Is 6.7%-Yielding Welltower Inc. A Buy Right Now? (NYSE:WELL)

34.56K Followers

Summary

Welltower Inc. is a promising health care REIT.
Fundamentals in the health care REIT market are intact, and Welltower continues to cover its dividend payout with cash flow relatively easily.
Shares now sell for a reasonable run-rate FFO multiple.
An investment in WELL yields 6.7 percent.

Welltower Inc. (HCN) is no longer at the top of investors' shopping lists, which I think creates an interesting buying opportunity because the company continues to perform well. The fundamentals in the health care REIT sector are intact, and Welltower's dividend is covered by recurring cash flow. Thanks to the sell-off in the REIT's shares, an investment comes with an entry yield of 6.7 percent.

Welltower's shares have dropped ~18 percent year-to-date as investors moved money out of dividend-paying stocks. Surging bond yields and expectations of higher inflation in 2018 were the primary reason why income investors rotated out of stocks in February 2018. Meanwhile, Welltower's shares slumped to new 52-week lows in 2018 (@$51.85).

Investors have no love for REITs right now.

Source: StockCharts

Welltower - Fundamentals Are Intact

Though the REIT's shares have dropped lately, the long-term fundamentals in the senior-focused health care market are intact. The U.S. population is aging rapidly, and the 85+ age cohort especially is growing at a fast clip. Obviously, the 85+ age cohort is the most attractive age demographic for health care REITs as people in this age group disproportionately require living assistance and medical services.

Source: Welltower Investor Presentation

In addition, the 85+ age cohort spends by far the most money on health care than any other age group.

Source: Welltower

Welltower is set to profit from these two powerful trends - an aging U.S. population and increasing expenditures on health care services - through its portfolio of health care facilities.

Welltower - Portfolio Overview

The vast majority of Welltower's portfolio today consists of senior housing facilities, which make up 71 percent of the REIT's net operating income. Outpatient medical facilities and long-term/post-acute care facilities account for 17% and 13% of NOI respectively.

Source: Welltower

Welltower's senior housing portfolio is spread out all over the United States, yet concentrated in urban markets with large populations. Anchor markets in the United States include Los Angeles, Boston, New York and San Francisco.

Source: Welltower

Investment-Grade Balance Sheet

Welltower has investment-grade credit ratings from all major credit agencies Standard & Poor's, Moody's and Fitch, providing income investors with comfort that the REIT is in a financially stable position.

Source: Welltower

Dividend Margin Of Safety

Welltower covers its dividend with normalized funds from operations quite easily thanks to its strong lease portfolio. The health care REIT earned $1.08/share, on average, in normalized FFO in the last six quarters, widely exceeding the going dividend rate of $0.87/share.

Source: Achilles Research

As far as the payout ratio is concerned, Welltower retains headroom to grow its dividend slowly in the coming years. The average normalized FFO payout ratio (last six quarters) was just ~81 percent.

Source: Achilles Research

Thanks to the drop in the share price, investors can benefit from a much higher entry dividend yield now.

Guidance And Valuation

Welltower's management has guided for its normalized funds from operations to clock in somewhere between $3.95/share and $4.05/share in 2018. The guidance reflects an estimated year-over-year decline of ~5 percent (Welltower pulled in $4.21/share in normalized FFO in 2017). Based on this guidance, income investors pay ~13.1x 2018e normalized FFO for one of the leading health care REITs in the country.

Your Takeaway

Welltower is a promising health care REIT to consider against the flow. The fundamentals in the senior-focused health care industry are intact, and Welltower has a strong balance sheet to withstand short-term industry trouble. Further, Welltower's dividend is reasonably safe, which is why I don't consider the rising dividend yield as a red flag yet. Shares are reasonably priced after the sell-off, too. Buy for income and capital appreciation.

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This article was written by

Achilles Research

34.56K Followers

I am a dividend investor and look for undervalued investments in the stock market. I identify misunderstood and undervalued equity investments and hold those securities until their price approximates my estimate of intrinsic value. I am a long-term investor only. I am building a $100,000 high-yield income portfolio. I am running this portfolio as an experiment to see if long-term sustainable income can be generated from a diversified pool of high-risk, high-yield securities. I am willing to accept high risk in order to meet my performance goals.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HCN over the next 72 hours. 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.

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