When it comes to diversified healthcare real estate investment trusts (REITs), Welltower (NYSE:WELL) is among the largest players in the space. And it has a history that's pretty impressive, too. But greatness is a heavy burden, and there's a difference between a great company and a great stock. Here's what you need to know about dividend stock Welltower before you jump aboard.
A great company
Welltower has one of the most diversified healthcare portfolios in the REIT sector. Roughly 63% of its net operating income (NOI) comes from senior housing. These are assets that provide limited assistance to largely healthy seniors. This is clearly the core of the portfolio, with 44% of NOI from properties it owns and operates (called senior housing operating portfolio, or SHOP in industry lingo, though technically it outsources the day to day operations to others) and about 19% from assets it leases out. About 22% of NOI is from outpatient medical facilities. A little under 7% is from medical systems (hospitals). And the rest comes from long-term/post acute care assets (nursing homes).
The only segment that Welltower doesn't have any exposure to in its portfolio is medical research, which is an area into which some of its peers have pivoted. However, that pivot came on the heels of Ventas (NYSE:VTR) spinning off its nursing home business before that sector started to struggle and Healthpeak Properties (NYSE:PEAK), formerly known as HCP, jettisoning its nursing home business after it began to struggle. Welltower bought into the space while it was struggling, adding the exposure when prices were relatively cheap. And, notably, this move kept the company focused on providing housing and care for seniors. Medical research, while a growing niche, is a slightly different business.
Also notable, roughly 93% of the company's top line comes from private payers. While not materially different from its closest peers, it provides material protection from changes in government reimbursement rates. That said, there is a very clear breakup here. The company's senior housing and outpatient businesses are largely private pay, while health systems and nursing homes are largely government pay. Since the latter are relatively smaller operations (about 15% of NOI) they don't impact the overall picture all that much, even though are far more exposed to Medicare and Medicaid payment changes.
Occupancy is fairly strong across the board, as well. And the company has been able to keep NOI growing, even in the senior housing space, which has been under pressure from a period of heavy construction. To put a number on that, Welltower was able to grow NOI in its operated senior housing assets by 2.8% in the most recent quarter while peers Ventas and Healthpeak experiencing declines of 5% and 4.1%, respectively. Clearly, Welltower is doing something right within its portfolio that its peers haven't been able to match.
Welltower's record on the dividend front is a bit harder to parse. It had a long streak of annual dividend increases, but has now held the dividend static for three consecutive years. Ventas has increased its dividend annually for more than a decade, while Healthpeak effectively cut its dividend when it spun off its nursing home business. So Welltower doesn't come off as best of bread here, but neither is it the worst.
Welltower is a highly diversified healthcare REIT that has done a good job of managing its business. Notably, it has seen success in a segment that has befuddled its peers. All in, it is a pretty great company that is highly respected by the markets it serves.
Is it a great stock?
But a great company can be a bad investment if you pay too much for it. For starters, dividend investors need to take the static dividend into consideration. A dividend that doesn't grow gets hit by the ravages of inflation over time, effectively reducing the buying power of the payment each year it isn't increased. REITs are specifically designed to pass income through to shareholders, so this is a big issue. And that's on top of a yield, at 3.8%, that is lower than what's on offer from its two closest peers. A relatively low yield with no growth isn't a big win for dividend investors.
Worse, while 3.8% may still sound desirable relative to the roughly 2% on offer from an S&P 500 Index fund, it is near the lowest levels in Welltower's history. That suggests a stock that is richly valued. A fact that is backed up by the REIT's price to normalized funds from operations (FFO) ratio of over 21 times, using the midpoint of the company's 2019 normalized FFO guidance. FFO is like earnings, meaning that Welltower is trading at a valuation that would be more aligned with a growth stock than a dividend stock that hasn't upped its dividend payment in three years.
Great in one way, not in the other
Diversified healthcare REIT Welltower is a very well-run company, highlighted by the fact that it is executing well in places that have caused problems for peers (operated senior housing assets and nursing homes). It isn't too far of a stretch to suggest that it is a great company. However, it is much harder to suggest that Welltower is a great dividend stock. A low yield relative to peers and -- more important -- relative to its own history, coupled with a steep valuation, suggest investors looking at the stock are better off putting it on their wish list than their buy list right now.