For some, age may just be a number. But for investors that number can have a dollar sign in front of it.
The United States is an aging nation. The baby boom after World War II and increased life expectancy are resulting in more seniors and increased demand for facilities where they can live with their peers and receive health care as they age.
According to U.S. government projections, the number of people age 85 and older will reach 6.6 million and nearly 2 percent of the population by 2020, up from 5.8 million in 2010. By 2050, that figure will have risen to more than 19 million, or more than 4 percent of the nation. By 2060, there will be nearly 100 million Americans that are 65 or older.
[See: 7 Stocks to Buy for the Baby Boomer Retirement Wave.]
There are about 22,000 senior housing and care properties in the U.S. — dominated by nursing care properties — in a market worth between $250 billion and $270 billion, according to the National Investment Center for Seniors Housing and Care.
“The demand for seniors housing and care is driven mainly by three factors: seniors’ desire for the less demanding, more carefree lifestyle offered by independent living; seniors’ desire for the socialization afforded by a community of peers; or seniors’ need for the daily personal care services offered by assisted living, memory care and nursing care properties,” the center says.
Some operations offer independent housing, assisted living services, memory care and skilled nursing all on one campus. These communities, which can have pools, social areas and restaurants, typically charge a hefty one-time entry fee and then monthly fees.
“It’s a huge difference from back in the day when you had just a nursing home,” says Mark Taylor, portfolio manager with Alpine Woods Capital Investors.
Many baby boomers who are retiring now have helped their parents enter senior housing, Taylor says. They’ve seen that the facilities can be pretty nice and view them positively for their own long-term care, he says.
“It’s just a mounting demand for this product,” he says.
The favorable demographic trends and relatively inelastic demand for health care services should bode well for senior housing facilities for the foreseeable future, says Morningstar analyst Edward Mui.
But the risk is new supply of senior facilities, he says.
[See: The 10 Best REIT ETFs on the Market.]
Senior living-related stocks have underperformed over the last 12 to 14 months, says Peter Martin, analyst with JMP Securities. The profitability of the units — some with 30 to 40 percent operating margin in private pay facilities — has spurred development, causing worries about over supply, Martin says.
Also, concern about health care reform with the new administration has been adding volatility to senior living stocks, Mui notes. But volatility in real estate investment trusts could create opportunities to invest in companies with solid fundamentals, such as the demographic trend backing senior living facilities, he says. Further, a repeal of or changes to Obamacare could help the nursing side of the business that has gotten hurt as the Affordable Care Act incentivizes outcomes rather than fee-based systems, he says.
Martin says senior care facilities can make for good investments over a longer term time horizon. After all, a current 65-year-old newly retired person may not need to enter a facility until their 80s, he says.
Taylor likes the larger continuing care retirement communities with multiple locations in a state or region because issues with vacancy rates at one facility can be balanced out by other facilities. He also likes those in areas with above-average socio-economic profiles because the more affluent can absorb fee increases.
Liquidity is also important for these facilities because some need to have 70 percent or even 90 percent occupancy to break even, Taylor says, adding that he likes to see more than 300 days of cash on hand.
One way to invest in senior living is through REITs such as Ventas (ticker: VTR) and Welltower ( HCN) and HCP ( HCP) that own a significant number of assisted living, independent living and skilled nursing facilities.
They have a relatively diverse portfolio and have gone through portfolio repositioning in recent months, Mui says.
Then there are providers such as Capital Senior Living Corp. ( CSU) and Brookdale Senior Living ( BKD).
[Read: Why Every Investor’s Portfolio Should Include REITs.]
With a market capitalization of $2.5 billion, Brookdale is five times the size of Capital, with its market cap of about $500 million, but Martin thinks the latter is the stronger company, pointing to its cash flow and asset ownership. He says Brookdale’s 2014 purchase of Emeritus Corp. has been “detrimental” to Brookdale.
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How to Invest in an Aging Population originally appeared on usnews.com
