Healthcare real estate is one of the most resilient and recession-resistant types of commercial real estate you can invest in. Not only are most healthcare properties leased to their tenants on a long-term, triple-net basis, but there are few types of businesses more essential than healthcare.
Two excellent healthcare real estate investment trusts, or healthcare REITs, are Medical Properties Trust (NYSE: MPW) and Healthpeak Properties (NYSE: PEAK). However, these two REITs have somewhat different investment styles, so let's take a closer look and see which could be the better buy now.
What do these REITs own? The short version
Medical Properties Trust is a hospital REIT. The company owns a portfolio of 431 properties in the U.S., Europe, and Australia, and nearly all of them are hospitals. Most of these are general acute-care facilities.
Healthpeak takes a more diversified approach. The company invests in three distinct types of properties: life science, medical offices, and senior housing. At the end of 2020, the company owned a total of 596 properties. About 38% of the income came from life science properties, 33% came from medical offices, and the other 29% came from senior housing.
Medical Properties Trust was relatively unscathed by the COVID-19 pandemic. It collected virtually all of its rent in 2020, save for about 2% of its rent in the early stages of the outbreak, which it agreed to defer. In fact, the company's funds from operations (FFO) actually increased in 2020. If you take a glance at Medical Properties Trusts' year-end numbers, you'd have a tough time figuring out anything was out of the ordinary last year.
Healthpeak was another story. Its medical office properties and life science facilities performed just fine. Both of those categories grew same-store NOI in 2020. But the senior housing portfolio didn't perform quite so well. When the pandemic hit, senior housing facilities were hit hard. Move-ins ground to a halt and haven't returned to pre-pandemic levels yet. In all, same-store NOI from Healthpeak's senior housing operating properties fell 27.5% year over year in 2020.
Dividends and valuation
Both of these REITs are excellent dividend stocks. Medical Properties Trust has a 5.3% dividend yield at its current stock price and has increased its dividend for eight consecutive years. Healthpeak, on the other hand, has a 3.8% dividend yield and hasn't increased its payout in several years as it has been prioritizing the strengthening of its balance sheet and portfolio, at which it has succeeded admirably. Of the two REITs, Healthpeak is the more financially solid and has more financial flexibility to pursue opportunities. If your main priority is generating income, Medical Properties Trust looks like the better bet.
As far as valuation goes, Medical Properties Trust trades for about 13.5 times its 2020 normalized FFO, which is a rather cheap valuation for a high-quality dividend growth stock with a large addressable market opportunity. Healthpeak trades for 19.5 times FFO, but given that the company has more financial flexibility and a stronger balance sheet in addition to aggressively investing in the fast-growing life science real estate market, the stock deserves a premium. Healthpeak also develops properties from the ground up, which has the potential for superior returns as compared with simply acquiring existing properties, which is how Medical Properties Trust grows. And don't forget that Healthpeak's FFO was depressed in 2020 due to its senior housing properties, which distorts the valuation a bit.
The bottom line
Both of these REITs have excellent growth tailwinds. The 65-and-older population (the segment that uses healthcare the most) is expected to roughly double over the next 30 years as the baby boomer generation continues to age. And the healthcare real estate market is estimated to be $1.1 trillion in size already, with only about 15% of the properties currently REIT-owned. There are countless properties owned by the physicians and hospital systems that occupy them, which translates to lots of expansion potential.
The bottom line is that I don't think investors will necessarily go wrong with either of these REITs. Medical Properties Trust seems to be the safer bet, especially for income investors. It owns a very predictable type of property and doesn't have the uncertainty that comes from development. On the other hand, Healthpeak has tons of room to grow and the financial flexibility to pursue value-creating opportunities. Of the two, Healthpeak is the one I own in my portfolio and don't have any plans to sell.