If you had invested just $1,450 in healthcare real estate investment trust Welltower (WELL 0.56%) at its initial public offering in 1971, and reinvested all of your dividends, you would be sitting on a million-dollar position today. Despite the outstanding track record of performance, there's reason to believe Welltower still has plenty of good years ahead. Here's a little bit about Welltower, and why it could make you a millionaire if you buy its shares and hold on for the long haul.
Welltower's business model
Welltower is a real estate investment trust (REIT) that focuses on healthcare properties. The company owns 1,375 properties.
The majority of the portfolio is made of senior-housing properties (70%), with the rest made of outpatient medical and long-term care facilities. Nearly all (93%) of the properties' revenue comes from private-pay sources, which tend to be far more stable and predictable than healthcare services dependent on government reimbursement programs, especially in the current uncertain Medicare environment.
Image source: Getty Images.
Welltower has two main sources of income. Some of its properties are leased to tenants on a long-term net-lease basis, which generates a steady, growing stream of rental income. In addition, a large portion of the senior-living portfolio's properties are operated as partnerships, where Welltower teams up with operators such as Sunrise Senior Living and Brookdale Senior Living (BKD -0.61%). It often comes as a surprise to shareholders that Welltower's largest source of income is resident fees and services, not rental income as with most REITs.
The company maintains a competitive advantage not just because of its size and financial flexibility, but also by investing in properties that are newer and in better condition than those owned by peers, and located in more attractive markets. Most of the properties are in high-barrier markets, where real estate values and household incomes are significantly above average. As an example, Welltower is currently developing a property in midtown Manhattan to capitalize on the underserved population of aging New York City residents.
In addition to its U.S. properties, Welltower has expanded into the U.K. and Canada in recent years, and nearly 250 of the company's senior housing properties are in these international markets.
An impressive track record of success
Since its 1971 IPO, Welltower has delivered strong and steady returns for its investors. Since its inception, the company has delivered 15.3% annualized returns, a remarkable level of performance to sustain over more than 45 years.
The company has a strong (but not flawless) track record of dividend increases, and has raised its payout at a 5.6% annualized rate. With a current FFO payout ratio of 83% (on the low end for REITs), there's no reason to worry about the safety of the nearly 5% dividend yield.
More good times ahead?
As you can see, Welltower has generated excellent returns for investors, and has sustained its high level of performance for an exceptionally long time period. However, the next few decades could be just as strong, or even better.
The main reason I love healthcare real estate as a long-term investment is the tremendous market opportunity. The U.S. population is aging fast -- in fact, the population of Americans over 85 is expected to double in the next 20 years.
Image source: Welltower investor presentation.
It's no secret that older Americans use healthcare facilities more, and spend more on care when they do. The average person in the 85+ group spends 390% more than the average American annually on healthcare. This should especially benefit Welltower, as it will create more demand for senior housing and medical office facilities, the company's main property types.
Image source: Welltower investor presentation.
In addition, the current healthcare real estate market is massive and full of opportunities for consolidation. The $1 trillion market is highly fragmented, with no REIT having more than a 3% market share, and all REITS owning just 15% of all properties. Just 10% of outpatient medical real estate is REIT-owned, which Welltower considers to be a particularly strong opportunity. For comparison, hotels and shopping malls are in the later stages of REIT consolidation, and are 40% or more REIT-owned.
The Foolish bottom line
No stock capable of 15% total returns is without risk, and Welltower is certainly no exception. For example, one of the company's operating partners could run into financial trouble, or higher interest rates could put pressure on the entire real estate sector.
However, for investors with a long time horizon, I feel that Welltower is still a very compelling stock from a risk-reward perspective. If you're looking for a way to capitalize on the growing need for healthcare in the U.S., this could be a smart way to do it.
