Healthcare real estate investment trusts (REITs) are having a tough time this year as the COVID-19 outbreak has had an outsized impact on the senior housing sector. Because of that, the average healthcare REIT has lost about 25% of its value this year, according to NAREIT.
However, not all healthcare REITs focus on that challenging sector. Two that stand out as good buys right now are Community Healthcare Trust (NYSE: CHCT) and Medical Properties Trust (NYSE: MPW).
Focused on strong demographic trends
Community Healthcare Trust owns a diversified portfolio of healthcare real estate leased to hospitals, doctors, and healthcare systems. The REIT focuses on acquiring properties outside of urban centers in regions with above-average population growth. These properties have held up quite well during the pandemic as the REIT has deferred less than 1% of its outstanding rent due to cash flow issues at some of its tenants, which it should receive by year-end.
The company's strategic focus on buying a mix of healthcare properties in non-urban growth areas has paid significant dividends over the years. Overall, the REIT has grown its asset base by 331% since its initial public offering (IPO) in 2015, which has helped power total returns in excess of 225%, vastly outperforming the S&P 500 and other REITs. Further, the REIT has increased its dividend each quarter since its IPO.
The company has lots of growth ahead. It already has several properties under contract that it expects to close over the next few months. It's also negotiating and performing its due diligence on other deals that could close in the next year. Meanwhile, as populations grow in its focus areas, it should be able to buy more properties as healthcare providers in those regions sell their facilities so they can keep expanding. It has ample financial flexibility to fund future deals thanks to its conservative balance sheet. That should enable the REIT to continue increasing its 4.2%-yielding dividend, which has been one of the keys to its success in producing outsized total returns.
Another strong year ahead
Medical Properties Trust focuses on owning hospital properties in the U.S. and abroad. These properties have held up exceptionally well during the pandemic as the company has collected nearly 100% of the current rent and interest due from its tenants. Meanwhile, its hospital-focused acquisition strategy has worked out well for its investors over the years. Since its IPO in 2005, the REIT has produced a more than 450% total return, significantly outpacing the S&P 500 and other REITs.
Driving that success has been the fast-paced growth of Medical Properties Trusts' asset base and normalized FFO per share, with the former growing at a 30% compound annual rate over the last decade while the latter has expanded at an 8.8% compound yearly pace. That has allowed the REIT to increase its dividend in each of the past seven years.
The company's growth has accelerated this year as it's on track to complete $3 billion of acquisitions, which helped drive a 24% year-over-year increase in its normalized FFO per share during the third quarter. Medical Properties Trust estimates that its 2021 investment pipeline is similar to that level, suggesting it can deliver another year of double-digit growth. That should enable it to continue increasing its 5.6%-yielding dividend and delivering market-beating total returns.
While most large healthcare REITs focused on expanding their senior housing portfolios in recent years, Community Healthcare Trust and Medical Properties Trust went in different directions. Their contrarian strategies have paid dividends as they've outperformed their larger peers while remaining relatively immune to the impacts of COVID-19. Because of that and their visible growth prospects, these REITs appear poised to continue producing market-beating total returns, making them great buys right now.