Healthcare real estate is one of the most obvious long-tailed growth opportunities in commercial real estate. The older segments of the population are growing rapidly as the baby boomer generation ages, and older Americans not only use healthcare services more but spend more when they do.
What's more, healthcare real estate is already a huge market, with an estimated $1.2 trillion in existing properties, and is in the early stages of real estate investment trust (REIT) consolidation. Only about 15% of all healthcare properties are REIT-owned, with the bulk owned by the physicians and health systems that occupy them, which means there's a ton of room for well-capitalized REITs to make acquisitions.
Not only is healthcare real estate a big growth opportunity, but it is also one of the most resilient types of commercial real estate during rough markets. Think of it this way: No matter how bad a recession is, people still need healthcare.
Two of the best ways to invest in healthcare real estate are through Healthpeak Properties (NYSE: PEAK) and Physicians Realty Trust (NYSE: DOC). While long-term investors will likely do well with either (or both) of these, let's take a look at the similarities and differences to see which might be the better buy right now.
What these companies do
If you aren't familiar with these REITs, here's the short version of what they do:
- Healthpeak Properties is one of the largest healthcare REITs in the industry, with a portfolio of 633 properties. And unlike many of its peers that focus on a single type of healthcare real estate, Healthpeak takes a diversified approach. Its properties are divided among three types -- life science (36% of rental income), senior housing (34%), and medical offices (30%).
- Physicians Realty Trust takes a more focused approach, with a portfolio of 268 properties, nearly all of which are medical offices. The general idea is that the company leverages its relationships with major health systems to build its portfolio.
Size, dividends, and stock performance
In addition to their property types, there are a few other big differences when it comes to size, dividends, and recent performance:
- As one of the largest players in the industry, Healthpeak has a $15.4 billion market capitalization, while Physicians Realty Trust is much smaller, with a market cap of just $3.8 billion.
- Both have a similar dividend yield, with 5.2% for Healthpeak and 5% for Physicians Realty Trust, based on their stock prices as of October 12, 2020.
- Healthpeak has significantly underperformed Physicians Realty Trust in 2020, with a year-to-date stock price decline of 17% versus 3%. This is mainly due to Healthpeak's exposure to senior housing, which was hit hard by the pandemic as COVID-19 outbreaks and restrictions severely affected the industry.
How do they grow?
Another key difference is growth. Physicians Realty Trust grows only through acquisitions. The company's strategy is to leverage its relationships with physicians and health systems to find attractive investment opportunities. It estimates it has an addressable market size of $250 billion to $300 billion worth of properties in the United States.
On the other hand, Healthpeak develops properties from the ground up, in addition to making acquisitions. This is a somewhat riskier, but potentially more profitable, approach, as development can create immediate value for investors.
I mentioned healthcare real estate is extremely resilient, but there are still some risk factors important to keep in mind. With both companies, the ongoing developments of the pandemic and the potential for regulatory changes in healthcare are significant risks to monitor going forward.
Healthpeak's exposure to senior housing adds an element of risk, especially now. Many of its properties have seen COVID-19 cases and resident deaths, and the move-in rate is far below where it was last year at this time. Senior housing is still likely to be a long-term growth market, but it is likely to face short-term headwinds.
Healthpeak also has more execution risk with a development-focused growth strategy. Things like construction timelines, costs, and lease-up of new properties are factors Physicians Realty Trust simply doesn't need to worry about.
Which is the better buy?
There's no easy answer here, and a solid case can be made for both REITs. Physicians Realty Trust is certainly the lower-risk option, as medical offices are perhaps the most recession- (and pandemic-) proof type of healthcare real estate. However, Healthpeak trades at a significant discount to compensate investors for the senior housing risk and also offers exposure to life science real estate, an exciting growth market all by itself.
Again, I don't think investors will go wrong with either. And it's worth noting I tend to be more of a bargain seeker with long-term focus rather than an investor looking for a safe play. So if I were going to put money to work today, Healthpeak would probably be my choice.