As the Baby Boomer generation continues to reach retirement age and beyond, there should be some major growth tailwinds for the senior housing industry. In this Fool Live video clip, recorded on June 15, Fool.com contributors Jason Hall and Matt Frankel, CFP, along with Chief Growth Officer Anand Chokkavelu, discuss the long-term potential and risks of pure-play senior housing REIT CareTrust REIT (NASDAQ:CTRE).
Jason Hall: Matt and I have been going back and forth about Care Trust REIT to some extent for the better part of a decade right now, it feels like it’s been that long. Care Trust REIT comes into this housing conversation because this is what I think is the best pure-play on seniors housing. This is a small company, was spun out of Ensign Group (NASDAQ:ENSG), five or six years ago, I think in 2014 or maybe at the end of 2014 or so. Ensign Group is a skilled nursing facility operator and the idea was to spin out Care Trust as a separate business as a real estate investment Trust that owns those properties and then leases them signs long-term agreements with care provider. It also own some independent living, some active senior housing facility, the skilled nursing is the biggest part of its business. Here’s the thesis behind this opportunity. About 10,000 Americans are turning 65 every day on average, and that’s going to continue for about another eight and a half years. The 65-plus population is going to hit 80 million at around 2030. That’s double where it would’ve been 20 years before that. There’s been a certain amount of stagnation in the number of housing that’s targeted at seniors and for good reason, people are more active, you have a lot of active communities that have opened, people are trying to stay home longer. But at the end of the day, we’re going to need to pivot and we’re going to need to provide more of the housing and care for seniors. Here’s the reason I’m going to share a chart here. I will talk a little bit about while I Care Trust REIT. Now, there’s an argument that It’s expensive and it does, it trades for about 16 times the midpoint of the company’s guidance for funds from operations this year. Funds From Operations or FFO is really a better metric for earnings per share for real estate investment trust because it’s basically earnings per share minus depreciation and amortization tied to real estate investments because they have to depreciate real estate. Real estate usually goes up over the long term, goes up in value. They’re depreciating an appreciating asset because GAAP requires them to do so. You can say 16 times FFO for this space is on the higher-end. You make that argument. But this is a company that’s earned higher valuation in terms of what they’ve done for investors. Right now you’re looking at a dividend yield and it’s about 4.2%, certainly below its historical peak, but I think it’s still a reasonable valuation, and here’s the bottom line. Since the company went public, it’s more than double that dividend that’s been able to increase it every single year. I’m not going to show up for the sake of time, but the company is also very well-capitalized. If you look at those leverage ratios, again, these are businesses that on a lot of debt, they have a lot of debt because they use the debt to acquire the properties and basically make money on their cost of debt versus what they can earn, and leasing those properties out, their debt book is really cheap. They’re explorations are very well staged, particularly against when their leases are coming up. Again, this is a company that I think is probably going to generate that. I can predict a more realistic case for beating the market for this company over the next decade than any of the other companies that we talked about so far. Matt Frankel, I know you can tell me something different.
Anand Chokkavelu: Who ranked it number 14.
Hall: $2 billion market cap, I would think between dividends and their ability to grow. I think in a decade, I think this could realistically be at ten backer.
Matt Frankel: To be fair, this is the best-in-breed stand-alone senior housing operator. I don’t want to own a senior housing operator, which is why I ranked it so low. I think given.
Hall: You own an apartment, apology department company.
Frankel: There are oversupply issues in the market right now, the COVID effect will not go away overnight. That’s going to take a few years for it to get back to normal. Seniors are just scared to live in senior housing facilities right now. A lot of the operators, this is my biggest hang up. A lot of the operators are not the best financial shape. You look at a company like Brookdale Senior Living (NYSE:BKD), I think it’s one of them. They’re very debt heavy, very leveraged. The operators scare me.
Jason Hall: Very, very good, very valid arguments. Absolutely.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Anand Chokkavelu, CFA has no position in any of the stocks mentioned. Jason Hall owns shares of CareTrust REIT. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.