The Long Term Play In Healthcare Facilities

By Aaron Levitt | October 03, 2010 AAA

Ask any baby boomer or recent retiree what their chief concern is when it comes to finally retiring and odds are they'll say healthcare. According to kaiseredu.org, healthcare expenditures in the United States exceeded $2.3 trillion in 2008, three times more than the $714 billion spent in 1990, and over eight times the $253 billion spent in 1980. This equates to just under $8000 per resident. Facing rising healthcare costs is scary proposition. These expenses have been rising significantly faster than the overall economy or personal incomes for more than 40 years. Over the longer term, broad healthcare investments such as the Health Care Select Sector SPDR (NYSE:XLV) should continue to do well. However, there is another way to play healthcare. One that leads to big dividends.

IN PICTURES: 5 Investing Statements That Make You Sound Stupid

Owning Your Doctor's Office
Individuals 75 years or older spend nearly 300% more on healthcare related costs than the population average. As America's population continues to live longer, they will require more medical services. More medical service equals more medical real estate. Newer hospitals and doctor's offices for practicing medicine as well as assisted living centers for aging retirees will need to be owned and operated. Opportunities exist for investors to participate in these facilities. There are a number of Real Estate Investment Trust's (REIT) designed to take advantage of this long term macroeconomic trend.

While some analysts continue to debate about the strength of commercial real estate, the medical sub-sector does have some things going for it. Recent data released by the National Investment Center for the Seniors Housing & Care Industry showed that occupancy rates for assisted living properties in the second quarter of 2010, was 88.3%. This was an increase from 87.8% in the first quarter. The group also found that 15 out of 31 major metropolitan regions recorded annual occupancy increases in throughout the quarter.

In addition, Standard & Poor's is quite bullish on the healthcare REIT sector over the next 12 months. Citing the group's huge cash flows and high rents to help buoy the financials, as well as insulate against shocks to commercial real estate. Finally, all those hospitals, assisted living centers and labs add up to big dividends for investors. The average dividend yield for healthcare REITs are at 5.2% - more than a full percentage point higher than their office twins.

Co-Pay Dividends
While retail focused REITs get their own exchange traded fund in the iShares FTSE NAREIT Retail (NYSE:RTL), healthcare REIT investors aren't so lucky. However, there are plenty to choose from and many offer big dividends and long term capital gains.

As one of the largest healthcare REITs, Ventas (NYSE:VTR) is a prime example of the current state of commercial real estate - those with cash are a making acquisitions. Recently, the company agreed to acquire the minority interests in 58 senior living communities from struggling Sunrise Senior Living (NYSE:SRZ) for $186 million. The company expects the deal to add nearly 10 cents to 2011's funds from operations (FFO). Shares of Ventas currently yield a healthy 4%.

Offering investors the highest dividend in the sector, Medical Properties Trust (NYSE:MPW) yields nearly 8%. The company follows a slightly different business model than traditional REITs by providing capital to facilities of through long-term triple-net leases. The company has reasonable debt levels and shows signs of strong revenue growth.

Focusing on senior living facilities including nursing homes, senior apartments and independent living communities, Senior Housing Properties Trust (NYSE:SNH) will benefit as more baby boomers give up their homes to live in such arrangements. The company is seeing some of that growth now and has been passing it on to shareholders. Senior Housing Properties recently raised its dividend by a penny and now yields about 6%.

Finally, REITs like HCP (NYSE:HCP), Health Care REIT (NYSE:HCN) and National Health Investors (NYSE:NHI) all offer 5% plus dividends, while owning a variety of property types.

Bottom Line
Healthcare costs will continue to be a major factor for future as our population ages and lives longer. Healthcare related real estate will also see its star rise. Stocks like Omega Healthcare (NYSE:OHI) offer big dividends and the stability of this macroeconomic trend. Investors looking for income should consider this sector. (For related reading, take a look at Investing In The Healthcare Sector.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

You May Also Like

Related Analysis
  1. Stock Analysis

    DXP Enterprises to Buy Back 0.4 Million Shares, Price Rises - Analyst Blog

  2. Stock Analysis

    Ventas Moves Closer to American Realty Healthcare Merger - Analyst Blog

  3. Stock Analysis

    CNH Industrial, Evogene Subsidiary Extend Collaboration - Analyst Blog

  4. Investing

    8 High-Yielders That Fund Managers Love

  5. Chart Advisor

    How To Trade The Biggest U.S. Companies In 2015

Trading Center