A Senior Play In Senior Housing

By Aaron Levitt | November 30, 2012 AAA

One of the biggest trends facing investors is our aging population. Each year millions of Baby Boomers will turn 65 and begin entering their golden years. Keeping that aging population healthy remains a top concern for policy makers, individuals and families. Over the longer term, the prognosis for broad healthcare investments such as the Health Care Select Sector SPDR (ARCA:XLV) remains good.

However, there is more than one way to profit from the trend aside from pills, medical devices and health insurers.

As the Boomers age, many could find living in their existing housing very difficult. As more transition to assisted living centers, senior communities or nursing homes, investors have opportunities to participate in these facilities. A number of Real Estate Investment Trusts (REIT) are designed to take advantage of this long-term fact. For investors, that could lead to some big dividends.

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Strong Rent and Occupancy Growth
Overall, the number of Americans age 65 and older is expected to grow 36% between 2010 and 2020. That compares to just a 9% growth rate for the general population. That aging population will need to live somewhere, and by the look of continued rent and occupancy growth, many older Americans are choosing to live in senior housing-type arrangements.

Data analysis by the National Investment Center for the Seniors Housing & Care Industry showed that the average occupancy rate for senior housing properties in the third quarter of 2012 was 88.8%. That's an increase of 0.8% from a year earlier. More importantly, the senior housing sector's average occupancy rate has risen consistently over the last 10 quarters and is almost 2% above its historical low reached during Q1 2010.

At the same time, as these occupancy rates have increased year over year, rental rates have also grown. While the 2.2% rent growth may not seem like much at first blush - especially compared to apartment rent growth - that's actually quite impressive considering rents at some senior housing facilities can top out at $80,000 a year. Likewise, cap rates across the sector have remained relatively stable over the past year - unlike some other commercial real estate sectors. Average cap rates for senior housing facilities have been about 8%, while nursing care facilities have enjoyed higher rates around 11%.

All in all, those higher occupancy and rent rates have helped buoy the sector's cash flows and financials. That adds up to some pretty big dividends for investors.

The Nursing Home Portfolio Play
Given the senior housing industry's long-term appeal, investors may want to consider adding the sector to a portfolio. Some of the biggest healthcare-focused REITs such as Ventas (NYSE:VTR) and Healthcare REIT (NYSE:HCN) have been adding various assisted living and independent senior facilities to their holdings over the last few years. Both of these firms recently purchased properties and assets from struggling Sunrise Senior Living (NYSE:SRZ). However, there are other choices as well.

A pretty good choice lies with Senior Housing Properties Trust (NYSE:SNH). The REIT focuses strictly on senior living facilities including nursing homes, senior apartments/independent living communities, and it has continued to see growth across its portfolio. The company continues to pass along that growth to investors and recently raised its dividend in a move that equates to a 2.6% year-over-year increase. Shares of Senior Housing Properties currently yield a juicy 7%. Investors may also be interested in the company's former spinoff Five Star Quality Care (NYSE:FVE).

While it isn't a REIT yet, investors may want to look at Brookdale Senior Living (NYSE:BKD). Activist investors at Fortress Investment Group (NYSE:FIG) have taken a shine to the company, and speculation is that they will push for it to become a REIT in the new year. Brookdale owns and operates 648 retirement facilities. Those assets will throw off plenty of cash for investors if it makes the conversion to becoming a REIT.

The Bottom Line
With millions of Baby Boomers retiring and moving on in life, our aging population will remain one of the biggest mega trends affecting our future. For investors, that leaves plenty of opportunities to profit. One of the more interesting ways is through senior living real estate. High rents and occupancy rates continue to make the sector attractive. The previous picks, along with HCP (NYSE:HCP), make ideal choices to play the sector.

At the time of writing, Aaron Levitt did not own shares in any company mentioned in this article.

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