Welltower's 3 Biggest Growth Opportunities

By Markets Fool.com

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Healthcare REIT Welltower (NYSE: HCN) has delivered amazing returns for its investors over the past 45 years, but there could be even more market-beating growth ahead. Between the favorable trends for the healthcare industry, existing opportunities for consolidation, and potential for expansion beyond the U.S., Welltower's best days could still be ahead of it.

Industry growth

The primary opportunity Welltower and its peers have is that the healthcare industry is expected to grow dramatically over the coming decades, which will create a tremendous need for healthcare properties.

The U.S. population is aging rapidly, with the 65-and-over age group expected to double by 2050. Even faster growth is expected in the older age brackets -- in Welltower's markets, the 75-and-over age group is expected to double in just 20 years.

Image source: Welltower.

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Older individuals tend to spend more on healthcare needs, as you may expect. In fact, Americans between the ages of 65 and 84 spend 124% more on healthcare needs than the average person, and those over 85 spend 390% more. Partially as a result of the aging population, overall U.S. healthcare spending is expected to grow at a 5.8% annualized rate over the next decade. This is especially good news for Welltower, as the vast majority of the company's portfolio is made up of senior housing and long-term care facilities, both of which directly benefit from an aging population.

Image source: Welltower.

Another potential catalyst for growth in the real estate industry is the recent creation of an independent real estate sector (real estate used to be part of the financial sector). According to fellow healthcare REIT Ventas (NYSE: VTR), whose investment strategy is quite similar to Welltower's, this could produce upwards of $100 billion of inflows into high-quality REITs with strong balance sheets.

Consolidation

Welltower and its high-quality peers such as Ventas could also benefit from a wave of industry consolidation. Currently, the healthcare real estate industry is about $1 trillion in size in the United States, and the largest company, which happens to be Welltower, has a market share of less than 3%.

As Ventas pointed out in a recent presentation, the healthcare real estate industry is still in the early stages of the trend toward securitized public real estate. Less than 15% of healthcare properties are owned by REITs -- a remarkably low figure when you consider that 40%-50% of malls and 50%-55% of hotels are owned by REITs.

Image source: Ventas.

The major beneficiary of industry consolidation is generally the strongest, most efficient companies. In healthcare real estate, this means Welltower, Ventas, and perhaps HCP (NYSE: HCP), once its spinoff of certain troubled assets is complete.

International expansion

Finally, another growth opportunity that's still in its early stages is the potential for international expansion. Welltower and some of its peers, including HCP, have started to expand overseas into the U.K., and Welltower has also invested several billion dollars into the Canadian market.

It's easy to see why. These markets are both seeing the same aging trends, or better, as the U.S. In the U.K., where Welltower has 90 facilities so far, the 75-and-over age group is growing five times faster than the overall population. In Canada, the growth rate is even higher. And this is in addition to the potential for consolidation in these markets.

Welltower has been investing rather aggressively in these two markets in recent years, and I wouldn't be surprised to see this trend continue going forward.

No shortage of opportunities

In full disclosure, Welltower is a major holding in my own retirement portfolio, and in my opinion, it's the best option to invest in healthcare real estate. However, as you've seen, there is no shortage of growth opportunities in the industry over the coming decades, and all of the major healthcare REITs should benefit from it.

Welltower has produced incredible returns over its 45-year history. In fact, if you had invested $10,000 in Welltower in 1971, you'd be sitting on an investment worth about $7 million today. And with the opportunities I've discussed here, I wouldn't be surprised to see this level of performance continue for years to come.

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Matthew Frankel owns shares of HCP and Welltower. The Motley Fool recommends Welltower. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.