Welltower - Largest Healthcare REIT With Growing Potential

| About: Welltower Inc. (WELL)
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Summary

Welltower is the largest healthcare REIT in the world with a market cap of more than $25 billion. At the same time, the company offers investors a strong dividend.

The 85+ population is anticipated to double over the next 20 years. At the same time, per-capita spending increases as you age. This means healthcare spending will increase rapidly.

Welltower's history of dividend growth combined with the growing healthcare markets makes the company a strong investment.

Welltower (HCN) is a real estate investment trust that operates in the healthcare industry. The company offers investors a quarterly dividend of $0.86 per share yielding more than 5% annually. At the same time, the company has been consistently increasing its annual dividend. This combination of the company's growing dividend and the growing healthcare markets makes HCN a strong investment at the present time.

Introduction

Welltower, as a real estate investment trust with a market cap of more than $25 billion, is the largest healthcare REIT in the world. The company provides senior housing facilities, assisted living communities, post-acute care facilities, and medical office buildings. As a result of its size, Welltower dominates the growing healthcare REIT markets and is a component of the S&P 500.

Welltower - Sinclair Story Line

Welltower has had a fairly difficult time over the past few years. In the face of a rapidly growing stock market, Welltower's stock price has stayed fairly consistent since 2013. The company's stock peaked in mid-2013 at just under $78 per share before dropping down to an early-2014 bottom of just over $53 per share. Since then, the company has seen its stock price set two additional peaks and two additional bottoms.

However, at a present share price of just over $68 per share, Welltower's stock price has continued to trade within this range. Despite this, as we will see in this article, Welltower has strong potential going forward.

Overview

Now that we have an introduction to Welltower and its recent stock price performance, let's begin with a more detailed overview of the company.

Welltower Earnings and Credit - Investor Presentation

Welltower has an enterprise value of $41 billion coming from 1,464 total healthcare properties holding 260 thousand residents. At the same time, at its present stock price, it has a dividend yield of more than 5%, a very respectable yield in the present low interest rate environment. With the S&P 500 (NYSEARCA:SPY) currently yielding 2%, this shows the very respectable yield Welltower provides.

And, in August 2016, Welltower announced its 181st consecutive quarterly dividend, meaning 45 years of consecutive dividend payouts. For much of this time, the company has continued to increase its dividend. This shows Welltower's continued commitment to paying out cash to shareholders.

Throughout this growth, Welltower has continued to maintain a stable credit ratio. This means that we can expect its interest obligations to remain low, which decreases the risk of the dividend being cut.

Commitment to Sustainability - Investor Presentation

At the same time, on top of this dominant market position, Welltower has continued to be focused on reliability and sustainability. We live in a world that is increasingly recognizing the effect of climate change, and as a result, companies are increasingly trying to be more sustainable. Part of this involves renting buildings that are energy efficient and have a minimal impact on the environment.

As a result of its efforts, Welltower has become one of eight real estate companies named to the Dow Jones Sustainability North America Index and has achieved Global Real Estate Sustainability Benchmark Green Star Designation for two consecutive years. Showing its commitment to the environment will make it easier for Welltower to find customers for its buildings.

Welltower's commitment to the environment will help the company become more successful in the long run.

Healthcare Real Estate Growth Trends

Now that we have a detailed overview of Welltower including the company's dominant size and its commitment to sustainability, let's continue by discussing the long-term growth trends of the healthcare real estate markets.

Healthcare Cost Improvements - Investor Presentation

Anyone who's stayed in a hospital for more than few days knows how expensive overnight stays in a hospital is. With the high cost of healthcare in the United States, companies are turning towards increasingly cheaper healthcare options such as post-acute care and senior housing.

With an increasingly aging population that requires hospital treatment, the markets for post-acute care and senior housing are growing rapidly. The growth of these markets should provide Welltower with an increased market size going forward. As the largest company in this industry, this should allow Welltower to continue growth in the future, providing increased income.

Healthcare Per-Capita Spending - Investor Presentation

This shows how an aging population is providing increased healthcare spending. Healthcare spending is expected to increase to an astounding $34.8 thousand per person for those 85+. This combined with how the 85+ population is expected to double over the next 20 years shows how healthcare spending is growing rapidly.

A significant portion of this healthcare spending will be used on living facilities. This helps to support how Welltower operates in a rapidly growing market. The company's operations in a growing healthcare market help to support how it is a strong investment at the present time.

Welltower's Growth Platform

Now that we have a detailed overview of Welltower along with a discussion of the rapidly growing healthcare markets, let us now discuss how the company will take advantage of this growing market.

Portfolio Transformation - Investor Presentation

Over the past half a decade, Welltower has been transforming its portfolio. From 1Q 2010 to the present day, the company has transformed its portfolio from 69% private pay to 92% private pay. And it has been increasingly focused on senior housing. Private pay facilities have a higher profit margin for Welltower, and this combined with the senior housing growth helps to show Welltower's successful portfolio transformation.

Portfolio Changes - Investor Presentation

In the midst of this portfolio transformation, Welltower has invested $5.4 billion across 248 new properties. The company has managed 99% of its properties in-house spread across major markets like Florida and southern California. These properties are 96% health system affiliated as a percentage of their net operating income.

Welltower's continued investments should allow the company's net operating income to continue growing. This should allow it to continue raising its dividend. This combination of being able to grow its dividends in a growing environment shows how Welltower is a strong investment at the present time.

Financials

So far we've looked into Welltower overall, along with a discussion of the rapidly growing healthcare markets, and as with the company's growth platform, it is now time to finish with the financials.

Financial Success - Investor Presentation

Welltower has been increasing earnings while driving down its leverage. Over the past five years, despite the company's stock price staying fairly constant since 2013, the company managed to grow its FFOPS (funds from operations per share) from $3.4 to $4.6. This represents growth of more than 35% or 6.4% annual growth and has allowed the company to grow its dividends.

At the same time, HCN has managed to reduce its leverage by 590 basis points or 5.9%. That means that the company's net debt over undepreciated book cap has decreased from more than 45% to just over 39% presently. That means that Welltower has managed to continue increasing its cash flow while decreasing its leverage, showing its commitment to shareholders.

This commitment to shareholders, with the company increasing dividends to take advantage of a growing market, helps cement why Welltower is a strong investment at the present time.

Conclusion

Welltower has seen its stock price bounce up and down over the past three years setting new regular highs and additional bottoms. However, at the same time, over the past three years, Welltower has managed to increase its dividend by almost 12% from $0.77 per share to $0.86 per share quarterly. This impressive dividend shows that HCN now yields more than 5% as the largest healthcare REIT.

At the same time, the size of the REIT markets is increasing rapidly. The 85+ age population is increasing incredibly rapidly and is expected to double over the next 20 years. Given that per-capita healthcare spending increases as you age, and companies are turning increasingly towards cheaper senior housing for patient care, this shows how Welltower is operating in a highly growing market.

Welltower's combination of continued shareholder commitment by increasing its dividend coupled with the rapid growth of the markets the company operates in shows how it is a strong investment at the present time.

Disclosure: I am/we are long HCN, SPY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.