Between 1946 and 1964, 76 million Americans were born. These so-called Baby Boomers are the largest generation the United States. This boom presents an interesting opportunity for investors, as we will see more than 10,000 people turn 65 every single day for the next 17 years. In fact, it is estimated that by 2030, more than 20% of the U.S. population will be 65 and older.
So how can you as an investor profit from this trend?
It is no secret that the U.S. health care system is in crisis mode. The soaring costs of health care are sinking the federal budget. The U.S. spends more on health care, per capita, than any other developed nation, with nearly a quarter of the 2012 budget being allocated to health care programs such as Medicare and Medicaid. These costs will continue to cripple the budget as retiring Baby Boomers continue to age and need access to more and more healthcare services.
When there's no more room in the budget, you need to either grow income, slash expenses or both. To curb the fastest-growing item of the budget (Medicare), we need to lower per-capita spending on health care. The good news is that there is a little-known sector within our health care system that can accomplish this goal.
By reducing acute care hospital expenses and switching to quality alternatives like skilled nursing facilities, health care costs can be reduced significantly. Skilled nursing provides short-term rehabilitation and nursing services after a hospital stay. When you compare the costs of these facilities with services provided by a major hospital, you see a world of a difference (typically a 70-90% reduction in costs).
This opportunity for massive savings will provide a major boom for skilled nursing facilities. Rather than looking to invest directly in the nursing facility companies, there is a better way to invest.
I have found a company paying a 7% dividend that works directly with skilled nursing and rehabilitation facilities. Better yet, it provides a pressing need for most of these facilities -- eliminating the need to own real estate. This allows facilities to focus on what they do best (provide health care) and not have to worry about the hassle of financing and owning buildings.
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Since 1996, Omega Healthcare Investors (NYSE: OHI) has been a landlord to the health care industry, with a portfolio of properties in the sub-acute, long-term health care industry. At the beginning of 2012, Omega owned or held mortgages on 432 skilled nursing facilities, assisted living facilities and other specialty hospitals, with about 50,160 licensed beds (48,030 available beds) located in 35 states and operated by 51 third-party health-care-operating companies.
Buying or building a health care facility can be a challenging and expensive project. Many operators simply choose to rent space rather than undergoing the process of buying or building. As a source of capital to the health care industry, Omega is the company facilities turn to when they cannot afford property or don't want to be in the real estate business. Omega has access to a host of quality long-term health care properties that can be leased to those facilities with the most favorable risk/reward ratio for their investors.
Omega’s debt is rated "investment grade" by Standard & Poor’s and Moody’s, providing it access to cheap capital to expand its growing real estate portfolio. Since 2004, Omega has invested more than $2 billion buying and developing real estate.
The company goes beyond just normal leasing. In the past year, they have also made money through:
• Purchase/leaseback deals: Buying real estate directly from a health care operator looking to free up capital and leasing back the property to the same operator. Omega did more than 20 of these type deals in 2011.
• Selling real estate. In 2011, Omega made a $5.3 million gain selling just two of its properties. They currently have seven others on the market in 2012.
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• Lending to its health care partners. In the past year, Omega has increased its interest income by over 100% from $18M to $36M.
Check out this impressive run...
By in large, Omega's core business is leasing. It signs tenants to multi-year lease agreements and collects rental income each and every year. Omega writes "triple-net" leases, which pass all of the property level expenses (maintenance, utilities, property taxes and insurance) back to the lessee. As a result, Omega has been able to grow rental income by 15% during the past year. Additionally, core revenue has grown by 19% in the past eight years (2004 to 2011), while the cash used to pay shareholders has been growing at an annual growth rate of 22%.
Because Omega is organized as a real estate investment trust (REIT), it is obligated to distribute at least 90% of taxable income to shareholders in the form of dividends. The current dividend yield is about 7%.
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Omega has been able to grow revenue consistently by nearly 20% per year for the past decade. This impressive double-digit growth has allowed Omega to raise its dividend steadily. With built-in demand as Baby Boomers continue aging and an incredible need for quality health care facilities, Omega's impressive growth should continue for at least the next two decades.
Risks to Consider: Because Omega own real estate, its portfolio is subject to the fluctuations of the equity and real estate markets. Economic weakness could lower real estate occupancy rates and cash flow growth potential. Finally, Omega could be a victim of health care reform and additional legislation. This could increase volatility and uncertainty.
Action to Take --> Buy Omega Healthcare Investors up to $25 a share. This is a great low-risk company with a 7% dividend and double-digit growth expected for the next 17 years as Baby Boomers continue to age. I expect this stock to hit $28 in the next 12 months as more investors become aware of Omega’s long-term appeal.
