Welltower (NYSE:HCN) is a real estate investment trust, or REIT, that specializes in healthcare properties. In fact, with 1,676 properties in its portfolio, Welltower is the largest healthcare REIT in the market and one of the largest REITs of any kind.
The portfolio has undergone a bit of a strategic shift over the past few years, adding significantly to its concentration of senior housing and outpatient medical facilities. In all, 63% of Welltower's income comes from senior housing and 27% comes from outpatient medical and health-system properties. In addition, 95% of the portfolio is private pay, which generally translates to more stable revenue than government-dependent payments such as Medicare and Medicaid.
When it comes to senior housing, Welltower's strategy is to focus on high-barrier (read: expensive) markets. In fact, the company is currently constructing two senior housing facilities in Manhattan, a dramatically underserved market where more older residents prefer to age without moving out of the city. The company develops high-quality facilities and partners with some of the best operators in the industry to create a product that is not only better than the competition, but difficult to replicate by would-be competitors.
Welltower has grown through a combination of developments and acquisitions. As I mentioned, the company constructs brand-new, top-notch facilities in high-barrier markets but also loves scooping up existing properties with reliable tenants already in place, especially when it comes to outpatient medical facilities.
Why healthcare real estate?
To make a long story short, healthcare demand is expected to surge over the next few decades. Because of the aging of the massive baby-boomer generation, the older segments of the population are growing -- fast. In fact, the 85-and-above age group is expected to double in the next 20 years, and this is the primary demographic for healthcare services like senior housing and skilled nursing.
The aging population should be a big catalyst for medical-office properties, as well, as older Americans utilize medical facilities more often and tend to spend more when they do. In fact, the average person in the 85-and-older age group spends roughly five times as much as the average American spends on healthcare each year.
In addition to the demographic trends that should result in ever-growing demand, there are tons of opportunities for consolidation right now. Only 11% of healthcare real estate is REIT-owned -- compared with more than 40% for property types like hotels and malls. About 65% of outpatient properties (a $372 billion market) are currently owned by either health systems or the physicians who work in them, and Welltower views this as one of its biggest growth opportunities.
Simply put, it's often a win-win situation for a property owner to sell to a REIT like Welltower. Doing so frees up capital for the operator and gives Welltower a built-in, established tenant. And as the biggest player in its space, Welltower has a big advantage when it comes to the financial flexibility to pursue opportunities as they arise.
Dividends and valuation
Based on its current share price, Welltower pays a 4.6% dividend yield in quarterly installments. The company has a fantastic track record of dividend raises in most years throughout its nearly 50-year history. And the company's 83% FFO payout ratio is perfectly reasonable for a REIT, so there's no need to worry about the dividend's safety.
When it comes to valuation, it's worth mentioning that healthcare REITs, in general, have performed tremendously well over the past year or so, with Welltower up nearly 40% in that time. REITs, in general, have been doing well thanks to calming interest rate fears, and healthcare has been a particularly strong subsector.
That said, Welltower trades for 18.3 times its 2019 FFO estimate. I wouldn't exactly call this cheap, but it's not expensive either, especially when you consider the company's track record of market-beating returns and the growth potential in the industry. Since its 1971 inception, Welltower has delivered an annualized 15.1% total return for investors -- about 50% better than the S&P 500 during the same time period.
Is Welltower a buy?
Obviously, Welltower isn't quite as much of a screaming bargain as it was a year ago when it was trading for just about 13 times FFO, but that doesn't mean that it's a bad idea to buy it today. With a fantastic track record of delivering strong returns, a generous and well-covered dividend, and lots of room to grow, Welltower could be an excellent addition to a long-term investor's portfolio.