My dad is in his early 70s. I remember when he was in his 50s and would joke that when he retired, he would be glad to take the spare bunk in my youngest son's room. Luckily, it hasn't come to that.
Like many American seniors, he and my mother, also in her early 70s, are in excellent health and extremely active. They both still work full time. They're not baby boomers. They're part of the smaller pre-boomer generation that was born at the tail end of the Great Depression and during World War II.
They have more in common with their parents than their younger boomer siblings or cousins. On the whole, they seem to be a little tougher, a little more independent and self-sufficient.
Baby boomers, on the other hand, not so much.
From the toy companies of the '50s to the Big Pharma companies of the 1990s hawking erectile dysfunction cures, corporations and their shareholders have consistently profited in a big way by catering to the perceived immediate needs of the biggest bubble of the U.S. population -- all 76 million of them, with another estimated 10,000 baby boomers turning 65 every day over the next 16 years. (My colleague Joseph Hogue wrote about this looming trend this summer in his "Graying of America" series.)
And as the boomers enter their golden years, the needs may change, but the opportunities for investors remain as lucrative as ever.
The Trend is Your Friend
One of the best investment ideas available to capture the upside of the aging Boomer trend is health care real estate investment trust (REIT) Senior Housing Properties Trust (NYSE: SNH). I've followed and recommended this stock for more than a decade.
While the stock has returned more than 50% within the past two years, it has recently given up some ground creating an entry point for investors. Here's why the investment thesis is still intact.
Near-Term Challenges Easily Overcome
Although the long-term outlook is bullish, Senior Housing is facing a couple of issues. Overall, its property portfolio does have limited exposure to government reimbursements; 60% of net operating income comes from private-pay senior housing.
However, while only 4% of revenue comes from skilled nursing facilities that rely on Medicare and Medicaid reimbursement, 31% of revenue comes from medical office buildings. So roughly 35% of the company's income is dependent on swift payment through some form of the federal bureaucracy.
Sequestration during the second quarter of this year did constrain revenue flow to the bottom line. As a result, Senior Housing's assets have underperformed the industry average this year.
To offset these pressures, Senior Housing is in the process of selling 10 properties, most of which are skilled care facilities. Not only does this reduce government reimbursement exposure, those assets also underperform others in the portfolio. In addition, occupancy in its retirement communities is expected to increase. These are the higher-margin products in the company's portfolio and are positioned best to benefit from the "Graying of America."
The asset sales can only help an already solid balance sheet. Funds from operation grew 7.5% this year, to $317 million. Funds available for distribution -- which is what investors are most concerned with when looking at a REIT -- grew 6% from last year, to $280 million. Most importantly, Senior Housing's long-term debt-to-capital ratio is only 29%, which is very low compared with the amount of debt typically required by REITs to operate and pay for acquisitions.
Shares of Senior Housing Properties Trust have recently fallen to an attractive price level. SNH is trading around $23, which, according to analyst estimates, is right at the company's net asset value (NAV), which is basically the tangible fair-market value of all the properties in the portfolio. The dividend yield is also attractive at well over 6%.
Risks to Consider: The Healthcare.gov debacle is sending shock waves throughout the health care industry, a sector that has been under pressure from regulatory ambiguity for a while. Senior Housing is mitigating its government exposure through sales of non-performing assets. An environment of rising interest rates would present significant risks to REITs and other financially sensitive stocks, but Senior Housing is well positioned to counter that risk with a low long-term debt-to-capital ratio.
Action to Take --> Regardless of the regulatory fog surrounding the health care industry, Senior Housing's focused business model will benefit from an inevitable demographic trend. With this macro tailwind and consistent 6%-plus distribution, don't expect shares to trade without a premium for long. Another factor supporting SNH is the very same boomers reaching for retirement income beyond the paltry returns of many fixed-income investments. A realistic 12-month price target of $30 would translate into a total return in excess of 36% including dividends.