Alzheimer's: A Growth Market For Healthcare REITs

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

“Nonpartisan RAND Corp. estimates that by 2040, the number of Americans afflicted [by Alzheimer's] will have doubled, as will the costs.” Bloomberg's article laments the sequestration cuts to medical research into this growing issue, but the statistic is a major reason to like healthcare real estate investment trusts (REITs) like HCP (NYSE: HCP), Health Care REIT (NYSE: HCN), and Omega Healthcare Investors (NYSE: OHI).

A Growing Problem

The quote above clearly shows how big an issue Alzheimer's is becoming. However, some think even that estimate is to rosy a projection. Bloomberg notes that The Alzheimer’s Association believes costs associated with the disease will be more than $1 trillion a year by 2050. That's a huge expense for a disease associated with aging and exploded by the shear size of the baby boom generation.

There's no cure, at least not yet. Even if medical funding is fully restored, a cure isn't at hand. This is a difficult condition to treat and one that often results in patients being placed in specially structured medical facilities. Such institutionalization isn't an issue of an unloving family, these patients frequently need constant supervision and an environment that removes dangerous everyday items like stoves. That's hard to do at home.

The Alzheimer's epidemic will, for better or for worse, result in increased demand for supervised senior housing facilities.

A Leader in Senior Care

healthcare REIT is among the oldest REITs dedicated to healthcare facilities. It owns around 1,000 properties in The United States, Canada, and in the United Kingdom. It's portfolio includes senior housing communities, skilled nursing facilities, medical office buildings, medical centers, and life science facilities. From the start, however, its main focus has been serving seniors.

The company's top line has expanded dramatically in recent years as it has aggressively grown via acquisition. A recent purchase was the acquisition of Sunrise Senior Living and subsequent sale of the company's management division. The complex deal, valued at nearly $850 million, is an example of the type of acquisition this large industry player is capable of executing.

This, however, underscores a big issue. healthcare REIT is so large at this point, that it needs big deals to grow. Still, the healthcare property market is large, so healthcare REIT should be able to continue growing even if the pace slows. That should support the regular annual dividend hikes healthcare REIT is known for.

After the broad REIT sell off, the shares still only yield around 4.5%. However, for conservative investors looking for exposure to the senior care industry, it's a good option.

More Diversification

HCP is another giant in the healthcare REIT space. Its portfolio, however, is more diversified, including senior housing, skilled nursing, life science, medical office, and hospital properties. Despite the broader industry view, about two-thirds of its over 1,000 facility portfolio is related to senior care in some way.

Like healthcare REIT, HCP is so big that it needs to do a lot of deals to fund growth. For example, in 2012, the REIT made about $2.5 billion worth of investments. Finding big deals is going to get increasingly difficult and HCP has stiff competition. But a large market should allow for acquisition driven growth for at least the immediate future.

The company has a long history of annual dividend increases and yields around 4.4% after the broad REIT sell off. It is a good option for conservative investors looking for a one-stop shop in the healthcare REIT sub-sector.

An Up and Comer

At nearly 500 buildings, Omega Healthcare Investors' portfolio of properties is around half the size of the two REITs above. Its portfolio consists of nursing facilities, assisted living facilities, and other specialty hospitals across 33 states.

Omega's portfolio is heavily tilted toward skilled nursing facilities. That makes third party payment issues a big concern. However, as the new healthcare laws take effect, any confusion here should slowly get cleared up. The added risk, however, has left the REIT with a yield discount to the pair above.

With a long history of annual dividend increases and an around 5.7% yield, this is a good option for more aggressive income investors. And, with a smaller portfolio, growth will be easier to come by.

Even if You Wait

This trio is a great group of stocks that will all benefit from increased demand for Alzheimer's care. The REIT pullback has brought their prices down to more reasonable levels. Those concerned about a deeper REIT sell off, however, should hold off on investing in HCP, healthcare REIT, and Omega. However, you should still put them on your watch list. Yields in the 6% range for the two larger companies would be ideal, with smaller Omega a good deal in the 8% area.

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Reuben Brewer has positions in HCP and Health Care REIT. The Motley Fool recommends Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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