Replace Welltower With National Health Investors

Senior Housing is presently one of the fastest growing real estate sectors and has attracted quite a bit of investor capital. Almost all of that capital has poured into Welltower (NYSE:WELL) as it is the most direct beneficiary of senior housing same-store NOI growth. At this point, Welltower has become substantially overvalued, and there is not enough gap in quality to justify the extreme premium at which it trades over senior housing peers.

The underlying growth rate of National Health Investors (NYSE:NHI) is just as strong as that of WELL; there are just some overlaying factors that are making it less obvious. NHI is trading at less than half the multiple of WELL with similar growth potential, making it a much better way to play senior housing.

Senior Housing Fundamental Strength

REITs in general have resumed growth, with organic same-store NOI growth averaging 2.9% annually.

Within REITs, there is quite a dispersion of growth by sector. S&P Global Capital IQ shows healthcare as the top growth sector.

The categories above are broad real estate categories. Medical offices and skilled nursing are also large contingents of the healthcare real estate sector, and each only has modest growth. So while the healthcare sector had 6.6% same-store NOI growth, that is almost entirely carried by senior housing, which is actually growing in the low double digits.

That makes it the 2^nd fastest growing REIT property type behind manufactured housing. Manufactured housing is a small portion of the residential REIT market cap, so its growth in the above graph is being drowned out by the presently low growth in apartments.

Senior housing fundamentals are looking strong for five reasons:

1. Demographic – silver tsunami
2. High absorption
3. Reduced construction
4. Occupancy upside
5. Nest eggs fueling affordability

The population is aging, both in the U.S. and globally. It is referred to as the silver tsunami and pointed to as a driver for senior housing. As more people reach prime senior housing age, demand naturally rises. This has led to strong absorption, with particularly strong move-ins over the last five years.

Unfortunately, the silver tsunami concept was also front and center in the minds of developers who got very ambitious in the 2015-2019 era. New supply of senior housing averaged about 3% of existing inventory annually.

This created a supply glut in 2018 and 2019 that became disastrous for the industry as the COVID pandemic led to substantial negative absorption in 2020 and early 2021.

Occupancy plummeted, and senior housing operators struggled. Many were forced to either go out of business or renegotiate leases with landlords, which in turn damaged the senior housing REITs.

During this era, many triple net leases were renegotiated into SHOP, or Senior Housing Operating Portfolio. It was a painful transition, as in those days, operating profits were far lower than the former rental streams.

Senior housing started to rebound in 2022. Absorption rebounded to about 5% annually, dropping to about 3% annually, as compared to new supply, which dropped to about 1% annually and has remained at that low 1% range.

The positive delta between absorption and new supply means occupancy has been recovering nicely. Occupancy has recovered from below 80% to close to 90%. Full occupancy is around 96%, so there is still a significant amount of occupancy growth ahead, and I believe most of it will be achieved since construction starts have remained low.

Additionally, the stock market remains quite strong, which is fueling nest eggs such that a higher percentage of seniors can afford the fairly lofty prices of senior housing. I think the wealth effect is particularly potent for the more discretionary side of SH.

You can see the way this whole timeframe played out in Welltower’s same-store NOI.

NOI got clobbered during the oversupply and pandemic but has sharply recovered from 2022 through today.

The recovery is complete in the sense that profits today are starting to surpass the pre-pandemic period, and there appears to be further runway for growth on both rate and occupancy.

During this recovery, there was increasing excitement for the senior housing sector, and the capital was disproportionately thrown at Welltower, resulting in a five-year price return of +181%.

I believe WELL has become materially overvalued.

Welltower Overvaluation

At first glance, it may appear that WELL’s price gains are justified by growth. FFO growth tracks quite consistently with market price, as seen below.

However, the above is a chart of FFO in the purple rather than FFO/share. During this same timeframe, shares outstanding have exploded.

As such, the strong FFO growth is not reflected in FFO/share, with WELL’s 25-year growth rate looking rather anemic.

Since FFO/share and AFFO/share growth have been modest in the long run and most of the recent growth represents recovery of what was lost in the pandemic, the earnings have not kept up with the market price.

The majority of the price movement has been from multiple expansion rather than growth. WELL now trades at a whopping 38.4X AFFO.

Peer senior housing REITs LTC Properties (LTC) and NHI trade at 13X and 16X AFFO, respectively. So Welltower is more than twice as expensive as its peers.

The overvaluation shows up in other metrics as well, with Welltower trading at 198% of NAV. That is higher than any other REIT.

In fact, current pricing represents an implied cap rate of 3%, while other healthcare REITs are trading at just over 8%.

I don’t think anyone would willingly buy real estate at a 3% cap rate when the 10-year treasury is still over 4%.

National Healthcare Investors – similar growth at a much better price

Welltower’s recent growth is impressive, with its senior housing operating portfolio (SHOP) growing at 23.4% year-over-year in Q2 2025.

If that growth were sustainable, it would justify the high AFFO multiple, but there is a big difference between true growth and growth that is a recovery of what was formerly lost, in this case during the pandemic.

NHI’s growth doesn’t currently look as impressive, but if one takes a longer run perspective, I think it is very similar. In fact, NHI’s 25-year FFO/share growth is substantially stronger than that of WELL.

NHI simply had less of a dip in 2020 and therefore less of a bounce in the following years.

They both have majority senior housing portfolios, so what is the difference?

NHI retained most of its triple net leases and only converted a small portion to SHOP.

57.4% of NHI’s portfolio is triple net senior housing, while only 5.1% is SHOP.

Its SHOP is growing at a similarly impressive pace to that of WELL.

NHI’s SHOP same-store NOI grew by 29% year-over-year, driven by occupancy gains, higher REVPOR, and margin expansion.

Triple net senior housing still experiences the same fundamentals – low supply, high absorption, and growing occupancy. It just reflects differently in the income statement.

Since revenue is contractual in nature, the REIT does not participate immediately in senior housing operations. Instead, what happens is the EBITDARM coverage improves. NHI did not lose as much revenue in 2020 because the tenant had to swallow most of it as EBITDARM coverage ratios collapsed.

Today, with senior housing fundamentals improved, the EBITDARM coverage ratios are fully recovered and looking quite stable. Further improvement in senior housing fundamentals will allow NHI to jack rent up on its tenants; it will just be delayed gratification as they have to wait for contract renewal.

My point here is that the underlying growth rates of NHI and WELL are very similar. They have similar property portfolios and are subject to the same underlying fundamentals.

The main reason growth rates currently look different is just the structure of WELL’s SHOP versus NHI’s triple net. Both are valid ways to do it and roughly equal in the long run. It is just a difference in timing.

I really don’t think that difference in timing is worth paying 38X AFFO for WELL when NHI can be bought at 16X AFFO.

Below are consensus estimates for NHI’s AFFO.

It is not rapid but quite solid for a 16X multiple.

Buying at today’s price nets investors nearly 5% AFFO growth on top of the 4.7% dividend. Those presumably combine to a market beating return.

The Bottom Line

Senior housing fundamentals are strong right now. Welltower’s appearance of outperformance is mostly illusory, having to do with contract structure rather than underlying differences.

In my opinion, now would be a great time to take gains on Welltower and reinvest in senior housing at a much better valuation with NHI.