Looking for long-term investing opportunities that benefit from a clear and unstoppable trend? Assisted-living stocks could be just the ticket. Millions of baby boomers are already in their early 70s. Life expectancies are increasing. Demand will increase for assisted living facilities, which help seniors live independently while providing some assistance for daily living and care.
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However, the average age for residents in assisted living is nearly 87, according to the Assisted Living Federation of America. The oldest baby boomers won't reach that age until 2033. So while the long-term boom for assisted living appears to be an almost sure thing, it will be a few years before the market really accelerates.
Investors in assisted-living stocks should be able to count on tremendous opportunities down the road, but it's important to pick stocks that are already strong today. CareTrust REIT (NASDAQ: CTRE), Omega Healthcare Investors (NYSE: OHI), and Welltower (NYSE: HCN) fit the bill. Here's why these are three top assisted-living stocks on the market right now.
CareTrust REIT finances and owns properties that it leases to tenants in the healthcare sector. These properties include assisted-living facilities plus skilled nursing and independent living facilities. CareTrust was spun off in 2013 from its parent company, The Ensign Group (NASDAQ: ENSG). Over half of CareTrust's operational beds and units are leased to Ensign.
The company makes money primarily through triple-net lease arrangements to healthcare providers. With triple-net leases, tenants are solely responsible for costs related to the properties, including property taxes, insurance, and maintenance and repair costs.
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Wall Street analysts project that CareTrust will grow average annual earnings by 30% over the next few years. That's lower than what the company has achieved in recent years. CareTrust's main avenue for growth is in making acquisitions. In the first 10 months or so in 2017, for example, the company acquired 35 properties, including seven assisted-living facilities and 27 skilled-nursing facilities.
As a real estate investment trust (REIT), CareTrust must return at least 90% of its net income to shareholders as dividends. The company's dividend currently yields 3.79%.
Omega Healthcare Investors
Like CareTrust, Omega Healthcare Investors is a REIT focused on the healthcare sector. Omega owns 1,012 properties in 42 states and the United Kingdom. These properties include 121 assisted-living facilities to healthcare operators in addition to 813 skilled-nursing facilities, 16 specialty facilities, and one medical office building, as well as fixed-rate mortgages on 47 skilled nursing facilities and four assisted-living facilities, and 10 facilities that are closed or held for sale.
Omega Healthcare Investors has only one customer representing more than 10% of its business -- Ciena Healthcare. Around 11% of Omega's revenue comes from leasing properties to Ciena, which operates skilled nursing and rehabilitation care services in Michigan. It's good that Omega's risk isn't too concentrated with one customer, especially since the company recently had to write down nearly $195 million after two operators failed to pay their bills.
Most of Omega's revenue is made from rental income. However, the company also makes nearly 8% of its total revenue from mortgage interest income. This mortgage revenue stems from fixed rate mortgage loans. These loans are secured by liens on the underlying real estate and personal property of the mortgagor.
Investors have a lot to like about Omega's dividend. The yield currently stands at 8.3%. Even better, Omega Healthcare Investors has increased its dividend payment for 21 consecutive quarters.
Welltower is the granddaddy of healthcare REITs. It was formed in 1970 as the first REIT to invest exclusively in healthcare facilities. Welltower is also one of the largest healthcare REITs owning assisted-living properties, with a market cap of $25 billion. The company owns long-term/post-acute-care facilities, assisted-living facilities, independent living/continuing care retirement communities, and care homes in the U.S., Canada, and the United Kingdom.
Currently, five customers generate over half of Welltower's revenue. Genesis Healthcare (NYSE: GEN), Sunrise Senior Living, and Revera combined comprise 36% of Welltower's total revenue. The company's risk is even a little more concentrated than it seems, since Revera owns a controlling interest in Sunrise Senior Living.
Like both CareTrust REIT and Omega Healthcare Investors, Welltower makes much of its revenue from triple-net leases. However, the company makes even more money -- roughly 64% of total revenue -- from fees and service charges residents pay in its senior-housing properties.
Welltower's dividend yields 5.12%. The company has a good history of dividend increases, although there have been stretches where Welltower didn't raise its dividend.
If your primary focus is dividends, Omega Healthcare Investors is probably the best choice. I don't see either CareTrust of Welltower catching up to Omega's dividend yield anytime soon. On the other hand, if you're looking for growth prospects, analysts think CareTrust will grow the fastest of the three. But if dependability and stability appeals most to you, it's hard to beat Welltower's longevity and track record.
Of these three top assisted-living stocks, Omega Healthcare Investors is my favorite. Wall Street growth projections aren't always reliable, but Omega's mouth-watering dividend certainly has been for several years. Omega Healthcare Investors stock is also the most attractively valued of the three, with shares trading at 15 times expected earnings. CareTrust REIT's forward earnings multiple is over 25, while Welltower stock trades at 36 times expected earnings.
Omega Healthcare Investors won't always have a smooth ride, as seen in the recent pullback in the stock after its third-quarter writedown. However, the company appears to be in good shape overall. And those baby boomers will keep getting older, giving Omega great long-term prospects.
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