Want to invest on the right side of one of the biggest demographic shifts in history? Try senior housing REITs.
Every day, 10,000 Baby Boomers turn 65. Over the next 15 years, the number of Americans over the age of 50 will swell to 132 million — a 70% jump from 2000’s numbers. 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 publicly-traded, senior-themed REITs, you can 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 10 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)
LTC Properties, Inc. (NYSE:LTC) 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 more than 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.
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 4.3%, making it competitive with other medical REITs. And importantly, LTC is a serial dividend raiser. Over the past five years, LTC has grown its dividend at a 9.3% annual clip. Had you bought LTC five years ago and held until today, you’d be enjoying a yield on cost of 7%. Not bad!
Ventas, Inc (VTR)
Next up is one of the bluest of blue-chip REITs, Ventas, Inc. (NYSE:VTR) — one of the few REITs included in the S&P 500. With a market cap of $23 billion, Ventas is one of the largest holdings in most REIT index funds. Due to its sheer size, Ventas cannot grow at the rate that some of its smaller rivals can. But with its size comes stability and financial strength.
A solid 56% of Ventas property portfolio is invested in senior housing, split between 26% in triple-net properties, 26% in domestic operating properties, and 4% in international operating properties. Another 19% of the portfolio is invested in post-acute care facilities, 15% is invested in medical office buildings and the rest is spread among hospitals, loans and other properties.
So, in Ventas, you get a nice, diversified sampling of the facilities that aging Boomers will be using in the decades ahead.
Ventas sports a current dividend yield of 4%. And like LTC, Ventas is also a serial dividend raiser. Ventas has grown its dividend at a 7.5% annual clip over the past five years. Had you bought Ventas five years ago and held until today, you’d be enjoying a yield on cost of a very respectable 5.5%.
Health Care REIT (HCN)
Another option would be Health Care REIT (NYSE:HCN). Like Ventas, HCN is big, with a market cap of $27 billion. It’s also one of the few REITs in the S&P 500.
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%). 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 3.8% and has been a steady dividend grower for years. Over the past five years, HCN has grown its dividend at a 3.2% clip. Had you bought HCN five years ago, you’d be enjoying a yield on cost of 7% today.
HCP, Inc. (HCP)
Next up is HCP, Inc. (NYSE:HCP), a blue-chip REIT included in both the S&P 500 Index and the Dividend Aristocrats Index for its 259 consecutive years of dividend hikes. With a $22 billion market cap, HCP is just a hair smaller than Ventas.
At 39%, senior housing makes up the largest segment of HCP’s portfolio, followed by post-acute facilities at 27%. Life sciences, medical offices, and hospitals fill out the rest of the portfolio at 16%, 15% and 3%, respectively.
Given its size and quality, HCP pays a very respectable dividend at 4.5%. And HCP has managed to grow that dividend at a 3.4% over the past five years. An investment five years ago would be generating a yield on cost of 7% today.
Sabra Health Care REIT (SBRA)
And finally, we get to Sabra Health Care REIT (NYSE:SBRA), a smaller competitor with a market cap of $1.8 billion. Sabra owns 154 real estate properties in 34 states including 102 skilled nursing facilities, 50 senior housing facilities, and two acute care hospitals. Sabra’s properties are rented under triple-net leases, meaning that the tenants are responsible for all maintenance, taxes and insurance.
Skilled nursing properties dominate Sabra’s revenues at 54%, with another 31% coming from senior living facilities. The remainder comes from acute care hospitals. Importantly, Sabra has been shifting its portfolio away from tenants that depend on reimbursement from the government. In 2013, 68% of rent revenues depended on non-private (i.e. government) payers. Last year, it was reduced to just 46%.
Sabra’s history as a dividend-paying REIT is fairly short, as the company was formerly part of Sun Healthcare Group. But since 2011, Sabra has raised its dividend by 22%. The shares sport a current dividend yield of 4.7%.
Disclosures: Long LTC
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.