemented temporary move-in restrictions as well to reduce the risk of the virus entering their communities.

Welltower, which generates over 60% of its operating income from both operating and leasing out senior housing facilities, was put in a difficult situation as occupancy rates in these properties, which had previously never dropped below 80%, fell below 73%.

As occupancy dropped, so did cash flow. With compressed cash flow and a cloudy outlook, Welltower took the unprecedented step in 2020 to cut its dividend by 30%, despite its history of paying uninterrupted dividends since 1971.

Nearly one year following the dividend cut, occupancy rates in Welltower's senior housing properties reversed course and have since shown steady monthly improvements.

Source: Welltower Investor Presentation, November 2021 
While occupancy remains below pre-COVID levels, the trending improvements are likely to continue as senior housing operators have an improved understanding of how to curb the spread of the virus, in addition to the availability of better medical treatments and high vaccination rates amongst residents and staff.

It appears the worst may be over for Welltower, with occupancy rates likely to continue trending back towards pre-COVID levels, especially when considering the continued improvements made late last summer despite the accelerating spread of the Delta variant. 

While Welltower has not fully recovered from the ongoing pandemic disruptions, the REIT is poised to benefit from the strong tailwinds of an aging population that can help accelerate the recovery.

Specifically, the population of those over the age of 80 is expected to grow by at least 3% over the next decade in each market Welltower serves.  

 

Welltower's portfolio of senior housing options, which includes independent living, assisted living, and memory care communities, is well-positioned to serve the needs of a growing pool of potential residents. 

Furthermore, this potential increased demand comes as the construction of new senior housing facilities has fallen 70% from its 2017 peak, following a period of overdevelopment.

Source: Welltower Investor Presentation, November 2021 
While industry supply currently exceeds demand, senior housing demand could start to outpace supply by the end of the decade, benefiting existing properties.

On top of improving occupancy and a promising outlook, the dividend cut of 2020 has provided Welltower with an improved payout ratio that is likely to withstand any near-term disruptions. In fact, the REITs payout ratio is about as healthy as it ever has been in recent history.

Source: Simply Safe Dividends
With the REIT's improving cash flow, positive outlook, and healthy payout ratio, we are upgrading Welltower's Dividend Safety Score from Borderline Safe to Safe. 

If Welltower's occupancy rates continue to improve as they have been as of late, we believe the REIT will be on track to increase its dividend late next year or sometime in 2023.

Regardless of a potential dividend raise, Welltower looks set to provide investors with a stable dividend income stream over the long run.