Healthcare real estate investment trust HCP, Inc. (DOC 0.35%) recently spun off its skilled nursing properties in order to focus on its core, private-pay assets, much of which are senior housing properties. While I'm a fan of HCP (I own the stock in my retirement account), let's see if investors might be better off with a more direct investment approach into healthcare real estate with senior housing operator Brookdale Senior Living (BKD -1.66%) instead.

The U.S. population is aging fast, so which is the better way to play the growing healthcare need? Image source: Getty Images.

Why invest in healthcare real estate with HCP?

There are some compelling reasons to invest in healthcare real estate. The 65-and-older population in the U.S. is expected to roughly double by 2050, and the older age groups (75+, 85+) are expected to grow at even faster rates. In addition, healthcare is a defensive form of real estate investing -- in recessions, people still need healthcare services just as much as they do in prosperous times.

Data source: HCP investor presentation.

HCP's shareholders had a roller-coaster ride in early 2016, after its HCR ManorCare portfolio of skilled nursing facilities caused a surprise loss, sending shares plummeting. However, shortly after this, HCP announced that it had decided to spin off those assets into a new REIT, QCP, and focus on its core property types of senior housing, medical office, and life science properties.

Now that the spinoff has been completed, HCP has 800 properties in its portfolio, the majority of which are in those three categories. More importantly for stability, 94% of HCP's revenue comes from private-pay sources, which are much more predictable than revenue sources that depend on government reimbursement programs. Furthermore, most of HCP's properties are leased to tenants on a "triple net" basis, which means that the unpredictable expenses of property taxes, building insurance, and maintenance are the responsibility of the tenant, not HCP.

As far as valuation goes, the best metric to look at for a REIT like HCP is funds from operations (FFO), which you should think of as the "earnings" of the REIT world. HCP projects 2017 adjusted FFO of $1.89-$1.95 per share, which translates to a forward P/FFO ratio of 15.4, based on the current stock price.

Brookdale Senior Living: Buy the operator instead?

First of all, it's important to point out that HCP's and Brookdale's business is intertwined. In fact, even after planned asset disposals, Brookdale-run properties will still account for 27% of HCP's income. So, knowing Brookdale as a company is important to HCP investors, whether they directly invest in the stock or not.

Also, although it's not a REIT, Brookdale does own about 40% of its facilities, so real estate is a substantial part of its business model. Therefore, like a REIT, Brookdale's "earnings" numbers can be deceiving. The best metric to focus on for Brookdale is known as CFFO (cash from facility operations), a similar metric to FFO, the best metric for REIT earnings. However, it's important to point out that the vast majority (about 80%) of Brookdale's revenue comes from its facilities and their residents.

From a valuation perspective, Brookdale looks extremely cheap. The company is expecting CFFO in the range of $1.96-$2.02 per share for 2016, which translates to a P/CFFO multiple of just 6.3 based on its current share price. As of this writing, Brookdale has not discussed 2017 guidance, so this isn't a perfect valuation comparison with HCP, but the point is that Brookdale's valuation is significantly lower.

Brookdale benefits from the same demographic trends I mentioned for HCP -- aging population and growing healthcare spending in particular -- but there are a few things to point out. Brookdale's relatively high debt load is an important piece of the puzzle, and is one big reason the stock is so much "cheaper" than HCP.

Which is the better long-term investment now?

HCP and Brookdale are two different (but intertwined) ways to play the aging population in the U.S. HCP strives to be a stable dividend growth machine, simply collecting a growing and predictable stream of rental income and passing it along to shareholders. On the other hand, Brookdale makes the bulk of its money by providing senior housing and related services, and aims to earn a profit from those activities.

As a big fan of dividend growth, I prefer HCP out of the two. Excluding the dividend cut related to its recent spinoff, HCP has increased its dividend for more than 25 years in a row, and has produced annualized total returns averaging more than 15% over that time. And now that HCP's riskier assets are not in the picture, it can get back to doing what it does best.

Don't get me wrong: Brookdale certainly has the potential to produce some impressive gains for its investors, especially as the elderly population grows and considering the stock's rock-bottom valuation. I'm just more inclined to go with the company that has a long track record of high performance.