Something's got to give. At a time when the aging of the U.S.
population is beginning to accelerate, the construction pace of new
housing and care facilities for seniors is shrinking.
Between 2010 and 2020, the number of Americans 65 and older will
grow +36%, compared with a growth rate of 9% for the general
population, according to the U.S. Department of Health and Human
You'd think we'd be on the verge of a boom in Baby Boomer housing.
Yet, construction in the seniors housing sector has nosedived in
recent years due to a lack of financing for developers and
continued recession-related economic pressures.
In the year ended March 31, the number of such units started
fell -37% from the previous year, and was down -45% from two years
earlier. That, according to a report from the National Investment
Center for the Seniors Housing & Care Industry and the American
Seniors Housing Association. In fact, the two trade groups termed
the amount of construction activity in seniors housing and care
since 2000 as "modest" compared with the 1980s and 1990s.
In this scenario, the law of supply and demand would seem to
favor the supply side. Even if lenders were to start lending again
and bulldozers were to start blazing, it would realistically take
at least a couple years before the number of new available units
would begin to come in line with a growing demand.
Short of purchasing a long-term care facility or a medical
office building on your own, one way to take advantage of this
discrepancy is by buying shares in health care REITS, or real
estate investment trusts that own health care properties.
Healthcare REITs, like all REITs, have a huge tax advantage.
They only pay taxes on earnings they do not pass on to their
shareholders. And they must pay at least 90% of their earnings in
This means that REITs often pay huge dividends, but there's a
drawback. REITs are usually unable to finance expansion with their
operating income, having passed the overwhelming majority on to
shareholders. Instead, they have to issue debt and equity to grow.
)$6.6B4.9%30.72.6$1.82$71M$2.6BHealth Care REIT
)$5.3B6.3%24.11.5$1.48$102M$2.4BNationwide Health Properties (
)$2.5B7.4%17.81.3$0.93$72M$984MOmega Healthcare Investors (
)$1.5B6.6%20.12.2$0.90$0.7M$493MNational Health Investors (
)$901M6.7%15.52.1$2.20$64M$1MMedical Properties Trust
)$759M8.5%22.51.1$0.39$13M$566MLTC Properties (
)$591M6.1%20.72.2$1.23$5M$11MUniversal Health Income Trust
One healthcare REIT that stands out:
National Health Investors (
. NHI yields 6.7% and is cheap compared with its peers. It's also
in a great cash and debt position, giving it plenty of room to
National Health Investors is one of just 125 profitable U.S.
companies that over the past year have decreased their debt by more
than -50% without increasing their number of shares outstanding.
And it's the only one that has accomplished this financial feat
that has a dividend yield of more than 6%. Its debt is now just
$1.4 million -- about 2% of the cash it has on hand.
This $900 million company purchases and leases health care real
estate and makes mortgage loans to health care operators. Founded
in 1991, the company now has 130 health care facilities in 18
states. These facilities are predominantly long-term care
facilities and assisted living facilities, but include residential
projects for the developmentally disabled, medical office
buildings, retirement centers, and a hospital.
The company currently pays a $0.55 per quarter dividend,
totaling $2.20 per year, for a dividend yield of 6.7%. In December,
the company also pays a variable cash dividend. Last year, the
variable dividend was $0.14, pushing its historical yield to
For the third quarter ended Sept. 30, 2009, National Health
Investors saw revenues of $19.6 million, up +26% from the same
period last year. The bulk of this gain came from rental income,
while its income from mortgage interest gained only slightly. Net
income for the quarter was up about 10%.
Not only has National Health Investors been putting up great
numbers, very few have noticed. Its price to earnings ratio is
still a measly 15.7. That's a full ten points below its peer
average of 26.0. And the company's forward price to earnings ratio
is an even lower 12.8. On a price to book basis, it's also
reasonably valued at 2.1.
During the past year, National Health Investors has paid off 85%
of its debt, which now totals just $1.4 million. It did this
without issuing new shares. This puts the company in a great
position to acquire new properties going forward. It also has an
excellent cash position with about $64.0 million at the end of the
Sept. 30 quarter.
National Health Investors last week announced it spent $28.25
million on five assisted living facilities from Bickford Senior
Living, which is also leasing the properties back from National
Health Investors for the next 15 years. The company said that this
investment will return a double-digit yield during the life of the
This is the best healthcare REIT out there. It's undervalued and
underappreciated. For the price, it's an absolute steal. If it
keeps posting outstanding results, it won't be for long.
Disclosure: Anthony Haddad does not own shares of any security
mentioned in this article.
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