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3 REITs For An Aging America

By Brodie McLeod - Mar 19, 2014 at 12:00PM

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Americans are getting older and specialized REITs can be interesting for investors.

One trend we all know about is the aging of the United States. 12.9% of the population were at least 65 in 2009 and this number is projected to increase to 19% by 2030, a 47% increase in a mere 21 years. Americans are living longer and the 79 million baby boomers are approaching retirement. With this trend will come a tremendous shift in resources, leaving investors with a cornucopia of opportunities ranging from health care to leisure. One almost undeniable opportunity lies with assisted living and long-term care.

A REIT With Independence

One of the big risks that comes with investing in health care for seniors is the amount of government involvement. Medicare may come with a seemingly large amount of money but it also comes with many strings attached as well as a set of rules and payments at the whim of whatever the current political mood may be. Senior Housing Properties Trust ( DHC -0.74% ) gives investors cover from this by having 93% of their properties gain the majority of their income from private resources. As of Jun. 30 this REIT has a well diversified portfolio of 395 properties across 40 states and D.C. including; assisted and independent living communities, continuing care retirement communities, nursing homes, wellness centers, medical offices, and clinical and biotech laboratories. The majority of these properties are triple net leased, meaning that the tenants are the ones responsible for expenses such as taxes and maintenance costs.

The biggest advantage of Senior Housing Properties is its lack of government dependence. While government involvement can give companies a cash windfall for a time, eventually the piper demands payment (in whatever form that may be). This is especially true with recent medicare cuts and the programs uncertain future. The REIT also has an appealing yield which currently sits at 6.67%.

The biggest downside of the REIT has been its under-performance (and even decline) of its share price in recent years. Its nice dividend may make a good investment for more conservative investors but its lack of combined growth  makes it a rather unappealing choice for more aggressive investors. It is also important to remember that even with a steady yield, the dividend paid fluctuates with the stock price. The second issue with the REIT is its dependency on Five Star Quality Care ( FVE -0.32% ), which is responsible for 44.2% of the income earned by the REIT and operates 60.5% of their assets. This sort of dependency essentially connects the success of the REIT to the performance (or lack of) an outside company.

A REIT With Growth

Omega Healthcare Investors ( OHI -2.85% ) is a REIT which provides financing and capital to long-term care facilities. As of Jun. 30 the trust own or held mortgages for properties across 33 states with 47 tenants including; 417 skilled nursing facilities, 16 assisted living facilities, and 11 specialty facilities. The REIT invested heavily in adding to their portfolio throughout 2012 by purchasing 51 new facilities. Omega Healthcare Investors contain lease agreements with almost all of their tenants allowing to annually increase payments by either a percentage, using formulas like the CPI, or by s specified dollar amount. Additionally the tenants are the ones responsible for costs such as maintenance and taxes.

The REIT's share price has performed quite well in recent time (even outperforming the S&P500 going back 10 years) as a result of impressive growth in their underlying business. Not only is the company performing well in terms of share price but they also have a rather appealing yield currently 6.31%. Much of this can be attributed to the REIT's top and bottom line growth. From 2008 to 2012 total revenues rose 81% to $350.5 million and net income attributable to common stockholders rose 55.4% to $120.7 million.

One red flag seems to be the REIT's diminishing returns on investment. From 2008 to 1012 assets rose 118.5% to just under $3 billion but revenues growth failed to keep up and growth in net income lagged even further. At best this indicates that management has run out of ideas for more profitable opportunities and is now settling for profitable, albeit less so, investments. At worst this indicates that existing properties and the REIT itself are becoming less profitable and the REIT is relying on new investments to continue growth.

A REIT With A Market Cap

In terms of market cap Ventas, ( VTR 0.34% ) leads the pack with one of about $18 billion. The REIT has a very diverse portfolio of over 1,400 properties, consisting of; seniors housing communities, skilled nursing facilities, hospitals, medical office buildings, and other health care properties. These properties span across 46 states, D.C., and the Canadian provinces of British Columbia and Ontario. Like the others REITs Ventas leased 889 of their properties with triple-net lease agreements.

Since the REIT's 1998 IPO past 10 years the REIT's stock has outperformed the S&P500 but has lagged over the past 5 years. However this can be overlooked with its current 4.28% yield. From 2008 to 2012 the REIT saw rental income rise an impressive 159% with net income attributable to shareholders rising 63%. All this makes a great combination of growth and dividends. The amazing growth in share price makes the REIT a good choice for more aggressive investors, while the dividend makes it a good choice for more conservative investors.

Venta's primary red flag is similar to that of Omega Healthcare Investors'. From 2008 to 2012 assets grew by 209%, outpacing revenue growth. Again, this shows that management is becoming less effective at maintaing a high rate of return on capital. A trend that can become more damaging as it continues.

The Foolish Bottom Line

With an already visible trend of an aging America specialized REITs offer investors a great opportunity to profit off of this. While they may not necessarily be the investment of choice for aggressive investors (there are some exceptions) the combination of healthy dividends and the long-term timeframe of shifting demographics make them a solid choice for the slow and steady investor.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Ventas, Inc. Stock Quote
Ventas, Inc.
VTR
$47.16 (0.34%) $0.16
Diversified Healthcare Trust Stock Quote
Diversified Healthcare Trust
DHC
$2.67 (-0.74%) $0.02
Five Star Senior Living Inc. Stock Quote
Five Star Senior Living Inc.
FVE
$3.10 (-0.32%) $0.01
Omega Healthcare Investors, Inc. Stock Quote
Omega Healthcare Investors, Inc.
OHI
$27.62 (-2.85%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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