Healthcare remains one of the most promising long term themes for investors — no matter who wins the presidential election. Advancements in new drug therapies and treatments are allowing us to live much longer lives. Meanwhile, infant mortality rates have decreased substantially. Simply put, our population continues to grow. That equates to a rising demand for healthcare. And providing that demand is Welltower Inc (HCN).
However, unlike drug companies, which provide the means for therapy, HCN is unique because it provides the place where the therapy is administered. Welltower owns hospitals, doctor’s offices, assisted living facilities and other medical related real estate.
It’s a profitable niche to focus on, and HCN happens to be the king of the sector.
For investors, the recent drop in HCN stock make a great opportunity to snag-up shares of the healthcare REIT and add its juicy — and growing — 5.2% dividend to their portfolios.
HCN = Healthcare. Pure and Simple.
Despite its recent name change, HCN is still “HealthCare REIT” as far as investors should be concerned. Welltower — as of the end of the last quarter — owned a total of 1,482 different healthcare properties. This includes senior housing, long-term post-acute properties, hospitals and outpatient medical buildings and doctors’ offices. And while the bulk of the holdings are in the U.S., HCN does hold 267 of those facilities in Canada and the U.K.
The firm’s portfolio remains pretty balanced among the property types. Partnerships with senior housing operators — like Brookdale Senior Living, Inc. (BKD) and Genesis Healthcare Inc (GEN) — are the largest swaths and come in at around 35% of its total.
This focus on senior housing, outpatient medical properties and long-term post-acute properties creates a great situation for HCN’s bottom line. More than 87% of its revenue comes from private pay sources. That means HCN isn’t tied to government reimbursement or policies. Medicare and Medicaid are great when it comes to steady payments into your facilities, but Uncle Sam limits the amount operators can charge the two health welfare systems.
Welltower is sort of immune to this.
When you put grandma into one of Brookdale’s residence homes, you’re required to pay the expenses. And senior living costs are very, very very expensive.
Private pay sources have allowed HCN to grow its dividend by a compound annual growth rate of nearly 5.7% since its inception back in the 1970s.
But that concentration does have a few risks.
Senior housing managers — not necessarily the building owners — have undergone plenty of scrutiny in recent months. That has come from the Feds — who have claimed that some operators have been over-charging Medicare and Medicaid for payments in order to juice profits and pad their bottom lines. Secondly, as one of the more lucrative forms of commercial real estate in terms of rents and cap rates, many developers have plowed forth with new construction of senior housing. With the pace of new construction reaching levels not seen since 2008, some analyst worry that the supply could outstrip demand and drive down rates.
These two facts have driven down shares for all the major healthcare REITs — HCP, Inc. (HCP), Ventas, Inc. (VTR) and HCN in recent weeks.
But investors shouldn’t fret about the roughly 10% drop in HCN stock over the past year — they should be buying the REIT by the fist full.
Using The Drop To Buy HCN
For starters, HCN’s exposure to any single operator of senior housing facilities is actually quite low — it’s in the single digits. Secondly, the quality of Welltower’s portfolio of senior housing facilities is strong. Again, you’re looking at mostly non-government reimbursement facilities in key metro areas with strong demographics — read: wealthy baby boomers. This helps HCN limit the damage and keep its facilities in high demand.
Next, HCN has one of the strongest balance sheets among the healthcare REITs. Welltower has only around 13 billion in long term debt, and the firm has been prudent in recent months to lower its interest rate expenses. Back in October, HCN issued $500 million worth of 10-year bonds at roughly just 4.3% interest. More recently, Welltower issued $700 million in 10-year notes at a rate of just 4.25%.
The purpose of these debt issues were to refinance already existing bonds coming due this year and next, and replacing them with long term maturities at lower rates. This deleveraged balance sheet will allow HCN to survive in the current senior housing malaise.
And it may just thrive.
The firm still has plenty of room on its revolving credit line and has historically been successful at pruning its portfolio for additional gains. It recently dumped its life sciences building portfolio for a return of roughly 15%. Asset sales and keep access to credit will allow HCN to add quality medical buildings into its already expanded portfolio. HCN anticipates selling around $1 billion worth of its properties in 2016.
At the end of the day, investors get a strong player that will continue to do what it’s always done — pay growing dividends, year in and year out.
The Bottom Line For HCN Stock:
Our aging population simply requires more medical care and HCN is the stock providing all the places needed to conduct that care. The recent drop due to perceived risks in the senior housing segment should be viewed as a great opportunity to snag-up shares.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
