Healthpeak Properties (NYSE: PEAK) has a yield of 4.9%. Omega Healthcare Investors (NYSE: OHI) offers a far more generous 7.5%. Neither REIT cut their dividend in 2020, despite the huge coronavirus pandemic headwinds facing the healthcare real estate investment trust (REIT) sector. But which one is the best long-term investment? Yield alone won't tell you that.
The dividend story
Omega has a higher dividend yield than Healthpeak. But that's not the only place where it shines on the dividend front. The real estate investment trust is also working on a 17-year-long streak of annual dividend increases. Healthpeak effectively cut its dividend in 2016 and hasn't raised it since. This move, however, requires a bit of explanation.
In 2016 diversified Healthpeak was struggling with its nursing home business, where operators were having troubles making rent. It chose to spin off its nursing home assets as a standalone company. The goal was to have the combined dividends of Healthpeak and its spinoff equal the pre-separation dividend. Only the spinoff ended up eliminating its dividend (and then it got acquired), which meant that Healthpeak investors really took a dividend cut.
That's extra interesting because Omega has long focused on owning nursing homes. These operations make up roughly 83% of its business (less intensive forms of senior housing make up the rest). So it has succeeded where Healthpeak, essentially, failed. One big problem with the nursing home space is that the cost is normally covered by third-party payers, often Medicare and Medicaid. These government-run programs can and do change their payment rates, and that can have a drastic impact on the operators in the space. This is a notable risk and why investors have long shied away from the niche, leaving Omega with an elevated yield.
Reworking the business
Still, if Omega's focus on nursing homes sounds fine to you, noting its strong dividend history, then there's no reason not to buy it. The aging of the baby boomers will lead to increasing long-term demand over time. This logic is doubly true for dividend investors looking to maximize the income they generate from their portfolios, given the high yield on offer. Just go in knowing that the yield is high because the nursing home space comes with third-party payment risks that can't really be predicted.
Which brings the story back to Healthpeak, which used its nursing home troubles to reposition its entire business. Today it's portfolio is broken down between senior housing (about 25% of net operating income), medical office buildings (31%), and medical research facilities (about 38%). Senior housing is struggling today, given the pandemic, but the other two businesses are doing very well. In fact, despite senior housing net operating income (NOI) falling 6.3% year over year in the third quarter of 2020, the REIT's overall NOI grew 2.8% because of the strength it has seen in its office and research businesses.
Omega, then, is the focused investment option while Healthpeak is the diversified choice -- And one that has benefited from material exposure to two in-demand property types. You know that diversification is good for your portfolio, but Healthpeak has clearly shown that it's good for REIT portfolios, too. If you're a long-term investor trying to get some exposure to the healthcare sector, Healthpeak's business model looks more attractive here, despite the lower yield and much less impressive dividend history.
A hard choice
One of the biggest reasons why Omega's senior housing-focused business has held up so well lately is that the government has stepped in to help nursing home operators during the pandemic. These are necessity businesses caring for people who can't care for themselves, so that financial lifeline makes sense. Historically, however, the relationship between nursing homes and the government has been much more tenuous. Omega has clearly managed that risk well over time, but it is not a low-risk investment by any stretch of the imagination, despite its strong dividend history.
Which is why, at the end of the day, Healthpeak's diversified approach will likely make more sense for most investors. It stumbled in the nursing home sector, for sure, but the REIT is now in better shape than before. For more conservative types, it likely has the edge here, despite its relatively modest yield.