One of the most promising niches in the real estate investment trust sector is housing for senior citizens. After all, a big swathe of the baby boomer generation is now in its retirement years, and both the number and proportion of older Americans are expected to rise significantly in the coming decades.
With that opportunity firmly in mind, several REITs concentrate most of their efforts on providing housing for seniors. Two notable, very active companies in the space are incumbent Welltower (NYSE:HCN), and Brookdale Senior Living (NYSE:BKD). Of the two, which is the superior operator in this thriving niche?
Welltower, once and for quite some time known simply as Health Care REIT, is the original senior housing REIT. It was founded in 1970, and has grown its business to the point where it now owns nearly 1,500 properties, and takes in quarterly revenue of just over $1 billion.
Although it isn't exclusively an operator of senior housing facilities -- it also holds assets in the outpatient medical segment -- they form far and away the bulk of its property list. Most are owned and operated by the company, but it also leases a number of them to partners (like, it so happens, Brookdale). In Welltower's first quarter, their collective occupancy was almost 91%.
The senior housing operating division -- the one with the proprietary-owned and proprietary-operated assets -- is the one that's been delivering for Welltower. On a same-store basis, it saw its net operating income grow by 5.5% on a year-over-year basis. This was, far and away, the best result out of the company's four divisions.
Meanwhile, normalized funds from operations (basically profitability with depreciation and smaller line items stripped out; a critical metric for REITs) saw a sturdy 5% improvement for the quarter, to $401 million.
The company plans to dive even deeper into senior housing. It has lately been divesting assets such as the Bellevue acute care hospital in New York City and buying new properties. These include a nearly 7,000 square-foot building in midtown Manhattan, which will be torn down to make room for a 15-story senior housing facility.
The purer-play rival
Compared to its peer (and partner) Welltower, Brookdale is a more purer-play senior housing operator. The great bulk of its top-line take comes from the resident fees generated by its facilities. In the first quarter, this was just over $1.06 billion, or 84% of total revenue.
But it's struggling more than its rival. As opposed to the consistently profitable Welltower, Brookdale has posted a string of quarterly and annual net losses recently, and earlier this year lowered its expectations for cash from facility operations (essentially its version of FFO).
A decline in occupancy has contributed to this. In the REIT's most recently reported quarter, the average occupancy rate slipped to 86.1%, from the year-ago rate of 87.4%. That's the opposite direction Welltower is going in the same segment -- its total occupancy rose marginally to the aforementioned nearly 91%.
Another difference between the two companies is that Brookdale is a less frequent acquirer. That doesn't, however, mean it's afraid to spend. In late 2014, it paid $1.4 billion in stock to buy Emeritus, which at a stroke expanded the company's asset list to 1,161 locations (although after divestments since then, the number has dropped to 1,121).
At a stroke, this put it at nearly the size of its rival in terms of facility count, although the costs of the acquisition are still negatively impacting the REIT's results.
Should the market's choice be yours?
Of the two stocks, Welltower is clearly the one favored by the market -- it's risen in price by nearly 13% so far this year, in sharp contrast to Brookdale's 19% decline. Investors are clearly punishing Brookdale for its red numbers and that recent chop in guidance.
But if we look at the company's CFFO, in spite of the reduction, it's still projected to rise this fiscal year, albeit modestly (by 2% to 4%) -- essentially matching Welltower's projections for growth. That stands to reason; Brookdale is a strong operator in a niche that is going to expand very significantly over the coming years.
Then again, so is Welltower. And it's the one with the better-placed facilities -- its desirable locations command richer prices; its average revenue per available room was just over $6,000 in the first quarter. For the same quarter, Brookdale's compatible figure was a bit shy of $4,500.
It's also spreading its wings, with operations in the U.K. and Canada, both of which are facing similarly graying demographics in the coming decades. Around 20% of Welltower's first-quarter revenue was derived from those two countries, up from 16% in the same time frame last year. Brookdale remains a purely U.S. operator.
Crucially for income investors, Welltower is the one that currently pays a dividend. At a quarterly rate of $0.86 per share, it yields 4.5%, which although that isn't spectacular for a REIT, it's very high compared to the average dividend-paying stock.
In my opinion, both companies are well placed in one of the best niches in the REIT space just now. I think both are good investments, but Welltower is the better company and stock.