In an ideal investment, you’ll have several overlapping investment themes come together. And that’s what I see today in Senior Housing Properties Trust (SNH, Financial), one of the biggest players in the senior housing segment with 372 properties spread across 38 states and Washington DC.
Let me start with biggest and most obvious theme: The graying of America. The Baby Boomers, the largest generation in U.S. history,y is entering retirement en masse, and as things stand now America lacks the senior housing inventory to accommodate them. 10,000 Baby Boomers turn 65 every day, and over the next 15 years, the number of Americans over the age of 50 will swell to 132 million. This means unprecedented demand for everything from active retirement communities with golf and tennis lessons to assisted living with full-time nurses. This is fantastic news for landlords of senior housing developments such as SNH.
Despite its name, Senior Housing is not a “pure play” on the senior housing market. 29% of SNH’s portfolio is invested in independent living facilities with another 21% in assisted living. Nursing homes and wellness centers make up about 3% of the portfolio each. And importantly, 97% of Senior Housing’s net operating income comes from private-pay properties; exposure to Medicare is minimal.
About 44% of its property portfolio is invested in medical office buildings. That is not necessarily a badthing, mind you. In fact, I like medical office buildings as a low-risk way to invest in the rising healthcare needs of an aging America without complicated aspects of ObamaCare mandates. It also makes SNH a more diverse healthcare REIT.
Moving on, let’s jump into my second theme: The low-yield market environment of the post-crisis world. Since May of 2013, when sitting Fed Chairman Ben Bernanke first indicated that he would soon start “tapering” his large-scale bond purchases, most investors have been expecting bond yields to rise. Well, nearly a year and half later, they are still waiting. Bond yields did indeed rise in the second half of last year, but they have been declining for most of 2014, and the 10-Year Treasury currently yields a piddling 2.2% at time of writing.
I have news for the bond bears out there: The Fed won’t tightening any time soon. The recent drop in bond yields has happened even while the Fed has effectively stopped its quantitative easing program. That means that it is the real bond market and not the Fed that is pushing yields lower.
Some of this is due to slow growth and record-low yields in Japan and Europe spilling over in the American bond market. But in any event, I don’t see the Fed raising rates aggressively, as doing so would invert the yield curve and potentially signal a recession. The last thing the Fed wants to do in engineer a recession when the job market is still sluggish.
Why does this matter to holders of SNH stock? Because SNH is a high-yield REIT with “bond like’ characteristics. All else equal, low bond yields make SNH’s high dividend all the more attractive. SNH currently pays a very attractive 7.0%.
Finally, I like to know who is in a trade with me. I’m a big believer in doing your own homework before investing in a stock, but I also think it can be reassuring to see that a manager you follow and respect is buying it too. So, I was thrilled to see that Thomas Howard, manager of the AdvisorShares Athena High Dividend ETF (DIVI, Financial) had made Senior Housing one of his ETF’s top-ten holdings.
Howard, whose book I recently reviewed, uses behavioral research to identify the “high conviction” picks of active mutual fund managers, essentially running a quantitative 13F guru-following strategy. DIVI is a new ETF with a limited track record, but Howard’s more established portfolios have been strong performers in recent years (see review).
With the market in the midst of a correction and bond yields scraping their lows of the year, a solid 7% yielder backed by strong demographic trends would seem like a winner.
Disclosure: Long SNH, DIVI
