Whenever I need inspiration for a new stock idea, I think about
Yes, Levi Strauss -- the man who invented blue jeans. As a
scrappy European immigrant to the land of opportunity, Strauss went
West during the California Gold Rush in the mid-1800s seeking his
fortune. But he didn't go as a prospector. Instead, Strauss made
his first fortune selling pick axes, shovels and other supplies to
49ers who were in search of gold. His second and much larger
fortune was made when he decided to make pants out of tent canvas,
dye them blue with indigo and sell the durable outerwear to
would-be gold miners.
Simply put, Strauss was an expert in finding trends and
profiting from them.
This kind of savviness reminds me of a company I've followed for
more than a decade now. I'm talking about
Senior Housing Properties Trust (
, a real estate investment trust (REIT) .
And I like this company particularly now, because it's seizing a
huge opportunity to make alot a of money.
Let me explain...
As 10,000 people in the United States turn 65 every day, they'll
need somewhere to go as they get older and need more care. Senior
Housing manages a $6.2 billion portfolio consisting of nearly 400
properties that include senior-living centers, skilled-nursing
facilities, medical office buildings and wellness centers across 42
Obamacare headwinds? Fuggedaboutit
Considering the rapidly-changing landscape of U.S. health care,
it's easy to see why Senior Housing could face significant
headwinds at first glance. After all, the largest portion of the
nation's aging population still heavily relies on government
subsidies such asSocial Security andMedicare to help pay for senior
lifestyle and care facilities. In this sense, a health care REIT
would likely be negatively affected by slow government pay and the
fiscal uncertainty of federal entitlements.
But that's not the case with Senior Housing. About 94% of Senior
Housing's netoperating income comes from private-pay properties.
This means tenants pay out of their own pockets, rather than
relying on a government subsidy or voucher system. So the company's
dependence to government reimbursement (and the uncertainty that
comes with it) is extremely limited. In addition, about 31% of the
properties are multi-discipline medical office buildings with
blue-chip health care tenants such as
Boston Scientific (
Quest Diagnostics (
Strike gold with the golden years...
The U.S. population of 85-plus is growing at a much faster rate
than the rest of the country's population, according to the U.S.
Census Bureau. By 2025, the population of 85-plus is projected to
reach 25% compared to 15% for those under 85. And although the
current growth rate of seniors who are 85-plus sits right at 5%, it
could double in just four years.
These undeniable demographic trends and the stock's consistent
performance, make Senior Housing a great addition to any retirement
portfolio. It's already a core holding in many of my client's
portfolios. Carla Pasternak, director of income research for
, also has recommended it as a key
Retirement Savings Stock
The company has been expanding quickly. This year alone, Senior
Housing raised more than $650 million in capitalmarket transactions
and has access to a $750 million unsecured creditfacility . Despite
this fast growth, it's been able to keep a lowly-leveredbalance
sheet compared to most REITS, with a debt-to-capital ratio of just
In addition, the company has performed consistently through the
years. Besides a growing stock price, Senior Housing has steadily
raised thedividend from $1.20 a share in 2000 to a recent $1.56 a
share, which brings the yield to roughly 7%. Add that tocapital
appreciation and you have a compounded annual return of 55% during
the past 12 years. Not bad for a "lost decade" of investing...
The fact that REITs are required by law to pay 90% of their
income as dividends to shareholders -- regardless of whether their
share price goes up or down -- makes this an even sweeter deal.
Risks to Consider:
Although the lion's share of Senior Housing is private pay --
which implies relatively affluent tenants -- tougher economic
conditions or external circumstances such asinflation , could
affect the company's pool of qualified prospects in the senior
lifestyle and assisted-living segment. In addition, as part as
their different tax structure, REITs don't pay incometaxes . This
means their dividends are usually fully taxable.
Action to Take -->
I see Senior Housing as a long-term holding, especially if you are
building a retirement, income-focused portfolio. This doesn'tmean
the stock can't perform well in the short term. Based on favorable
long-term demographics and the company's historic consistency, a
12-monthprice target of $29 is completely reasonable. Factoring in
dividend income, this translates into a 33% total return.