Welltower, Inc. (HCN) is an excellent choice for income investors wanting to bet on consistent dividend growth, long-term. The health care REIT benefits from an aging U.S. population, especially the 85+ age cohort, which should translate into long-term FFO and dividend growth. Welltower is a well-managed REIT with an affordable valuation. An investment in this leading U.S. health care REIT throws off a dividend of 5.1 percent, and the yield on cost will most probably rise in the future.
Welltower and other health care REITs face extremely attractive long-term growth prospects thanks to an aging population that will depend more and more on medical assistance in old age. Companies such as Welltower with their portfolios of post-acute care and senior housing facilities are in a strong position to capitalize on this projected demand growth. In particular, the 85+ age cohort is the fastest growing ‘elderly demographic,’ which is the most important target market for health care providers including Welltower.
Source: Welltower, Inc.
Per-capita health care expenditures increases exponentially as people age, suggesting U.S. health care REITs will profit with their senior-focused health care facilities.
Source: Welltower, Inc.
The demand projections on the back of an aging U.S. population make an investment in Welltower very attractive long-term.
Source: Welltower, Inc.
Portfolio Overview
Welltower derives most of its net operating income from senior housing facilities (70%) while post-acute care (13%) and medical outpatient facilities (17%) account for the remainder of the health care REIT’s income.
Source: Welltower, Inc.
Welltower’s senior-related health care facilities are located all throughout the United States, though the company also has a footprint in Canada and the U.K. In any case, Welltower’s facilities are concentrated in populous metropolitan areas in the U.S. such as Los Angeles, Boston and New York.
Source: Welltower, Inc.
The health care REIT’s senior housing portfolio has an occupancy rate of 86.7 percent whereas its medical outpatient business exhibits an occupancy rate of 94.6 percent.
Here’s an overview of Welltower’s portfolio performance as of the end of the September quarter.
Source: Welltower, Inc.
Fortress Balance Sheet And Improving Leverage Stats
Turning the focus toward financials, Welltower has a strong balance sheet with investment-grade credit ratings. It is important to note that Welltower’s leverage metrics have improved over time as the company has transformed its portfolio and shifted its operating focus toward senior housing facilities.
As of today, Welltower has investment-grade credit ratings from all three, major credit rating agencies.
Source: Welltower, Inc.
Taking a look at Welltower’s debt maturity profile reveals that the company has no major debt coming due until 2021.
Source: Welltower, Inc.
Excess Dividend Coverage, Moderate FFO Payout Ratio
Welltower has excellent dividend coverage stats, which reveal significant potential for the health care REIT to grow its dividend payout.
Here’s a chart comparing Welltower’s funds from operations (on a normalized basis) to the company’s dividend rate.
Source: Achilles Research
Welltower widely overearns its dividend with normalized FFO: Average 5-quarter normalized FFO of $1.09/share compares against an average dividend rate of just $0.87/share.
Alternatively, investors concerned with dividend coverage can look at Welltower’s normalized FFO payout ratio (average ~80 percent last 5-quarters):
Source: Achilles Research
Guidance And Valuation
Welltower has lifted its full-year normalized FFO guidance from $4.15-$4.25/share to $4.19-$4.25/share when the health care REIT released third quarter earnings earlier this month.
Since shares currently change hands for $68.12, income investors pay 16.1x 2017e normalized FFO. This is not cheap, for sure, but considering that the odds are tilted in favor of sustainable long-term dividend growth, the price tag looks quite OK.
Your Takeaway
Welltower is poised to profit handsomely from an increase in life expectancy rates in the U.S. as older people increasingly rely on specialized senior-related health care facilities. Welltower has a fortress balance sheet and moderate leverage stats which allow the company to grow without putting its dividend at risk. Welltower also has excellent dividend coverage stats which support growth in its quarterly cash dividend. Shares are reasonably valued given the quality of its dividend stream. Buy for income and capital appreciation.
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Article source: https://seekingalpha.com/article/4126235-5_1-percent-yielding-health-care-reit-strong-buy