Health care real estate investment trust Welltower (NYSE: HCN), as you might expect, makes the majority of its money from its healthcare properties, but you might be surprised to learn that rental income isn't the company's largest source of revenue.
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Clearly, there's more to Welltower's business than meets the eye, so here's a breakdown of where Welltower's revenue comes from, and why it's been able to consistently outperform the market for nearly five decades.
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The simple answer
For the easy answer to the question "How does Welltower make its money", we don't need to look any further than the company's income statement. With that in mind, here's a breakdown of Welltower's revenue in 2016:
Data source: Welltower investor presentation.
Welltower's business -- the quick version
Welltower is the largest healthcare-focused REIT in the market, and has operations in the U.S., U.K., and Canada. As I write this, the company owns, or has an interest in, just over 1,400 healthcare properties. The majority of Welltower's portfolio is made up of senior housing properties (69% of NOI), with additional substantial holdings in outpatient medical facilities (17%) and long-term/post-acute care properties (13%). 93% of Welltower's portfolio derives its income from private-pay sources. This is excellent for stability, as private-pay revenue tends to be much more predictable than healthcare revenue dependent on government reimbursement programs.
And as you can see from the chart, while Welltower does have several revenue sources, the overwhelming majority comes from just two -- rental income and resident fees and services.
As a REIT, you may expect that rental income would account for most of Welltower's income, but Welltower isn't simply a buy-and-lease owner of real estate. Rather, the company provides real estate capital to some of the best senior housing, post-acute, and other types of healthcare operators, and the properties are structured as partnerships. Examples of Welltower's largest partners include Brookdale Senior Living, Sunrise Senior Living, and Genesis Healthcare, among others.
Within the senior housing part of the portfolio, some of the properties are operated as partnerships, and some are simply leased to their tenants on a triple-net basis. This is why some of the company's revenue comes from rent, while more than half depends on services provided and fees collected at its properties.
As far as growth goes, it's tough to make a case against the healthcare REIT industry, and Welltower in particular. The senior citizen population of Welltower's target markets is expected to roughly double by 2050, which should particularly fuel growth in senior housing, Welltower's bread-and-butter. Additionally, the healthcare real estate industry is highly fragmented and is still in the early stages of REIT consolidation, and Welltower's size and financial flexibility should give it a big advantage.
The Foolish bottom line
Welltower isn't simply a landlord, like many REITs. Rather, the company aims to create and nurture lasting partnerships with some of the best operators in the senior housing, post-acute, and outpatient medical businesses.
Over the company's 46-year history as a public company, it's become abundantly clear that the business model is a winner. Since 1971, the company has averaged annual returns of 15.5%, consistently outperforming the market, and has increased its dividend at an average rate of 5.6% per year. While this is no guarantee of future results, with the growth expected in the healthcare industry in the coming decades, there's no reason Welltower can't continue its track record of market-beating performance going forward.
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