Published: November 23, 2009

Something's got to give. At a time when the aging of the U.S. population is beginning to accelerate, the construction pace of new housing and care facilities for seniors is shrinking.

Between 2010 and 2020, the number of Americans 65 and older will grow +36%, compared with a growth rate of 9% for the general population, according to the U.S. Department of Health and Human Services.

You'd think we'd be on the verge of a boom in Baby Boomer housing. Yet, construction in the seniors housing sector has nosedived in recent years due to a lack of financing for developers and continued recession-related economic pressures.

In the year ended March 31, the number of such units started fell -37% from the previous year, and was down -45% from two years earlier. That, according to a report from the National Investment Center for the Seniors Housing & Care Industry and the American Seniors Housing Association. In fact, the two trade groups termed the amount of construction activity in seniors housing and care since 2000 as "modest" compared with the 1980s and 1990s.

In this scenario, the law of supply and demand would seem to favor the supply side. Even if lenders were to start lending again and bulldozers were to start blazing, it would realistically take at least a couple years before the number of new available units would begin to come in line with a growing demand.

Short of purchasing a long-term care facility or a medical office building on your own, one way to take advantage of this discrepancy is by buying shares in health care REITS, or real estate investment trusts that own health care properties.

Healthcare REITs, like all REITs, have a huge tax advantage. They only pay taxes on earnings they do not pass on to their shareholders. And they must pay at least 90% of their earnings in dividends.

This means that REITs often pay huge dividends, but there's a drawback. REITs are usually unable to finance expansion with their operating income, having passed the overwhelming majority on to shareholders. Instead, they have to issue debt and equity to grow.

One healthcare REIT that stands out: National Health Investors (NYSE: NHI). NHI yields 6.7% and is cheap compared with its peers. It's also in a great cash and debt position, giving it plenty of room to grow.

National Health Investors is one of just 125 profitable U.S. companies that over the past year have decreased their debt by more than -50% without increasing their number of shares outstanding. And it's the only one that has accomplished this financial feat that has a dividend yield of more than 6%. Its debt is now just $1.4 million -- about 2% of the cash it has on hand.

This $900 million company purchases and leases health care real estate and makes mortgage loans to health care operators. Founded in 1991, the company now has 130 health care facilities in 18 states. These facilities are predominantly long-term care facilities and assisted living facilities, but include residential projects for the developmentally disabled, medical office buildings, retirement centers, and a hospital.

The company currently pays a $0.55 per quarter dividend, totaling $2.20 per year, for a dividend yield of 6.7%. In December, the company also pays a variable cash dividend. Last year, the variable dividend was $0.14, pushing its historical yield to 7.2%.

For the third quarter ended Sept. 30, 2009, National Health Investors saw revenues of $19.6 million, up +26% from the same period last year. The bulk of this gain came from rental income, while its income from mortgage interest gained only slightly. Net income for the quarter was up about 10%.

Not only has National Health Investors been putting up great numbers, very few have noticed. Its price to earnings ratio is still a measly 15.7. That's a full ten points below its peer average of 26.0. And the company's forward price to earnings ratio is an even lower 12.8. On a price to book basis, it's also reasonably valued at 2.1.

During the past year, National Health Investors has paid off 85% of its debt, which now totals just $1.4 million. It did this without issuing new shares. This puts the company in a great position to acquire new properties going forward. It also has an excellent cash position with about $64.0 million at the end of the Sept. 30 quarter.

National Health Investors last week announced it spent $28.25 million on five assisted living facilities from Bickford Senior Living, which is also leasing the properties back from National Health Investors for the next 15 years. The company said that this investment will return a double-digit yield during the life of the lease.

This is the best healthcare REIT out there. It's undervalued and underappreciated. For the price, it's an absolute steal. If it keeps posting outstanding results, it won't be for long.

-- Anthony Haddad
Staff Writer
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