The assisted living industry is still very much in its infancy, only emerging as a housing and long-term care option for seniors with special needs over the past four decades. Welltower (NYSE:WELL), a healthcare real estate investment trust, began around the same time that assisted living facilities began to be built in 1970.
The recently rechristened Welltower (formerly Health Care REIT) is the largest healthcare REIT in the nation -- owning or having leases in place for some 1,400 seniors housing, post acute-care, and outpatient medical facilities across 42 states, including more than 200 internationally spread between the UK and to a lesser extent Canada.
While the company is already a market leader, some fascinating opportunities still lay ahead for the enterprise.
The population as a whole is getting older. According to the U.S. Census Bureau, the percentage of the population aged 65 or over is projected to double over the next 45 years, while the 85+ bracket is expected to triple. Similar overarching demographic trends exist in both the United Kingdom and Canada.
Over the long-term, this means an ever-greater percentage of people will be needing senior housing and medical facilities -- Welltower's exact specialty.
Its specialized capabilities have been built up over four plus decades of consistently allocating capital nationwide in the US, Canada, as well as across the Atlantic in the UK. Importantly the company has prudently undertaken such an expansion by partnering with the two largest operators of assisted senior living facilities in Canada, and it is doing the same in the United Kingdom, where they have entered into a contract with the UK's top private operator.
Speaking of demand, the Centers for Medicare and Medicaid Services projects that national health expenditures will rise at an average annual clip of 5.7% between the years 2013 through 2023. Under the Affordable Care Act (Obamacare), federal medical assistance funding was increased. As of early February 2016, roughly half of the states have also expanded Medicaid coverage. This expansion has the effect of increasing the revenue of Welltower's tenants/operators such as Genesis Healthcare and Sunrise Senior Living, especially in light of the fact that most of their operating leases are designed with escalating rent structures in place.
The breadth and variety inherent in Welltower's operations are no less than encyclopedic.
In seemingly every aspect, the company has taken steps to meticulously diversify its business in order to insulate it from undue exposure to either economic headwinds or counter-party risks to the extent possible.
For reporting purposes, the REIT has broken down its operations into three segments: triple-net properties which are leased out to third-party operators, senior housing operating consisting primarily of independent, assisted living facilities, and care homes, and lastly outpatient medical facilities. But to be more exact, it derives its operating income from five property types:
- Seniors housing operating: 35%
- Seniors housing triple-Net: 28%
- Long-term/Post-acute care: 21%
- Outpatient medical: 15%
- Hospitals: 1%
Here is how this compares against other public healthcare REIT's:
Equally impressive is the diversity among its operating partner/tenant base:
|Partner||%of net operating income|
|Sunrise Senior Living||13%|
|Brookdale Senior Living||7%|
|Benchmark Senior Living||4%|
This contrasts with its closest public competitors who are more reliant on single clients, as evidenced by Ventas' 22.5% exposure to its largest tenant and Healthcare Property Investor's 22% exposure to its largest operating partner (Brookdale Senior Living). Additionally, Sunrise Senior Living enjoys the full investment grade, financial backing of its parent company in Welltower, while Genesis Healthcare recently reported 11.6% year over year earnings growth in 2015.
A overall well diversified revenue/operating income base along with a healthy customer profile make Welltower strong enough to withstand most any vicissitudes which may sooner or later come its way.
New acquisitions, developments, and joint-ventures
Transaction volumewithin the senior housing sector is at an all-time high with approximately $17 billion in senior living mergers and acquisitions recorded over the past 12 months throughout the United States.
Welltower has been a prime participant in this consolidation wave of a fragmented $1 trillion dollar industry.The three largest owners of healthcare-related real estate in the country collectively make up only 7.4% of the overall market. Welltower has done so by scooping up newer, barely over decade-old premises, tenanted by over 14 of the healthcare industry's top operators of assisted senior living and long term/post-acute care facilities, in predominantly major metropolitan markets.
Looking ahead, the REIT is well-positioned to continue to grow given its scale and a long-tenured, seasoned management team with 24 years of average industry experience, which has done an exemplary job of sticking to tried and true investment tenets.
I think Welltower is smart to purchase properties that are leased to third-party operators under mainly long-term, triple-net master leases (the most lucrative type a landlord can hope to obtain given that such agreements make the tenant responsible for all maintenance, insurance and related taxes). By not getting involved in active property management, and diversifying premises by both facility type and geography, the company should be able to build consistent, growing cashflow that it can then reinvest in the business or pay to shareholders in dividends.
Management has demonstrated its solid ability to generate returns for stockholders over the long-term as per its compounding of company book value by some 120% over the past 10 years. There is little to indicate that this same group cannot produce similar results going forward as new properties added to the portfolio go on to bolster revenue, net operating income for the company, and ultimately dividends paid out to shareholders.
To summarize, Welltower is positively affected by existing demographic trends, applicable healthcare laws and possesses both the availability of capital at a reasonable cost and the ability to make beneficial investments.
All things or any one by itself which could significantly boost the company's underlying value going forward.