This article was originally published on October 31st, 2016. It was updated on March 7th, 2017.
Now that healthcare REIT HCP, Inc. (PEAK -0.33%) has completed the spinoff of its skilled nursing and post-acute care assets, the company has a more stable portfolio of high-quality, private-pay properties. Therefore, dividend-seeking investors should compare it to another healthcare REIT with a similar portfolio to the "new" HCP, and one excellent candidate is Senior Housing Properties Trust (DHC 0.43%).
Why buy a healthcare REIT?
In a nutshell, the demographic trends just make sense for healthcare real estate investors. The U.S. population is aging rapidly, and this should produce strong demand growth for the foreseeable future.
Thanks to an aging senior citizen population, the healthcare real estate industry could thrive in the coming decades. Image Source: Getty Images.
Over the 20-year period from 2010 through 2030, the senior (65 and up) population is expected to grow from 13% of the U.S. population to 19.7%. The older age groups are expected to grow even faster, with the 85-and-older population expected to roughly triple by 2050.
Image source: Senior Housing Properties Trust investor presentation.
This means a greater need for senior housing facilities, which make up the majority of both REITs' portfolios.
The new HCP
HCP is currently in the middle of completing a spinoff of its troubled skilled nursing and post-acute facilities into a new REIT known as QCP (QCP) or "quality care properties."
You can read the details of the spinoff here, but the remaining HCP is made up of 862 properties, of which about 54% are senior housing properties and 40% are medical office buildings. Of the entire portfolio, 95% consists of private-pay assets, which are generally much more stable than healthcare properties dependent on government reimbursement programs.
Image source: HCP investor presentation.
The portfolio is geographically diverse and not too dependent on any single tenant, although some of the industry's largest senior housing operators such as Brookdale Senior Living and Sunrise Senior living still make up a large portion of the senior housing tenants.
Senior Housing Properties Trust: Almost the same composition
Senior Housing Properties Trust may have the closest portfolio to the post-spinoff HCP. The 53%/41% mix of senior housing and medical office properties is nearly identical to HCP's, as is the 97% private-pay composition.
The company's 436 properties are spread among 43 states and D.C., and the tenant base is extremely diverse. Senior Housing Properties Trust has been a public REIT for 17 years and is included in the S&P 400 MidCap Index.
About the dividends
At first glance, Senior Housing Properties Trust is the more appealing dividend stock. It pays a yield of 7.4%, and its dividend is well covered by its FFO.
However, smart dividend investors know it's not just about a high dividend. Rather, what we really want is a high dividend that grows, and Senior Housing's has been stuck at $1.56 since 2013.
On the other hand, HCP pays a slightly lower 6.7% yield, but the company has an outstanding record of increasing its payout. In fact, HCP has increased its dividend for 31 consecutive years, and it was the first healthcare REIT to be added to the S&P 500 Dividend Aristocrats Index. Furthermore, HCP's dividend is just as well-covered by its FFO. Both companies currently have a payout ratio of 83%, which is normal for REITs.
Image source: HCP Investor Presentation.
The caveat is that with HCP's spinoff, the dividend may nominally decrease or stay the same at first. However, I'm confident that the dividends from the two REITs will be equal to or greater than the current payout and that management will make it a priority to maintain the record of dividend growth going forward.
Valuation
HCP is admittedly difficult to value until we have some post-spinoff earnings metrics. However, we can use the company's 2016 guidance to estimate it. Using the $2.86 midpoint of HCP's full-year adjusted FFO guidance range, we see a P/FFO ratio of 12.0.
Senior Housing Properties Trust is a bit easier since it's not splitting off any of its assets. Using the company's actual normalized FFO for the first six months of 2016, the stock trades for approximately 11.2 times FFO.
While this isn't a perfect comparison, I'm confident in saying that Senior Housing is the cheaper of the two right now.
Which is the better buy?
In full disclosure, I own HCP in my own portfolio and plan to keep my HCP and QCP shares for decades to come. However, now that both companies are purely senior housing and medical office REITs, Senior Housing Properties Trust looks a little more attractive right now, simply because of its lower valuation, higher dividend, and more established history with the current business model.
Having said that, healthcare real estate is such an attractive long-term opportunity that I don't think investors can go wrong with either of these REITs. In fact, both could produce market-beating total returns for decades to come.
