Replace Welltower With National Health Investors

Core Viewpoint - Senior housing is one of the fastest-growing real estate sectors, with Welltower (WELL) being the primary beneficiary of this growth. However, it is now considered overvalued compared to its peers, particularly National Health Investors (NHI), which offers similar growth potential at a significantly lower valuation [1][2][24]. Industry Overview - The senior housing sector is experiencing strong fundamentals driven by demographic trends, high absorption rates, reduced construction, occupancy upside, and increased affordability due to rising nest eggs among seniors [10][11]. - The average annual organic same-store NOI growth for REITs is 2.9%, with healthcare being the top growth sector, largely due to senior housing, which is growing in the low double digits [3][6][9]. Market Dynamics - The senior housing market faced a supply glut in 2018 and 2019, leading to negative absorption during the COVID pandemic. However, recovery began in 2022, with absorption rates rebounding to about 5% annually, while new supply has remained low at around 1% [13][17][18]. - Occupancy rates have improved from below 80% to nearly 90%, with full occupancy around 96%, indicating further growth potential [18]. Company Analysis - Welltower's stock has seen a five-year price return of +181%, but its valuation is now considered excessive, trading at 38.4X AFFO, compared to peers like NHI, which trades at 16X AFFO [22][32][34]. - NHI's growth potential is similar to that of Welltower, but it has retained a more stable structure with less volatility during the pandemic, resulting in a stronger long-term FFO/share growth rate [40][48]. Financial Metrics - Welltower's current pricing reflects an implied cap rate of 3%, significantly lower than the average cap rate of over 8% for other healthcare REITs, raising concerns about its valuation sustainability [34][36]. - NHI's same-store NOI grew by 29% year-over-year, driven by occupancy gains and higher revenue per occupied room (REVPOR), showcasing its strong operational performance [46][51]. Investment Recommendation - Given the current market conditions and valuations, it is suggested that investors consider reallocating from Welltower to NHI for better value and growth potential in the senior housing sector [52].