Healthcare real estate is an interesting long-term opportunity, as the aging U.S. population should translate into steady demand growth for healthcare. Senior housing is one of my favorite ways to invest in healthcare over the long term, as it will be a particularly strong beneficiary of the aging population and doesn't rely too much on government reimbursement programs like Medicare and Medicaid to generate income.
Two of the most senior housing-focused REITs are HCP Inc. (PEAK -0.17%) and Senior Housing Properties Trust (DHC 2.55%). Here's a quick rundown of the companies, and which one is the better buy right now.
Image source: Getty Images.
Comparing the companies
HCP underwent a major repositioning in 2016, with the spinoff of its skilled nursing assets into a newly created REIT. Now, the company has approximately 800 properties, 44% of which are senior housing, 22% are medical offices, and 21% are life-science properties. 94% of HCP's portfolio is made up of private-pay revenue sources, which is generally more stable than properties dependent on government reimbursements.
Image source: HCP Investor Presentation.
On the other hand, Senior Housing Properties Trust owns 434 properties and concentrates on just two main property types. Senior housing makes up 53% of the portfolio, and medical offices make up 41%. There are smaller positions in skilled nursing facilities and wellness centers. 97% of the company's net operating income is derived from private-pay properties. By market cap, Senior Housing Properties Trust is approximately one-third of HCP's size.
Image source: Senior Housing Properties Trust Investor Presentation.
So, both have similar focuses and are well-positioned to benefit from the aging U.S. population. HCP is larger and has a more diverse mix of properties, while Senior Housing Properties Trust has an edge in private-pay revenue.
Dividend and performance history
Senior Housing Properties Trust has the higher dividend of the two, with an annual yield of 7.3%, versus 4.7% for HCP.
Until last year's spinoff transaction, HCP maintained a fantastic record of dividend increases. In fact, the company was a member of the S&P 500 Dividend Aristocrats Index, having raised its dividend for more than 25 consecutive years. Now that the spinoff is complete and the accompanying dividend reduction has been made, it remains to be seen whether the company will continue to increase its payout going forward.
Senior Housing Properties Trust has a strong track record of dividend payments, but it has not increased its dividend since 2013. However, the company's FFO payout ratio has dropped in recent years and now sits at 83% of normalized FFO, so there's room for increases in the future. In a nutshell, both companies have strong, but not perfect, dividend histories.
Despite the higher dividend yield, there's not a major difference in the historical performance of the two companies. In fact, the total returns produced by both stocks over the past 15 years are nearly identical.
SNH Total Return Price data by YCharts.
Valuation
The companies have similar portfolios and have delivered similar performances for investors. Also, both are in similar financial shape. Senior Housing Properties Trusts has a 42% leverage ratio, while HCP projects that it will have leverage in the 43% to 44% range once announced dispositions have been completed.
So, let's take a look at each company's valuation to see which might be the better choice right now.
|
Company |
Recent Price |
2016 FFO |
P/FFO |
|---|---|---|---|
|
HCP |
$31.64 |
$2.04 |
15.5 |
|
Senior Housing Properties Trust |
$21.31 |
$1.88 |
11.3 |
Data sources: Guidance obtained from each company's most recent quarterly report, and adjusted/normalized FFO figures were used, where applicable. Stock prices are as of 5/25/2017. HCP's FFO is excluding the effects of spun-off assets.
Which is the best buy?
To be clear, I'm a fan of both stocks and own HCP in my personal portfolio. Both companies have similar business models and have produced nearly identical returns for shareholders. However, Senior Housing Properties looks like a far more compelling value right now, so if I were to buy one of the two today, that's the one I'd go with.
