Welltower Inc

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Welltower Inc. is an S&P 500 company headquartered in Toledo, Ohio, driving the transformation of healthcare infrastructure. The company invests in leading senior housing operators, post-acute healthcare providers and health systems to create facilities that meet the requirements for modern delivery models.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Welltower is primarily a real estate investment trust (REIT) focused on healthcare infrastructure. Its portfolio consists of senior housing (independent living, assisted living, memory care, skilled nursing facilities) and other types of medical facilities (such as outpatient medical buildings, acute medical facilities, rehab facilities). These properties are largely located in the U.S., the UK, and Canada.

Revenue Distribution & Trends:

  • Senior Housing: This segment is Welltower’s largest revenue contributor, accounting for 72% of the total revenue in the nine months of 2023. As populations age, there’s an increasing demand for facilities that can cater to seniors’ needs. While occupancy has improved significantly from COVID lows, it is still below historical levels, particularly in certain markets like Canada. The operating income for the senior housing segment is affected mainly by occupancy rates and the cost of labor, which is directly related to labor shortages.
  • Outpatient Medical: This segment provides medical facilities like outpatient centers, ambulatory care centers etc, primarily located in the U.S. This segment accounted for 17% of total revenue in the nine months of 2023. The main forces driving this revenue line are volume of patients and utilization rates.
  • Health Systems: This is Welltower’s smallest segment. Revenue in this segment includes revenue from hospitals, surgery centers, and other specialized facilities. For this segment, demand and occupancy are the main drivers of profitability.

The healthcare industry generally has been undergoing several changes, such as the rise in the cost of healthcare, a shift to value-based care, and increasing demand for specialized healthcare services and senior housing due to an aging global population.

Competitive Landscape:

  • The senior housing market is somewhat fragmented but consolidating, as major providers are expanding regionally and nationally. This competitive market puts pressure on occupancy rates and pricing power.
  • The outpatient medical space is less concentrated, but many players are looking to expand their footprint in the industry, causing increased competition in the long-term. This creates challenges for businesses in those subsegments.
  • Other players are other healthcare REITs as well as private equity and other financial investors.

Welltower attempts to distinguish itself in the market by being focused on its top operators in the industry and its commitment to a diversified, internationally spread portfolio with an emphasis on high-quality assets that have low volatility. Additionally, they look to increase same-store revenues, which should reflect higher operational performance. They also focus on innovation and the use of modern technology.

Financial Analysis:

  • Revenue Growth: Revenue growth has been mixed over the past several years. Revenue has increased overall from 2017, but a significant decline was seen in 2020 due to Covid, followed by strong recovery in 2021 and moderate growth in 2022 and the beginning of 2023.
  • Profitability: The net income and profit margins of the business tend to fluctuate considerably based on non-operating losses, impairment charges, one-time write-offs, and gains on sale of assets. Operating income has generally seen increases with an upward trend over the last decade, even through 2020. However, recent spikes in interest rates have decreased interest income from investments, thereby putting pressure on the margins.
  • Balance Sheet: Welltower has a fair debt load. Total debt is roughly 1/3 of the total assets. Debt coverage ratios, such as the fixed charge ratio and net-debt-to-EBITDA ratio, have been showing a decline. A low coverage and high leverage can make the company vulnerable in the face of declining profits. Cash on hand seems high, implying plenty of short-term liquidity.
  • Dividends: REITs usually pay high dividends, and Welltower is no exception. Welltower’s dividend is currently around 5%, which is attractive for investors seeking passive income. This is also the main reason why its leverage may increase - because of the payouts and the need to fund operations and new investments.
  • Key Metrics:
    • Net Operating Income (NOI): NOI has been trending up, but has been recently slightly pressured by operational expenses.
    • Occupancy: Occupancy rates in senior housing have recovered well and are trending toward pre-pandemic levels, implying further growth in operating profits.
    • Debt to EBITDA: This ratio has increased over the past several quarters, which should be observed as they indicate a weakening of the financial structure of the company.
    • Average Yield on Investments: Yield has decreased a bit lately due to increase interest rates that decrease the value of the properties, but is expected to stabilize in the long term.

Moat Rating: 3/5 Welltower possesses a narrow moat. While they operate in a fairly stable industry, their advantage stems more from size, scope, and reputation than anything else. This is further compounded by the fact that many of the segments they operate in do not have high switching costs, or require a unique resource which gives them pricing power. As a result, competitors can enter their markets and compete effectively through lower costs. That said, their diversification across geographies and types of properties does offer some benefits and does give some defensibility to their operations.

Risks to Moat and Business Resilience:

  • Interest Rate Hikes: This is one of the biggest risks that Welltower faces, as higher rates increases their cost of capital, making it more expensive to acquire properties. It will also put pressure on operating margins.
  • They are facing pressure on operating margins and profits due to rising interest rates and could struggle to meet or continue with their dividend.
  • Regulatory and Reimbursement Changes: The healthcare industry is subject to frequent changes in regulations and reimbursement policies, which can significantly affect Welltower’s financial results. Regulatory changes may create barriers to expansion and even lower existing operating profits.
  • Macroeconomic Downturn: A severe economic downturn could lead to a decrease in occupancy rates in senior housing, as fewer people might be able to afford these facilities. This also hurts the value of the assets, thereby impairing their ability to finance future investments and continue to pay out dividends.
  • Competition: The healthcare infrastructure is becoming more and more competitive, and new entrants can easily copy their properties and processes. This increases pressures on their operating profits.
  • Their operating profits are heavily dependent on factors like occupancy and labor costs, both of which are volatile and can be very cyclical.
  • Concentration of Operators: Their revenue is primarily dependent on a few big operators in the space, such as Brookdale and Genesis Healthcare. This could cause significant risk if any of the main operators begin to struggle financially.

Given the above risks, we can see that the moat is not impenetrable, and is susceptible to both industry and company specific changes. Their business resilience is also questionable, mainly because of dependence on external economic factors.

Understandability Rating: 3 / 5 Welltower’s business is moderately complex, mainly due to its involvement in healthcare real estate, with various properties and financing instruments. While its underlying business, providing real estate to senior and medical care facilities, is simple enough to grasp, there are several nuances in their business (the way they structure their leases, specific needs for each type of facility, etc).

Balance Sheet Health Rating: 4/5 Welltower’s balance sheet is generally healthy. It has a decent amount of cash on hand, and their total debt relative to their overall assets is acceptable. However, they are facing a difficult time controlling their borrowing costs and have also incurred write-offs and increased depreciation expenses lately.