Welltower Inc (HCN): A High-Yield Medical REIT Blue Chip

We wrote a detailed analysis reviewing how Dividend Safety Scores are calculated, what their track record has been, and how to use them for your portfolio here.

Welltower has a Dividend Safety Score of 84, suggesting that the company’s dividend is extremely safe. Welltower has never cut its dividend since it began paying one in the early 1970s, and the dividend has been raised almost every calendar year. This is due to several positive factors.

First, the medical industry is generally insensitive to economic downturns, especially with the secular tailwinds of a fast aging population in the US, Canada, and England. As seen below, Welltower’s revenue grew each year during the financial crisis.

Source: Simply Safe Dividends

Second, the long-term rental agreements that underpin Welltower’s business model make for extremely secure and predictable cash flow.

Next, management has shown a long-term dedication to consistent and moderate dividend growth, while maintaining a sustainable and secure payout ratio.

With a year-to-date and 2016 full year guidance FAD payout ratio of 83.9%, and 86.0%, respectively, Welltower’s current payout is well covered by its funds available for distribution.

Looking at Welltower’s balance sheet, the REIT’s high absolute debt load may appear alarming. However, remember that this industry is monstrously capital intensive, so high debt loads are to be expected.

Rather, we need to view Welltower’s debt levels in the context of the industry in which it operates. For example, its leverage ratio (Debt/EBITDA) is 8% lower than the industry average, while its current ratio is nearly 3x that of its average peer.

In addition, the company is highly free cash flow positive, and its interest coverage ratio indicates it has no trouble servicing its debt obligations.

Furthermore, as you can see, not only is Welltower’s debt considered investment grade by all three credit rating agencies, but its debt ratios are all strong and getting stronger.

Source: Welltower Investor Presentation

That positive trend has been going on for the last few years, as Welltower’s exemplary management team has proven itself able to grow the REIT’s funds from operation (operating cash flow) per share at a brisk pace while reducing its debt as a percentage of overall capital (debt + equity).

Source: Welltower Investor Presentation