The Baby Boomers are going to need a new place to crash.
The largest generation in U.S. history is entering retirement en masse, and as things stand now America lacks the senior housing inventory to accommodate them. 10,000 Baby Boomers turn 65 every day, and over the next 15 years, the number of Americans over the age of 50 will swell to 132 million. This means unprecedented demand for everything from active retirement communities with golf and tennis lessons to assisted living with full-time nurses.
This is fantastic news if you happen to be a senior housing landlord—and with the plethora of publically-traded senior-themed REITs, you can, indeed, be a landlord. Today, we’re going to look at the senior housing REITs best positioned to profit from the graying of America.
I should be clear on one point: Investing based on demographic trends is a long-term strategy. But your patience is likely to be rewarded. In their groundbreaking 2005 paper on demographics and industry returns, professors Stefano DellaVigna and Joshua Pollet found that, over time horizons of five to ten years, each additional point of annual demand growth due to demographic factors led to a 5%-10% jump in annual abnormal industry stock returns. But over periods of five years or less, demographics had little impact on stock returns. With demographic trends, patience is key.
With that said, let’s jump into some of the best potential long-term senior REIT buys:
LTC Properties
LTC Properties, Inc. (NYSE:LTC) is a real estate investment trust that invests primarily in the long-term care sector of the health care industry, including long-term care provider properties, skilled nursing properties, assisted living properties, independent living properties and memory care properties. LTC also invests in first-lien mortgages secured by long-term care properties.
A little over 80% of LTC’s portfolio is invested in properties with the remainder in mortgages. And among properties, skilled nursing is the biggest single segment, at 55%. Assisted living comes in second at 37%.
With any health-related stock, you have to address the issue of Medicare. It’s no secret that the U.S. government is short of funds these days, and Medicare cutbacks have been an unfortunate outcome. But that is what makes LTC such an attractive way to play the trend of Boomer aging. LTC is a landlord, not a care provider, so Medicare cutbacks will have little impact on revenues. And even better, most of LTC’s properties are leased under triple-net leases, meaning the tenant covers taxes, insurance and maintenance.
LTC’s monthly dividend works out to a current yield of 5.3%, making it competitive with other medical REITs. LTC is also a relatively small REIT with a market cap of just $1.34 billion. I like that, as smaller REITs can generally grow their portfolios—and their dividends—at a faster rate than their lumbering large-cap cohorts. And with a debt-to-equity ratio of only 46%, which is half the level of many of its peers, LTC has a lot of room to borrow. This too gives it flexibility to grow that its competitors do not have.
Health Care REIT
A larger, more liquid option would be Health Care REIT (Health Care REIT Inc (NYSE:HCN). From its name, you might assume that HCN was primarily a play on hospitals and doctor’s offices, but it’s not. Only about 36% of the property portfolio by value is invested in health-related properties.
About 64% of the portfolio is in senior housing, split between properties that HCN operates (38%) and those that are leased on a triple-net basis (26%). In a triple-net lease, the tenant is responsible for all taxes, insurance and maintenance; the landlord’s only responsibility is to collect the rent check. Looking at the health-related properties, medical office buildings and skilled nursing facilities make up another 16% and 14% of the portfolio, respectively, and the rest is split between hospitals and research facilities.
Impressively, apart from the skilled nursing facilities and hospitals, which depend heavily on Medicare and Medicaid, HCN’s tenants have very little dependence on the government. Across its portfolio, 87% of its revenues are from private pay clients. That’s a major positive in an era of slashed reimbursements and Obamacare restrictions.
HCN sports a dividend yield of 5.0% and has steadily raised its dividend over the past decade.
Senior Housing Trust
Next on the list: Senior Housing Properties Trust (NYSE:SNH), one of the biggest players in the senior housing segment with 372 properties spread across 38 states and Washington DC.
Despite its name, Senior Housing is not a pure play on the senior housing market. About 44% of its property portfolio is invested in medical office buildings. That is not necessarily a bad thing, mind you. In fact, I like medical office buildings as a low-risk way to invest in the rising healthcare needs of an aging America without complicated aspects of Medicare reimbursements or ObamaCare mandates. But it’s something to consider if you are specifically looking for investments in senior housing.
29% of SNH’s portfolio is invested in independent living facilities with another 21% in assisted living. Nursing homes and wellness centers make up about 3% of the portfolio each. And importantly, 97% of Senior Housing’s net operating income comes from private-pay properties; exposure to Medicare is minimal.
Dividend growth has been fairly modest over the REIT’s history, though it currently pays a very attractive 7.2%.
This article first appeared on InvestorPlace.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management.