Welltower – The Best Health Care REIT For 2017: Analysis Of The ‘Big Four’

Updated on

Health care is an industry that is poised to explode over the next few decades. There are a number of driving factors behind this industry growth.

First, the population of the United States is rapidly transition to an older demographic. Over the next 20 years, the proportion of the country’s 85+ age group is expected to double.

Source: Welltower

Older demographics spend significantly more money on healthcare than their younger counterparts. On a per-capita basis, the 85+ year demographic spends almost eight times as much on healthcare than the 19-44 year bracket.


Source: Welltower

Savvy investors will be thinking about ways to profit from this trend.

One method would be to purchase healthcare stocks. These could be manufacturers of medical devices like Abbott Laboratories (ABT); pharmaceutical companies like AbbVie (ABBV); or a more generalized healthcare conglomerate like Johnson & Johnson (JNJ).

For income-oriented investors seeking high yields, there is a better way….

Purchasing healthcare REITs will give beneficial exposure to this demographic shift without as much regulatory uncertainty and with higher potential for current income.

Why Invest in REITs?

 For dividend investors, REITs have a number of attractive characteristics. The most notable is their dividend requirements.

REITs are legally required to pay 90% (or more) of their earnings as distributions to unitholders. While this makes it more difficult for REITs to realize rapid business growth, it generally drives high yields that benefit investors looking for current income.

There are currently four large health care REITs whose size differentiates them from the rest of the industry. These REITs are:

  • Welltower, Inc. (HCN); $24 billion market capitalization
  • Ventas, Inc. (VTR); $22 billion market capitalization
  • HCP, Inc. (HCP); $14 billion market capitalization
  • Omega Healthcare Investors, Inc. (OHI); $6.3 billion market capitalization

This article will discuss the investment prospects of each company in detail.

Welltower Business Overview

Seasoned investors will recognize Welltower by its previous name. The company went by the name of Health Care REIT until the name change in September of 2015.

The trust was founded in 1970 and is currently one of the largest REITs (healthcare or otherwise) in the United States. By enterprise value, their $41 billion places them 6th among all REITs and 1st in the health care REIT segment.


Source: Welltower Investor Presentation, slide 5

Welltower’s U.S. property portfolio is well-diversified across geographical segments.


Source: Welltower Investor Presentation, slide 17

The company also has sizeable property portfolios in Canada and the U.K.

Since inception, the trust has an impressive record of increasing dividend payments to shareholders. Welltower has grown dividends at a 5.7% CAGR over the long term, and has paid steady or increasing dividends every year since 1992 (a streak of 25 years).


Source: Welltower Investor Presentation, slide 17

The company will likely soon be added to the Dividend Aristocrats List (25+ years of rising dividends).  It is currently a member of the Dividend Achievers List (10+ years of rising dividends).

You can see all 272 Dividend Achievers here.

Welltower’s growth prospects stem largely from the ongoing transformation of their property portfolio. The trust is looking to build up two segments of its business. They are growing seniors housing because this business is exposed to less regulatory risk than life science, hospitals, or outpatient medical business.

Welltower is also looking to expand its private pay asset base, which are real estate assets where the tenant pays all costs (and is not subsidized). These assets are generally more profitable for the REIT.


Source: Welltower Investor Presentation, slide 13

Over the past decade, Welltower has grown funds from operations (FFO) per share from $2.97 in 2006 to $4.55 (expected) in 2016, which is good for a CAGR of 4.4%.

I expect Welltower to continue growing FFO per share at a rate of 3%-5%, which combined with their dividend yield of 5.2% is good for long-run expected total returns of 8.2%-10.2%.

Ventas Business Overview

 Ventas is a large U.S. healthcare REIT with a diversified operations base. Their reporting segments include:

  • Senior Housing Operating Portfolio (“SHOP”)
  • Senior Housing Triple Net (“NNN”)
  • Medical Office
  • Life Science
  • Skilled Nursing
  • S. Acute Care Hospitals
  • Loans
  • International Hospitals
  • Specialty Hospitals

Compared to the other REITs on this list, Ventas has the most diverse operating base.


Source: Ventas Investor Presentation, JP Morgan Healthcare Conference, slide 24

One of Ventas’ main goals when developing their portfolio is to seek out regions where there exists a high barrier to entry. The trust’s method of achieving this is to purchase assets in high cost-of-living coastal cities, where real estate is priced at a premium.


Source: Ventas Investor Presentation, JP Morgan Healthcare Conference, slide 26

Ventas has done a great job at compounding business metrics over time. The trust has grown dividends at an 8% CAGR since 2001, and their FFO has been on a similar positive trend.


Source: Ventas Investor Presentation, JP Morgan Healthcare Conference, slide 7

Over the past ten years, Ventas has grown FFO per share from $2.44 in 2006 to $4.10 (expected) in 2016, which is good for a CAGR of 5.3%. Over the long-run, I expect Ventas to continue growing at a similar rate, say 4%-6%.

This combines with the trust’s dividend yield of 4.8% to yield expected total returns of 8.8%-10.8% over the long run.

HCP Business Overview

HCP is a healthcare REIT with operations in three main segments:

  • Senior Housing
  • Life Sciences
  • Medical Offices

HCP’s business model is much simpler than say, Ventas, which has many more operating segments. HCP’s competitive advantage comes from their very high quality portfolio (which they call ‘best-in-class’).


Source: HCP Investor Presentation, NAREIT Investor Forum, slide 5

 HCP’s business strength is evident in their dividend history. With 31 consecutive years of dividend increases, HCP is the only REIT to be a Dividend Aristocrat (elite stocks with 25+ consecutive dividend increases).

You can see all 50 Dividend Aristocrats here.

HCP investors should be aware of some notable changes the company has decided to make with regards to their real estate portfolio.

Namely, the company has divested of their ManorCare assets (which are a group of skilled nursing and rehabilitation centers, assisted living facilities, memory care comminutes, and outpatient rehabilitation clinics).

Note:  HCP reduced its dividend when it spun-off ManorCare.  This does not technically count as a dividend reduction due to the spin-off (allowing HCP to stay a Dividend Aristocrat), it did reduce shareholders income from HCP.

The ManorCare assets were spun-off as a separate entity, named Quality Care Properties, which is structured as an independent, publicly-traded REIT. The spinoff was completed on October 31, and investors should have seen QCP units deposited directly into their brokerage accounts.

The reason for the divestiture was profitability (or lack thereof). The ManorCare assets were barely able to cover their fixed costs due to changes from Medicare to Managed Care plans.

This spinoff will impact the company’s FFO per share, as HCP will become a smaller trust. These changes are described in the following diagram.


Source: HCP Investor Presentation, NAREIT Investor Forum, slide 5

For investors looking for current income with the peace of mind of a Dividend Aristocrat, consider HCP. They are one of 15 Dividend Aristocrats to offer no-fee DRIPs.

Over a ten-year time period, HCP’s FFO per share has grown from $1.98 in 2006 to $2.72 (expected) in 2016. This represents a CAGR of 3.2%, which is the lowest on this list.

One notable fact is that the poor performance of the ManorCare portfolio has been a drag on HCP’s performance in recent years. The company’s FFO actually peaked at $3.16 in 2015 (which represents a 2006-2015 CAGR of 5.3%). The divestiture of these assets should restore FFO growth for this trust.

Between expected FFO growth of 3-5% and the trust’s dividend yield of 7.0%, investors can reasonably expect long-term total returns of 10.0%-12.0% from this REIT.

Omega Healthcare Investors Business Overview

 Omega is a healthcare REIT with over 900 locations in the U.S. and U.K. The company has a diversified portfolio of real estate assets leased to over 80 different operators.

The company operates in two main segments:

  • Senior Housing
  • Skilled Nursing Facilities (or SNFs for short)


Source: Omega Investor Presentation, slide 6

The company’s assets are extremely diversified across the continental United States. Their largest concentration of assets is in Ohio, where they hold 9.5% of their portfolio. They even have a small presence in the United Kingdom.


Source: Omega Healthcare Investors Third Quarter Earnings Presentation

Their business model is slightly different than the other REITs in this article.  Omega focuses on SNFs. These facilities offer affordable alternatives for patients discharged from the hospital who still require significant levels of medical attention.

Over the coming decades, the need for SNFs is expected to grow well above the country’s current capacity. This demand will lead to the construction of more facilities by Omega, which will be a catalyst for this REIT’s growth.


Source: Omega Healthcare Investor Presentation, slide 4

Discharging patients to SNFs reduces the fiscal burden of medical care. With medical costs increasingly under the microscope by governments and taxpayers, it is likely that Omega’s business will remain strong for the foreseeable future.

Omegas has been a dividend darling for investors. Earlier this month, the trust announced their 18th consecutive increase in their quarterly dividend.

Omega is a Dividend Achiever – companies with 10+ years of consecutive dividend increases. Further, the trust currently has the third highest yield of any Dividend Achiever at 7.5%.

One of the factors that has helped the company rank favorably is their strong record of dividend growth. On a YTD nine-month basis, Omega has reported FFO of $2.44 which equates to a run rate of $3.25.

This means that over the past decade, Omega has grown FFO per share from $1.24 in 2006 to $3.25 (expected) in fiscal 2016 for a CAGR of 10%. This is well above the peer group in this article, and excellent on an absolute basis.

Even if the trust slows its FFO growth to a more reasonable 6-8%, investors will still experience fantastic long-term returns in the range of 13.4%-15.4% thanks to the company’s 7.4% dividend yield.

Valuation Comparison

 REITs are unique in that they are exposed to many non-cash charges (like depreciation and amortization) that effect the company’s earnings from an accounting perspective. As a result, traditional valuation techniques such as the price-to-earnings ratio are not effective for assessing REITs.

One of the easiest alternatives is to compare a REIT’s current dividend yield to its historical dividend yield. If the current dividend yield is higher than average, the REIT is undervalued; similarly, if the dividend yield is lower than average, the REIT is undervalued.

With those rules in mind, let’s consider the dividend yield of each of these four REITs compared to historical averages.


Source: Data from YCharts, table created by author

Knowing this data, it is easy to compute the premium or discount associated with the current stock price of these REITs. This is under the assumption that their 5-year average dividend yield occurs when the company’s stock price is near fair value.


Source: Data from YCharts, table created by author

From the table, Ventas is trading at fair value and the other three REITs are trading at various discounts (HCN, OHI, and HCP in increasing order).

Final Thoughts

Healthcare REITs are in a very favorable position right now. Our aging population and the medical costs that come with it are going to create plenty of new business for these companies in the years to come.

Each of the four companies discussed in this article will benefit from this trend, but two stand out in particular.

HCP is the most attractively valued, and has the best dividend record (with 31 consecutive annual increases) of any REIT in the peer group.

On the other hand, Omega Healthcare Investors has a better total return record and a higher dividend yield.

Either choice should reward investors over the long run.

Article by Sure Dividend

Leave a Comment