Leading healthcare real estate investment trust Welltower (HCN 0.52%) has grown tremendously since its inception in 1971. In fact, investors who got in at the ground floor are sitting on a total return of more than 75,000%. However, with the healthcare industry expected to grow rapidly in the coming decades and plenty of acquisition opportunities available, Welltower's best days could still be ahead of it.
Welltower: The one-minute version
Welltower is a real estate investment trust, or REIT, specializing in healthcare properties. At the end of 2016, Welltower owned just over 1,400 properties. Most of the portfolio (69%) is senior housing properties, and there are also substantial holdings in outpatient medical facilities (17%) and long-term/post-acute care properties (13%).
Senior housing is Welltower's main focus. Image source: Getty Images.
The basic strategy is simple: Acquire healthcare properties in desirable, affluent, high-barrier markets that are newer and more desirable than those of the competition. Then, partner with some of the best operators in the healthcare industry to run these facilities. Major senior housing operators such as Sunrise Senior Living, Brookdale Senior Living, and Benchmark Senior Living are among Welltower's largest tenants.
For example, Welltower's three largest senior housing markets are Los Angeles, Boston, and New York. The average U.S. senior housing property in Welltower's portfolio is 15 years old, as compared with 18 for peers, and is located in an area where household income is 50% higher. This business model has produced consistently better same-store NOI growth than peers, as well as higher occupancy levels.
Additionally, over the past few years, Welltower has expanded rather aggressively into the U.K. and Canadian markets, where the industry trends are just as favorable as they are here (more on that shortly). The company is now one of the largest REITs of any kind, and is also one of the more financially solid, with investment-grade (Baa1/BBB+) credit ratings and a rock-solid balance sheet.
Recent portfolio improvements and future goals
There have been a few notable changes to Welltower's portfolio and financial condition over the past few years.
For starters, the balance sheet has strengthened quite a bit over the past few years. Take a look at how Welltower's key debt metrics have improved since 2013.
|
Metric |
4Q 2013 |
4Q 2016 |
|---|---|---|
|
Net Debt/Enterprise Value |
38.3% |
31.1% |
|
Net Debt/EBITDA |
6.1x |
5.4x |
|
Interest Coverage |
3.4x |
4.2x |
|
Fixed-charge Coverage |
2.7x |
3.3x |
Data source: Welltower. All figures are "adjusted", where applicable.
Along with its third-quarter 2016 earnings report, Welltower announced a major shakeup to its portfolio. The company announced plans to dispose of $3.3 billion in assets, and as a result, the private-pay revenue mix increased, long-term/post-acute care concentration decreased, and perhaps most importantly, the company's leverage dropped significantly.
This is just the latest step in a longer-term portfolio transformation into a mostly private-pay dependent business model. Private-pay healthcare, as opposed to healthcare businesses dependent on government reimbursements, is generally more stable and predictable. And since the beginning of 2010, Welltower's private-pay revenue mix has increased from 69% of the portfolio to 93%.
Image source: Welltower investor presentation.
Two big reasons healthcare real estate could have a bright future
There are two main reasons I think Welltower's best days could still be ahead of it.
First, the U.S. population is getting older. The 65-and-older age group in the U.S. is expected to grow by more than 20 million people by 2030, and the 75+ and 85+ age groups are forecast to grow even faster. Senior citizens use healthcare services more than younger Americans, and tend to spend more. Plus, this trend is excellent news for Welltower in particular, since senior housing is the company's bread-and-butter.
Image source: Welltower investor presentation.
In fact, the demand for senior housing is expected to soar in the coming years.
Image source: Getty Images.
Second, the healthcare real estate industry is in the early stages of consolidation, and being that Welltower is the largest player in its industry, the company has a major advantage here. It's estimated that less than 15% of all healthcare properties are REIT-owned, and no REIT has a larger share of the $1.1 trillion industry than Welltower does.
The bottom line
I consider Welltower to be a low-risk stock over the long term. Healthcare real estate is an inherently defensive type of asset, as healthcare tends to do just fine during recessions, and tenants are usually on long-term leases.
However, Welltower can be quite risky to own over short periods of time -- say, less than five years. Interest rate risk alone can easily cause the stock price to fluctuate significantly, and that's actually the main reason Welltower dropped by 16% over the last five months of 2016.
For this reason, when I say that Welltower's best days could still be ahead of it, I'm saying that with a long-term focus in mind. Investors who are in it for the long haul should do quite well, so invest accordingly.
