Welltower Boosts Position With Growth In New Sectors

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About: Welltower Inc. (WELL)
by: Avisol Capital Partners
Summary

Welltower Inc. is one of the largest REITs in the US.

The REIT recently elevated its FY2019 guidance.

It is well established in the fast growing senior living segment.

Welltower Inc. (WELL) established its position as one of the leading REITs as it reported yet another encouraging quarterly numbers. The REIT's stock has shown over 23 percent growth this year so far and maintained its track record of paying dividends, making it a strong contender for any income focused long-term portfolio. The company also has positive external environment stimuli going in its favor as the REIT is mainly invested in the senior living segment which is set to benefit from demographic changes. So, let’s have a look at the future prospects of this REIT which was recently featured on the list of most admired companies compiled by Fortune.

Strategic Growth Drivers

Welltower is mainly invested in senior living properties, the segment which is expected to be full of action due to demographic changes. Another main area for Welltower is Medical Office properties, which is a niche segment likely to benefit from spike in demand for outpatient services. Apart from these, the REIT also holds interest in long-term care facilities and health systems, making its portfolio of investments a well-rounded and diversified one.

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Source: Company Website

While we analyze the appeal of Welltower as an investment candidate, it is important to look at the future prospects of its main growth drivers. Coming to the senior living properties segment, the average U.S. life expectancy increased from 68 years in 1950 to 78.6 years in 2017, largely due to the decrease in mortality at older ages. Such growing number of aged people in the society is expected to lead the development in the senior living properties segment. Further, the poverty rate for Americans aged 65 and older has dipped sharply from nearly 30 percent in 1966 to 9 percent today, ensuring that the older population now has higher disposable income to pay for their healthcare and living arrangements. Further, the segment is also expected to benefit from more adults working for a longer period of time.

Similarly, the outpatient services segment is also in the upswing as costs of in-patient services are rising, pushing people to opt for alternatives. There is a fundamental shift occurring in the US healthcare segment and the REITs sector is expected to respond to that. Currently, only 11 percent of outpatient medical real estate is owned by REITs, and Welltower, being one of the biggest players in the segment, is well positioned to benefit from the growth in the sector. Outpatient service segment mainly comprises medical office buildings and post acute care facilities, which are widely considered to be amongst the least volatile healthcare properties. Welltower’s growing traction in the segment will likely provide more stability to the REIT’s top line growth as well.

Earnings Analysis

Welltower recently reported its quarterly earnings and provided corporate updates. The REIT continued with its steady and upward trajectory and the guidance was equally positive. Its normalized FFO attributable to common stockholders stood at $1.05 per diluted share, up from to $1.00 per diluted share in 2018. The REIT revised its guidance for net income attributable to common stockholders guidance to a range of $3.33 to $3.43 per diluted share from the previous range of $2.62 to $2.77 per diluted share.

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Source: Nasdaq

The REIT also announced $0.87 per share as its 193rd consecutive quarterly cash dividend. The REIT’s current dividend yield stands close to 4 percent, which, along with steady capital appreciation shown by Welltower, makes it a strong contender for any long-term portfolio. Its track record of consistent dividend payments also vouches for the safety factor. Overall, the REIT seems to be on the right track, after undertaking extensive restructuring which saw it exiting from high cost segments such as skilled nursing and moving into relatively low cost segments such as senior living and medical office buildings.

Investment Thesis

Welltower is not only one of the biggest players in the healthcare REIT segment but is also amongst the most established ones. With its long history, the REIT has strong foundation to build its business upon. With its strong growth in financial metrics such as Net Operating Income and consistent dividend payment, Welltower seems to be an ideal candidate for an investment portfolio. However, there are some factors which also need to be paid attention to.

The REIT currently has its major chunk of income coming from senior living facilities, which contributes nearly 2/3rd of the Welltower’s net operating income. This may be considered a red flag by investors as it makes the REIT more vulnerable to any volatility in the segment. The impact of any negative development in the senior living segment will likely be magnified for the REIT. However, the segment is currently doing well with most of the indicators pointing towards even better future prospects.

Another concern about the REIT is its current valuation. While Welltower has several things going on for it, making it a good investment prospect, the current price of the stock, which also happens to be close to its 52-week high, may deter investors. Though even at this price level, the stock delivers an attractive 4 percent dividend yield, which pays testimony to the robustness of the REIT. Further, the price of a stock generally mimics the discounted valuation of its future prospects and the REIT’s current projects in the work seem to justify the elevated valuation. The REIT recently announced a spate of new investments including its definitive purchase agreement with Summit Medical Group to acquire a 43 acre medical campus in Berkeley Heights. Welltower also fortified its presence in the senior living segment as it purchased the remaining 66% interest for $218 million in five Sunrise senior living properties.

Despite these concerns, Welltower has a number of positive attributes working in its favor. From a long-term perspective, the REIT remains an attractive investment option. However, due to its current high prices, it is suggested to build your position in a systematic manner, spanning a stretch of time. More conservative investors may wait for a meaningful pullback in the stock price to initiate a position in this well managed and well established REIT.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.