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Cash in on Boomers with Senior REITs

Who says romance can’t happen in an old folks home? Health Care REIT Inc. (NYSE:HCN) has been wooing other senior living properties, and agreed on Wednesday to buy Sunrise Senior Living (NYSE:SRZ) for about $850 million in cash.

Here are the specifics, from the New York Times’ Dealbook section:

“Under the terms of the deal, Health Care REIT will pay $14.50 a share, 62% above Sunrise’s closing price on Tuesday…

Through the deal, Health Care REIT will add 20 senior housing communities that Sunrise owns outright as well as an interest in joint ventures that control 105 additional properties. Most of the centers are aimed at the higher end of the market, and they are concentrated in markets like New York, Los Angeles, Chicago and London.”

Health Care REIT is no small player in senior housing. It has a $12.5 billion market cap without the Sunrise Senior living buyout, making it bigger than Campbell Soup Co. (NYSE:CPB) or discount retailer Dollar Tree (NASDAQ:DLTR) by that metric. And it’s on track to do $1.8 billion in revenue this year and owns almost 1,000 total properties in over 45 states.

I love the demographic play for health care stocks in general as Baby Boomers age, and I particularly like the senior housing REITs as long-term investments due to their huge dividends. HCN stock yields over 5% right now, though it admittedly has underperformed the market year-to-date with just a 6% gain vs. about 8% for the Dow Jones Industrial Average.

But long term, Health Care REIT is soaring — up 50% in five years vs. a flat market.

Sunrise Senior Living had more that doubled in the last year, so it’s a good fast-growing addition to HCN operations, though shares have admittedly rolled back on the deal. That’s probably because the REIT crowd is more concerned with dividends than acquisitons and is a bit miffed that cash isn’t going into their pockets instead.

But while the cash isn’t going to shareholders now, it will over time as SRZ operations support the big dividend. By law, REITs must deliver 90% of their taxable income back to shareholders via big dividends and Sunrise operations will help Health Care REIT shareholders in this way over the long term.

And if you’re investing in a demographic trend, long term is the only way to go.

Other big health care REITs you may want to consider are:

  • HCP Inc. (NYSE:HCP) — 4.4% annualized yield, shares up 9% in 2012.
  • Ventas (NYSE:VTR) — 3.9% annualized yield, shares up 17% in 2012.
  • Senior Housing Properties (NYSE:SNH) — 7% annualized yield, shares down 4% in 2012.

Just make sure you do the research on operations and dividend history before investing in any of these plays. With a firm tie between dividends and earnings, the payouts in these stocks can be more volatile than a consumer staple play like Procter & Gamble (NYSE:PG).

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Article printed from InvestorPlace Media,

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