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It's been a rough year for many healthcare REITs as the pandemic has wreaked havoc on the healthcare industry. However, the new COVID-19 vaccines are beginning to provide a light at the end of the tunnel for the industry and for several healthcare REITs that have been battling greater vacancy in their senior living properties and rent deferments in their medical offices.
We'll compare two of these healthcare real estate investment trusts, CareTrust REIT (NASDAQ: CTRE) and Diversified Healthcare Trust (NASDAQ: DHC), to determine which is the better buy right now.
Real estate portfolios
One of the key differences between CareTrust REIT and Diversified Healthcare Trust is the properties they invest in. While both companies are invested in senior housing, this asset class contributes less than 20% of Diversified Healthcare Trust's Net Operating Income (NOI) while 100% of CareTrust's portfolio is in this sector.
Diversified Healthcare Trust has been shifting their focus toward life science and medical office properties since 2008. These two property types now make up 77% of the company's real estate portfolio.
In terms of portfolio size, CareTrust REIT owns 214 properties made up of skilled nursing, assisted living, and independent living across 28 states. These properties are all triple net leased to some of the top operators in the industry.
Diversified Healthcare Trust owns a total of 407 healthcare-related properties across 37 states and Washington, D.C., which includes 271 senior housing properties and 11.6 million square feet of life science and medical office space.
CareTrust's executive team is made up of individuals with extensive experience in senior housing operations. The REIT is a spinoff from The Ensign Group (NASDAQ: ENSG), which is CareTrust's top tenant. CareTrust CEO Greg Stapley was co-founder of Ensign, and Chief Operating Officer Dave Sedgwick had also played several leadership roles in operations for Ensign since 2001 before joining CareTrust in 2014.
The company's chief financial officer and chief investment officer both had executive roles at Nationwide Health Properties.
Diversified Healthcare Trust's management is contracted through The RMR Group (NASDAQ: RMR) and has no employees of their own. Diversified Healthcare Trust President and Chief Operating Officer Jennifer Francis is also the Executive Vice President of The RMR Group.
RMR is an asset management company that manages various types of commercial real estate. Besides Diversified Healthcare Trust, RMR also manages four other publicly traded REITs, including Service Properties Trust (NASDAQ: SVC), Office Properties Income Trust (NASDAQ: OPI), Industrial Logistics Properties Trust (NASDAQ: ILPT), and Tremont Mortgage Trust (NASDAQ: TRMT).
These two REITs are on opposite ends of the spectrum when it comes to their debt profiles. CareTrust is currently very conservative with a debt/EBITDA ratio of only 3.1x. Meanwhile, Diversified Healthcare Trust is coming in at a debt/EBITDA ratio of 10.9x.
Diversified Healthcare Trust also has just over $810 million in debt maturities between 2021 and 2024 and over $1 billion maturing in 2025. Considering that the majority of this debt is unsecured fixed rate with an average interest rate of 7.19%, their debt/EBITDA ratio could improve substantially if they're able to refinance the debt at a lower rate.
CareTrust doesn't have any maturities until 2025, when their $300 million in senior unsecured notes are due, followed by $200 million in secured term loans maturing in 2026.
As of writing, Diversified Healthcare Trust's share price is down nearly 50% YTD for 2020. While the pandemic had a major impact on this, their share price also fell roughly 30% in 2019.
As of this writing, CareTrust REIT's price is actually up over 9% YTD for 2020 after climbing roughly 15% in 2019.
While Diversified's price trend is certainly something to be cautious about, they're now priced at an incredibly low FFO multiple of 4.5x compared to CareTrust's 19.1x. That shouldn't be taken as a knock on CareTrust's price, though, since they're still pretty close in line with the FFO multiples of other healthcare REITs.
Diversified cut its quarterly dividends to $0.01 per share in April 2020. This was after four consecutive quarters of $0.15 per share after being cut from $0.39. Unless there are some sharp increases in FFO in early 2021, it's unlikely that dividends will be recovering in the near future.
CareTrust, on the other hand, declared a slight dividend increase in March 2020, from $0.225 per share to $0.25 and has maintained that throughout the pandemic. The company has increased its dividends every year since its formation in 2014. At an FFO payout ratio of 69.4%, the dividend should continue to be sustainable.
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Which is the better buy?
While the heavily discounted price of Diversified Healthcare Trust is tempting, I would have to say the clear winner for today is CareTrust REIT. While the senior housing market has struggled across the board for most of 2020, CareTrust's hyper focus on their niche with a management team that fully understands the industry has allowed them to continue pressing forward.
CareTrust REIT's choice in strong operators and their healthy balance sheet makes them a good bet for a healthcare REIT that will continue growing for several years.
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