Healthcare REITs: A Place To Put Grandma

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Healthcare in the United States is changing. Part of the need for this change is the country's aging population. Regardless of what the government does, we are still going to need to deal with the elderly. Part of that is providing appropriate care in appropriate facilities. Healthcare real estate investment trusts (REITs) that own facilities geared to Grandma and Grandpa stand to be beneficiaries.

First Steps
To his credit, President Obama took bold steps to push healthcare reform in this country. While there are many who disagree with the approach taken, there are few who would say the current system isn't flawed. So, at the very least, the president has started the country down the path toward a solution.

The current law, nicknamed Obamacare, is set to make material changes to the healthcare industry. There will be winners and losers, however, healthcare will always be a hands on process. An x-ray can be read in any part of the world, but it can only be taken where the person has the broken bone. And that bone can only be mended in the location of the broken bone. While simple, this is a solid foundation underpinning healthcare REITs.

Getting Older
One area of the healthcare REIT industry that will be increasingly in demand is housing for the elderly. The aging of the country has come in two flavors. First, people are simply living longer because of healthier lifestyles and medical advances. Second, the baby boom is hitting retirement age. These two events will create a boom in demand for a place to put Grandma and Grandpa.

There are several types of properties along a spectrum from well living to full medical care. First there are residences for healthy seniors who can, for the most part, live alone. So-called independent living facilities provide a mixture of senior tailored facilities (wide halls, cafeterias/restaurants, bus services to stores, etc.) and the ability to be around similarly aged and able people. Families, meanwhile, know that there are people looking out for their loved ones even if those people aren't providing material services.

The next level of care is assisted living. These facilities provide help with the activities of daily living, such as bathing. Basically, residents get the extra help they need so they can still live mostly normal lives and be around people like themselves without having to be in a nursing home. The nursing home is the last option, in which residents need material help with just about every aspect of their lives. They can be thought of as extended-stay hospitals.

REIT Options
There are a number of REITs that specialize in housing for the elderly. The REITs generally own the property while others actually run the day to day operations at the facilities. This is a good structure for both parties, freeing up capital for the operator and creating a reliable income stream for the REIT.

Omega Healthcare Investors (NYSE: OHI)
Founded in 1992, Omega Healthcare Investors focuses on skilled nursing facilities. It owns or holds mortgages on over 450 skilled nursing facilities, assisted living facilities, and other “specialty hospitals” across 33 states. It works with nearly 50 different operators. While the company owns mortgages, its main business is owning properties.

Omega's business has been relatively stable, allowing it the distinction of increasing its dividend every year through the 2007 to 2009 recession. That's impressive given that some of the largest REITs, such as mall owner Simon Property Group (SPG), were forced to trim or eliminate dividends. It speaks to the stability of the entire sector, as well as the strength of Omega's business. Indeed, management is fairly conservative, which is a nice benefit for risk averse investors. The shares recently yielded almost 7%.

Senior Housing Properties (NYSE: SNH)
Senior Housing Properties, recently yielding nearly 6.5%, also increased its dividend right through the recession, keeping in tact its long history of yearly dividend hikes. The company was formed by CommonWealth REIT (CWH) in 1998 and spun off to that company's shareholders a year later. While the company owns multiple types of healthcare real estate, nearly two thirds of its properties are senior living communities. It owns buildings in 38 states.

In recent years, management has ventured into the medical office space, which is more growth oriented. This is an important portfolio shift and one that may provide some diversification for investors seeking exposure to senior oriented properties, but that also want a little more growth than the sector usually offers. Slightly more aggressive investors might find this REIT of interest.  

Sabra Health Care REIT (NASDAQ: SBRA)
Sabra Health Care REIT was created in 2010 by Sun Healthcare Group, which was purchased by Genesis HealthCare late last year. Sun Healthcare was effectively separating its property holdings from its property management, using the REIT structure as so many companies have done lately. Sabra owns a little over 100 facilities, most of which are nursing homes, in over 20 states.

Investors should note that Sabra has significant exposure to its former parent, which operates the vast majority of Sabra's facilities. While this is a notable risk, it isn't uncommon for a REIT to come into existence in this manner and eventually diversify its tenant base via acquisitions. That said, over the near term, investors should keep an eye on this factor. The stock's recent yield is a little under 6%, but based on its relatively short trading history, it is hard to put a value on the company's dividend profile.

Aviv, a large nursing home operator, is one to watch for. It reintroduced plans for an initial public offering late in 2012 after shelving similar plans following the severe 2007-2009 recession. It owns over 250 properties across 29 states.

Boomer Power
The senior housing sector will be in high demand in the future as the baby boomers change one more thing about society—getting old. This gives the industry decent growth prospects. While there are properties within the sub-sector that are at more risk of government regulatory changes than others, that doesn't diminish the long-term potential. Income focused investors should spend some time reviewing this group.


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