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Welltower (NYSE:WELL) is the largest REIT specializing in healthcare properties, and has produced some pretty impressive returns throughout its 45-year history. But high returns generally follow high risk, so just how risky is Welltower? You may be surprised.

A 45-year record of consistent performance

While a company's past performance doesn't guarantee its future results, it's tough to ignore Welltower's history. Since 1971, it has produced an average annualized total return of 15.8% per year, a remarkable level of performance to maintain for four and a half decades. Think of it this way -- if you had invested $10,000 in Welltower in 1971, your investment would be worth about $7.4 million today.

Additionally, Welltower has managed to increase its dividend consistently (though not every single year) since inception. The cumulative dividend growth rate of 5.8% has helped Welltower's shareholders more than keep up with inflation, and there's no reason to believe this trend is in any danger of reversing. The current payout represents 75% of Welltower's FFO (low for an REIT), so there is plenty of room for dividend growth, even without considering future revenue growth.

Source: Welltower investor presentation

Factors that reduce Welltower's risk

First, the good news. Here are five major factors that help reduce Welltower's risk.

1. Size: Welltower is the largest healthcare-focused REIT with a total property value of about $42 billion. This reduces its dependence on any one property, and also allows the company to achieve more efficient operations than smaller peers.

2. Geographic diversity:  Not only are Welltower's properties spread out all over the United States, but the company has been aggressively expanding into Canada and the U.K. in recent years. It has invested $5.5 billion between those two markets, which provides added safety from localized headwinds.

3. Superior product: Welltower invests in facilities that are newer and nicer than those offered by its competitors. For example, its average post-acute or long-term care facility is 22 years old, while its peer-group average is 36 years. The company's senior housing portfolio is 13 years old, on average, while peers' properties are 18 years old. This leads to consistently higher occupancy rates.

4. Attractive markets: In addition to newer facilities, Welltower concentrates its portfolio in affluent locations. Its average senior housing property is situated in an area where the median household income is 50% higher than the average for REIT-owned properties.

5. Growing demand: I've saved the best for last here. One reason Welltower isn't risky is that the demographic trends favor strong long-term growth, rising demand, and higher income from its portfolio of properties. The 75-and-over population in Welltower's markets is expected to double over the next 20 years, and healthcare costs have been rising faster than the overall inflation rate for some time. In other words, there should be a steady growth in demand for medical facilities, especially for Welltower's senior-housing oriented portfolio. And, since commercial properties derive most of their value for their ability to generate income, rising healthcare costs should translate into property values that grow faster than other types of real estate.

Image Source: Welltower Investor Presentation

But, there are still some risks...

To be perfectly clear -- no stock capable of annual returns in excess of 15% is without risk, and Welltower is certainly no exception.

Interest rate risk is a big one to be aware of, especially in the current environment. In fact, recent speculation about an imminent hike in the fed funds rate is likely a big reason why Welltower underperformed the S&P 500 by a wide margin after some particularly hawkish comments from the Federal Reserve on Sept. 9 about the fed funds rate.

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Low interest rates are good for REITs for two main reasons. First, they make borrowing cheaper, which generally results in higher margins on acquired properties. Second, they make REITs more appealing to yield-seeking investors, creating upward pressure on their stocks. Think about it this way: When 10-year Treasuries are paying about 1.7%, it can seem worth the risk to own a REIT like Welltower that pays 4.7%. If those ultra-safe 10-year Treasuries are paying say, 4%, it changes things.

There are a few other risk factors worth mentioning as well. The rise in healthcare demand or costs that I mentioned earlier could be slower than expected, potentially leading to an oversupply situation. Or, one of Welltower's major tenants or operating partners could face financial troubles.

The bottom line

Although Welltower isn't without risk, it does appear to have an extremely favorable risk/reward profile. And, as long as its management sticks with the strategy that has produced such excellent returns for 45 years, any weakness in the company's stock should be nothing more than a temporary buying opportunity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.