Note:  Moved from Healthcare to Senior Growth Strategies portfolio 3.22.25.

Oh Those Golden Years

Nobody likes to grow old, but when it happens it’s comforting to find high quality care is available.  When that time arrives, the first name that comes to mind might be Sunrise, Brookdale or Oakmont Senior Living.  Or, it could also be one of 20 or more highly respected brands in private pay senior living. The financial partner behind many of these top quality names is Welltower (WELL).  With over 1400 properties, Welltower is the biggest healthcare dedicated REIT in this large, growing and highly fragmented field.

Investing with proven winners is a strategy that separates Welltower from many companies in the business of senior living healthcare.  Occupancy rates of 90% and better are typical of their properties.  And because 90% of its business is private pay, there are virtually no Medicaid related issues.  That puts Welltower in a pretty rare spot in a healthcare world.

The company invests in senior living and health care properties. It invests across the full spectrum of health care real estate, including senior living communities, medical office buildings, in-patient and outpatient medical centers and life science facilities. Senior housing accounts for nearly 70% of Welltower’s revenue.   The balance serves post-acute care and outpatient medical facilities and includes brands like Genesis HealthCare.  These latter two services help hold down the cost of healthcare by providing an alternative to higher cost in-patient hospital care.  Most are private pay also.

Welltower doesn’t operate facilities.  They own properties and lease them under terms of 15 years or longer.  Most rents are received under triple-net leases requiring the operator to pay rent and all additional charges incurred in the operation of the property.  The tenants are required to repair, rebuild and maintain the leased properties.  Substantially all of these operating leases are designed with escalating rent provisions.  That’s about as good as it can get.  

Company Origins: Deep Rooted In Senior Care
Welltower is no novice.  They pioneered REITs in healthcare properties.  They have been in senior living for more than 45 years.  So they have survived good and bad times.  Lead by CEO Thomas DeRosa, Welltower’s management team has deep experience in finance and acquisitions as well as operational savvy both in the United States and internationally. Within the past five years the company’s real estate assets have more than tripled to $29 billion.  Along the way they have expanded investment in Canada and the United Kingdom starting Welltower along a path of a true global healthcare REIT.

Huge Industry Ripe For Consolidation
To give you some perspective, the present size of the senior care business is a staggering $1 trillion.  Growth is being driven by the over-65 population which is projected to nearly double in the next 15 years to 72 million.  (We’ve all heard that 10,000 people a day are turning 65 in this country.) Per capita healthcare spending expands with age, so there is a strong likelihood that a $2-3 trillion market could be in place by 2030.

Public REITs offer the most liquid means of investing in senior housing and long-term care facilities.  The two largest are Welltower and HCP (HCP).  From an investor perspective, Welltower is a more pure play with two thirds of its investments in this area, about twice the level of HCP.

Welltower and HCP may be the largest but together they account for less than a 6% market share.  Thus in addition to organic growth, industry consolidation is a strong possibility.  Being publicly owned and having readily marketable securities for acquisitions gives both companies clear advantages.

Solid and Attractive Growth
Welltower is not only the largest public REIT in the senior living field but the business is still growing.  In just the past three years revenues have grown an average 5% annually to $4.4 billion in 2015.  Net income has increased exponentially from $80 million in 2013 to $540 million last year.

Investors are attracted to REITs because of their generous dividends.  The company’s dividend paying strength is measured in operating cash flow, also called funds from operations (FFO).  This is a measure commonly used by Wall Street in valuing REITs.  By this technique, we note that FFO has increased on average 15% to $4.21 per share in 2017.

Wall Street views Welltower’s outlook as pretty conservative. That’s great because there are few things quite as dangerous as an optimistic group of Wall Street types.  It also gives plenty of room for upside surprises.

Analysts are only looking for 2% revenue growth to $4.4 billion and FFO to hold above $4.  Keep in mind, none of these estimates assume property acquisitions. That’s why the numbers are skewed to the low side.  Remember, this is based on conservative estimates -- we're all about preserving that dividend.

For investors looking at certain highflying technology companies, 3-5% minimal profit may not be overwhelming.  However, compared with the paltry 0-3% growth projection for the average US REIT, Welltower’s pace is lightning fast.

Financial Strength Provides Lots of Opportunity
Welltower’s balance sheet leverage surprised us in several ways.  First, with $28 billion in assets and $13 billion in liabilities, it is not nearly so leveraged as we had expected.  That is good as it leaves room for lots of investment growth and that translates into income.  The other surprise is the $240 million in cash.  To us, that’s a sign that management is exercising restraint by not chasing after acquisition opportunities solely for the sake of growth.  Good thinking guys.