June 25, 2019

There are very few issues that Democrats, Republicans, Independents, and Libertarians all agree on these days, and one of the most contentious issues is the role of healthcare in America and what form or forms it should take. Should it be government-run, privately-operated, or some combination of both? All sides are waging a war of moral rhetoric to shape the narrative as we head into a major election year.

The stakes are huge for all involved, but one thing we know for sure is that spending on healthcare across America will rise, to the tune of about +6% in 2020, reaching $6.0 trillion by 2027, as forecasted by the Centers for Medicare & Medicaid Services (CMS). As a result, the healthcare-related share of GDP is expected to rise from 17.9% in 2017 to 19.4% in 2027. The conventional thinking is that the major portions of the Affordable Care Act (Obamacare) will survive and the industry will see sustained growth in enrollment numbers going forward, driven by increased income and demographics.

From a fundamental standpoint, the Baby Boomers – that group born 1946 to 1964 which constitutes a little more than a quarter of the U.S. population – are retiring in droves. Estimates are that 10,000 Boomers turn 65 each day, a phenomenon that won’t end until 2029. Life expectancy for Americans has risen from 74 years in 1980 to 79 years today, according to www.healthsystemtracker.org.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Data from CMS concludes that Medicare spending growth is projected to average 7.4% from 2019 to 2027, the fastest rate among the major payors. Growth in hospital spending is expected to increase 5.6% per year between 2018 and 2027, primarily because of the projected growth of Medicare and Medicaid. Physician and clinical services are also predicted to grow in the coming years, by an average of 5.4%. This increased spending will mostly be due to delivering care and medical services to aging Americans.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The increased rate of spending comes at a time when the demographic data supports going long some of the healthcare Real Estate Investment Trusts (REITs), where investors cannot only collect a nice dividend yield and some capital gains to build wealth, but also own a hedge against rising healthcare costs. The healthcare industry is still fairly fragmented, with many opportunities for attractive income and growth.

The Opportunity in Healthcare Facility REITs

One sub-sector that stands to greatly benefit from more people living longer is the healthcare facilities operators. Greater numbers of patients require more space to diagnose, hospitalize, treat, rehabilitate, and take care of their long-term conditions. This is good news for companies that specialize in elder care, a sector that includes real estate REITS that own hospitals, long-term care facilities, assisted living housing, rehabilitation centers, ambulatory centers, medical offices, outpatient centers, nursing homes, and senior communities that are going to flourish during the next decade, under any form of healthcare legislation.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Senior housing demand is expected to soar over the coming decades. By 2025, demand for senior housing is expected to grow by 92,000 units per year. The inertia is just too broad and powerful to prevent success from happening for the most-savvy of builders and operators of this class of properties. Welltower Inc. (WELL), Ventas (VTR), and HCP Inc. (HCP) are the three largest healthcare REITs by a wide margin and all three have seen their stocks appreciate nicely in 2019. The big are getting bigger and are paying out some juicy dividend yields in the process, most with rich histories of steadily rising dividends.

Welltower yields 4.16%, Ventas yields 4.51%, and HCP pays out 4.53%. When looking at some of the smaller healthcare REITs, dividend yields can be even higher. One that sticks out on my radar is Omega Healthcare Investors (OHI), which sports a dividend yield of 6.94%. These yields can pump some fresh oxygen into one’s income portfolio and rival those of utilities and telecoms as a stable source of all-weather, recession proof cash flow where long-term growth is – by definition – inevitable.
Navellier & Associates does not own WELL, VTR, HCP or OHI in managed accounts and our sub-advised mutual fund. Bryan Perry does not own WELL, VTR, HCP or OHI in personal accounts.

At a time when tariffs, global trade tensions, currency manipulation, volatility in the Mid-East, political chaos in the EU, and uncertainty about the 2020 elections present risks to the stock market, there are a few safe harbor sectors for investors to consider. In my view, healthcare REITs are one of them.

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry


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