The U.S. Census Bureau has projected that the population of those 65 and older will more than double between 2012 and 2060, from roughly 40 million to over 90 million. So, if you love looking around the corner for that perfect storm of the right company in the right place at the right time, you're going to want to keep a close eye on owners of healthcare and retirement real estate like Physicians Realty Trust (DOC) and Equity Lifestyle Properties (ELS 0.82%).
Physicians Realty Trust
This may seem like common sense, but a study by the U.S. Census Bureau in 2010 found that "self-rated health declines with age." So, it should come as no surprise that doctor visits tend to increase with age, and you can start to see why I am interested in a company like Physicians Realty Trust, which specializes in owning and leasing medical office buildings.
As of this past June, Physicians Realty owns 122 properties made up of seven hospitals, one corporate office, and the rest medical office buildings, which are spread across 23 states; and it's this niche focus that makes Physicians Realty intriguing.
Source: The Oaks Medical Building, Florida -- Physicians Realty website.
The majority of Physicians Realty's peers stick to senior housing and skilled nursing facilities, and one of the reasons for this is because investments in medical office buildings are often too small to move the needle. However, as a small-cap company, acquisitions in the range of $10 million to $50 million are perfect for Physicians Realty -- and the company has been making plenty of acquisitions as its increased total assets from $124 million to $1.2 billion since it went public in mid-2013.
However, there are some concerns with this company, and one of the biggest is that it lacks a true competitive advantage. The good news is that buying real estate doesn't require a ton of competitive edge, and that should allow the company to build an advantage as it goes. For instance, as Physicians Realty continues to grow it will develop stronger relationships with its tenants, which could lead to better access to deals, and with size and stability comes better access debt and lower borrowing costs. So, while Physician Realty's story is still developing, and there is certainly risk here, the company is in the right place at the right time, and I believe there is a potentially big upside.
Equity Lifestyle Properties
Similar to Physicians Realty, Equity Lifestyle focuses on a niche. The company is the leader in manufactured home communities and RV resorts and campgrounds, and as of this past June, Equity Lifestyle owns a portfolio 387 properties with 143,800 sites in 32 states.
Source: Venice, Florida. Equity Lifestyle company website.
What caught my eye about this company is that I believe they help to keep the classic retirement dream a reality. First, many of the company's properties are age restricted (55 and older) and located in retirement hot spots -- which is among Equity Lifestyle's chief competitive advantages. For example, more than 100 of company's locations are within 10 miles of the coast, and the remaining majority of properties are either near a lake, in the mountains, or in the southern portion of the U.S. Second, Equity Lifestyle generates 70% of revenue from renting sites in their communities to tenants who build manufactured, or factory built, homes on the land; and for retirees living on a budget, this is often a more affordable way to live in a prime location.
Most interesting, despite being a well-established industry leader, I think the company still has room for growth. This is headlined by the aging population, which should help drive demand and allow Equity Lifestyle to increase rent over time. But also, according to Equity Lifestyle's 2014 annual report, there are 50,000 manufactured home properties and nearly 9,000 RV resorts in North America. The beautiful part is that this industry is highly fragmented and "not operated by large owner/operators," which creates an opportunity for the $5 billion Equity Lifestyle to make future acquisitions.
Which is the stock for you?
Physicians Realty and Equity Lifestyle are both in a great position to benefit from the aging of the U.S. population, but if you want to narrow it down to just one then it's a question of risk tolerance. If you are looking for bigger upside, I like the younger, smaller, and faster-growing Physicians Realty. However, if you want a little more predictability, Equity Lifestyle is five times larger, has a track record that dates back 1993 as a public company, and was able to grow its dividend -- which currently yields 2.5% -- right through the financial crisis in 2009. But no matter which way you go, I think these are two solid companies with plenty of opportunities ahead.
