The price-to-FFO (funds from operations) multiple is the most popular method of valuing real estate investment trusts (or REIT) such as Welltower (HCN). FFO is the most widely used metric for evaluating REITs.
An REIT’s price-to-FFO multiple holds the same meaning as a PE (price-to-earnings) multiple does for equities in other industries.
Peer group’s price-to-FFO
Welltower’s current price-to-FFO multiple is 17.43x. This high price-to-FFO multiple signifies the fact that HCN has been consistently returning higher capital value over the past few months and that it’s also distributed reliable, steady dividend yields to its investors.
Welltower has undertaken several strategic steps to boost its market leadership. Apart from positioning its portfolios in high-barrier, affluent metro cities, it’s also recently undertaken several expansion initiatives. It’s also taken steps to streamline its portfolio by disposing of its noncore and underperforming assets. These disposals have resulted in a spike in its share price, pushing its price-to-FFO multiple higher.
In terms of price-to-FFO, HCN is trading on par with most of its peers. Its close peers HCP (HCP), Healthcare Trust of America (HTA), and Ventas (VTR) have price-to-FFO multiples of 16.28x, 18.07x, and 16.28x, respectively.
Peers’ dividend yields
HCN currently offers a next-12-month dividend yield of 3.4%, which is in line with the next-12-month yields of its close competitors. HCP, Healthcare Trust of America, and Ventas offer dividend yields of 2.1%, 1.2%, and 3%, respectively.
Determining net asset value (or NAV) is also a method for valuing REITs. The Vanguard REIT ETF (VNQ) has a market cap–weighted index with a broad product portfolio covering industries such as healthcare, self-storage, and residential REITs. VNQ has a net asset value of $81.2 million.
In the final article in this series, we’ll see how analysts view Welltower.