The pandemic led to a bifurcation in the health-care real estate investment trust (REIT) industry. Medical-office and research facility-centered landlords, for example, have done quite well, while those providing care to seniors have struggled. Welltower (WELL 0.32%) falls largely into the latter category and cut its dividend 30% in 2020. But here are 10 reasons why you might want to consider it just the same.
1. A growing population of customers
About two-thirds of Welltower's net operating income is derived from senior housing, ranging from senior-independent communities all the way to nursing homes properties. Clearly, this REIT has made a bet on caring for the elderly. And thanks to the aging of the baby boom generation, there's going to be a lot more demand for this landlord's properties. In 2020, 17% of the U.S. population was 65 or older. That is projected to rise to 22% by 2040, representing a 44% increase in the total number of people in the 65 and older category.
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2. Needed services
As people age they generally need more help with daily tasks. Although care can be provided in a person's home, it is often most cost-effective to provide care in communal housing. At the extreme, costs of providing care in a nursing home (roughly 5% of Welltower's net operating income) can be just a third of other available options. The cost-benefits of senior housing may not be as dramatic, but the trend is the real story here.
3. Not much new construction
Although there's a tidal wave of seniors on the way and care in group settings offers material benefits, construction of new facilities has been minimal. For senior housing, construction starts in the third quarter of 2021 were 71% lower than they were at their peak in 2017. In the nursing home sector, demand is projected to outstrip supply as soon as 2030, thanks to regulatory constraints on new construction. These are tailwinds for companies like Welltower that own senior housing.
4. Private-pay customers are a plus
Roughly 93% of Welltower's rents come from private-pay customers. That removes the risk of changes to reimbursement rates in Medicare and Medicaid, the typical payment method for nursing homes. To be fair, these two programs provided solid, reliable payments during the pandemic, while other forms of senior housing saw residents just move out. But, long term, having more private-pay customers is likely to be a net benefit because it makes increasing rent much easier.
5. Strong on the balance (sheet)
Although Welltower, and many of its peers, have faced headwinds during the pandemic, including falling occupancy (more on this below), the REIT's balance sheet retains its investment-grade rating. That means it should have ample financial flexibility to keep investing in its properties and in acquisitions, no matter what is going on in the broader market. And, in a worst-case scenario, it can lean on its balance sheet to muddle through really tough times if needed.
6. A giant
On top of a strong balance sheet, Welltower is one of the largest names in the health-care property market, with a market cap of $36 billion. This suggests that it would be easy for the company to access the capital markets if it needed cash. Combine points five and six, and Welltower is operating with a solid foundation that can be used to support future investments.
7. Diversified
While most of the company's business is tied to senior housing, its portfolio is pretty well spread out geographically. For example, it owns facilities in the U.S., Canada, and U.K. In the U.S., Los Angeles and New York combined account for more than 5% of rents, with 147 properties. The rest of the 1,720 properties are spread around another 40 states or so.
And while senior care is the big driver here, the remaining third of Welltower's portfolio is in office properties and health-care facilities, providing a bit of an offset to the ups and downs in senior housing.
8. On the mend
Senior housing is starting to show signs of recovery. For example, occupancy levels at senior housing assets that Welltower both owns and operates (known as SHOP in the industry) hit bottom in February and have been heading higher since. This is a trend that's being seen across the senior-housing sector and suggests that the worst is in the rearview mirror.
9. SHOP?
SHOP assets generate nearly 40% of net operating income. But because Welltower both owns and operates these facilities (it actually hires other companies to do the day-to-day work), the performance of these assets flows through to the company's top and bottom lines. This is why the dividend cut was needed in 2020 -- to help ensure there was enough cash to keep its facilities operating smoothly. But with business picking back up, Welltower is poised to rebound, as improved property performance will show up in its earnings just like the earlier declines did.
10. A well-covered dividend
The REIT's third-quarter dividend was $0.61 per share, and it had funds from operations (FFO) of $0.80 in the quarter. So, the FFO payout ratio was a reasonable 76%. That suggests that the dividend is pretty safe at the moment and could even be increased without too much of a stretch. Meanwhile, as SHOP gains start to boost FFO, investors should expect to see some dividend growth.
Not a slam dunk but worth a look
There's no reason to sugarcoat the problems that Welltower has faced -- the pandemic has been tough. But given its focus on senior housing, the outlook for the industry, its strong financial position, and the potential to benefit from an upturn in the SHOP portfolio, there's a lot to like here.
In fairness, the 2.9% dividend yield isn't huge. But for conservative investors looking for a diversified way to play senior housing, the risk-reward trade-off might just be worth it.
