As discussed previously, real estate invstment trusts can be a great way to gain exposure to the real estate sector without having to purchase and operate individual properties. They open up real estate to a far wider range of investors than would otherwise be able to participate in this market. Moreover, they can allow individuals to invest in a entirely new asset class. Welltower Inc. (WELL, Financial) is an example of such a REIT.
Welltower invests in and operates housing for seniors, assisted living facilities and other health care-focused properties. As one of the largest REITs in the U.S., it is certainly a heavyweight in the sector and offers ample diversification for the risk-conscious investor. Let’s take a closer look at its recent performance.
Some recent numbers
On its earnings call for the fourth quarter of 2018, Welltower reported weaker revenue than expected. Total revenue came in at $1.24 billion, missing expectations by just under $21 million (although this was still good for a 12% increase compared to the same quarter in the previous year.). This minor blip did not seem to phase the market as the stock has been trading in the $75 per share range for most of the last month.
For the entirety of 2018, Welltower posted funds from operations of $4.03 per share. As a reminder, FFO is a metric specific to REITs that is calculated by taking net income, adding back depreciation and amortization charges and subtracting gains from property sales. This accounts for the fact accounting rules require REITs to apply depreciation charges to their assets. As the vast majority of a REIT's assets are real estate (which tends to appreciate, not depreciate, over time), earnings are a misleading metric. This is why FFO is preferred. On the earnings call, management reaffirmed 2019 guidance of an FFO between $4.10 and $4.25 per share share.
The aging baby boomer population will continue to drive demand for quality end-of-life care (incidentally, this is also a reason to be bullish on large pharmacy chains like Walgreens Boots Alliance (WBA, Financial)). With properties in the U.S., U.K. and Canada, Welltower is extremely well positioned to serve the growing number of elderly people. In the U.S. alone, one in four people will be over 65 by 2040.
Moreover, Welltower is constantly evolving its portfolio to serve the specific needs of elderly patients. In particular, it has shifted its focus away from hospitals and acute-care facilities, and now invests primarily in housing for seniors. As health care for elderly people has gotten better, more and more of it can be delivered in the comfort of their own homes. Hence, the shift toward living space over medical facilities.
Summary
Welltower is not a stock that is going to double in value overnight. It may even trend sideways for long periods of time. But this REIT has demographics on its side, and its sheer size should provide it with enough protection against unexpected downturns. With a dividend yield of 4.58%, which should remain safe going forward, this is a nice addition to an income portfolio.
Disclosure: The author owns no stocks mentioned.
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