Healthcare real estate investment trusts HCP, Inc. (DOC -0.86%) and Ventas (VTR -0.39%) are similar in many ways. Both have similar property portfolios, pay similar dividends, and have similar long-term strategies. Here's a comparison of these two REITs, and which one could be the better buy now.
These two healthcare REITs are similar investments in many ways. Image Source: Getty Images.
Comparing the company's investment portfolios
HCP and Ventas are quite similar in many ways. For starters, both recently completed spin-offs of their skilled nursing portfolios in order to reduce risk and improve their overall asset quality. Ventas spun off most of its skilled nursing portfolio into Care Capital Properties in August 2015, and more recently, HCP spun off its HCR ManorCare portfolio of skilled nursing assets into newly created Quality Care Properties, or QCP for short.
After the spin-offs, both REITs have similar investment portfolios. Ventas is the larger of the two with about 1,300 properties, 54% of which are senior housing and 19% are medical offices. The rest are made up of smaller (5-7%) positions in life science, hospital, and post-acute facilities, as well as loans held for investment.
Image Source: Ventas.
HCP consists of 800 properties, with senior housing and medical office buildings the two largest property types, as well as a sizable amount (21%) of life science properties.
Image Source: HCP.
For both companies, most the portfolios are made of private-pay healthcare assets, which are generally more stable and predictable when compared with properties dependent on government reimbursements.
Finally, with dividend yields of 4.8% and 5% for HCP and Ventas, respectively, and both having solid histories of dividend increases, it's tough to call one the better dividend stock.
Both look like long-term winners
There are several reasons to invest in healthcare real estate for the long term. For starters, the U.S. population is aging -- fast.
In fact, the 65-and-older age group is expected to roughly double by 2050, and the 75-and older and 85-and-older age groups are growing even faster. This is expected to create growing demand for healthcare facilities, especially senior housing, which is HCP and Ventas' bread-and-butter.
Image Source: HCP.
In addition, the existing healthcare real estate market is large and fragmented. Estimated at about $1 trillion in size, no REIT has more than 3% of the market. And all REITs put together only own about 12-15% of the existing inventory of healthcare properties. When you compare this with hotels and shopping malls, which are 40% or more REIT-owned, it's not tough to see that there is lots of room for consolidation among the existing market, in addition to the long-term growth opportunities.
Image Source: Ventas.
In its latest investor presentation, Ventas correctly pointed out that the most efficient players should reap most of the benefits of this consolidation, and while Ventas is the larger of the two, both should have ample growth opportunities in the coming decades.
Valuation -- Which REIT is cheaper?
So far, the focus of the discussion has been how similar these two REITs are, and how both look like long-term winners. Let's look at their current valuation to see if we can call one the better buy.
When valuing REITs, the best metric to use is the price-to-FFO ratio, as FFO (funds from operations) give the best picture of a REIT's "earnings". Here's how these two stack up side-by-side:
|
Company |
Share Price |
2017 FFO Guidance |
2017 P/FFO |
|---|---|---|---|
|
HCP |
$30.85 |
$1.89-$1.95 |
16.1 |
|
Ventas |
$61.69 |
$4.12-$4.18 |
14.9 |
Data Source: Company financials. Normalized, or adjusted, FFO figures were used, where available.
The bottom line
These are two very similar REITs that both have winning long-term business models, and it's hard to call one the "better" company. However, Ventas trades for a significantly lower valuation at the time of this writing, so I'd lean in that direction as the better buy now.
