There's a demographic wave crashing across the developed world today as the baby boomer generation crests into its retirement phase. That will drive increased demand for medical care and makes healthcare-focused REITs, or real estate investment trusts, interesting long-term investments. But how do you want to get that exposure? Omega Healthcare Investors (NYSE: OHI) and Medical Properties Trust (NYSE: MPW) let you make focused bets on this giant trend. Here's a look at what that means.
Omega Healthcare Investors uses the REIT structure to buy senior housing assets. It owns roughly 950 properties, with 83% of its assets falling into the skilled nursing category. In layman's terms, that means nursing homes. The rest of its portfolio is in senior housing meant for residents with less-intensive care needs. Although the REIT is trying to diversify its portfolio, it's still basically a nursing home REIT.
That's important, because nursing home stays are generally covered by third-party payers like Medicare and Medicaid. This has historically been seen as a risk, because payment rates from government programs like these are often driven by politics. A cut in reimbursement rates can be a notable blow to the operators that occupy Omega's properties. However, during the coronavirus pandemic, government backing has been a net positive, since there's been little question about the integrity of the primary payer.
Moreover, nursing home stays are necessity-based. So demand for this type of facility is much less impacted by external events that might drive well seniors away from group living arrangements, like assisted living.
Omega has actually held up quite well during the pandemic, collecting virtually all of the rent it was due in the third quarter and sporting an adjusted funds from operations (FFO) payout ratio of roughly 80%. Meanwhile, it has a 17-year long track record of annual dividend increases behind it. And the 7.3% yield is pretty attractive, too.
For investors looking at a way to play the graying of the baby boomer generation, it's an interesting, though highly focused, option. There's clear risks in that focus, of course, but so far Omega has deftly managed those risks and rewarded investors well along the way. That said, it's been preening its portfolio in 2020, culling out 19 weaker properties. That's not inherently bad, but it sets up the big difference in this comparison.
At the other end of the care spectrum is Medical Properties Trust. This REIT owns hospitals, which is where highly skilled, medically intensive procedures are performed. Once done, and the patient is recovered enough to move to another level of care, they are quickly moved to places like nursing homes for long-term recovery. Medical Properties Trust owns 385 properties across nine countries. (65% of its rents come from U.S.-based assets.)
It's very expensive to stay in a hospital, so any procedure that can be done elsewhere is usually done elsewhere. Thus, like nursing homes, hospitals tend to be necessity-based businesses. The payment comes from a variety of sources, including private pay, insurance, and government programs.
Like Omega, Medical Properties Trust has been doing pretty well despite the pandemic headwinds, collecting basically all of the rent it was due in the third quarter. Its adjusted FFO payout ratio was around 87%. That'a bit high but not terribly worrying because there's some noise in those numbers.
The biggest thing here is that Medical Properties Trust has been growing quite quickly. This can create a timing mismatch between rental income and cash outlays for purchases (which are usually funded to some degree with stock sales that impact the payout ratio). The REIT expects that acquisitions and property investments will total more than $3 billion in 2020. That's vastly different from Omega, which still had another 13 properties on the chopping block at the end of the third quarter.
Investors seem to approve of the trends at Medical Properties Trust, given that its yield is 5%. That's materially lower than Omega's yield. Medical Properties Trust has increased its dividend annually since 2013, which isn't quite as robust a record as Omega, but it's not exactly bad, either. Basically, when you look at the big picture, Medical Properties is more of a growth business than Omega right now.
Which is right for you?
Investors looking for a diversified healthcare REIT probably won't want to touch either of these REITs -- a company like Healthpeak (NYSE: PEAK) would be a better bet. That said, for those with a growth focus, Medical Properties Trust could be an interesting choice, given the necessity nature of hospitals and its ongoing capital investment program.
Investors looking to maximize current income, meanwhile, would likely prefer Omega Healthcare. However, it's important to recognize the risks inherent in the nursing care sector (notably government payments) and the fact it's basically working to right-size its portfolio. Growth isn't the key focus right now; muddling through the pandemic is.
All in, there's no clear winner here, and the final call might even be to pick a totally different way to play the aging baby boomer trend.