- 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.
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.
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.
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.
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.
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.
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.
If you like to read more of my articles, and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click 'follow'. I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.
This article was written by
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.