The COVID-19 outbreak has had a significant impact on the healthcare sector. Many providers weren't able to see patients or perform elective procedures due to the pandemic. Because of that, some couldn't afford to pay their rent. Those and other issues have weighed heavily on healthcare real estate investment trusts (REITs), which have fallen more than 20% on average this year.
However, while the subgroup as a whole has been under pressure, some healthcare-focused REITs have stood out for their outperformance in a challenging year, including Community Healthcare Trust (NYSE: CHCT) and Physicians Realty Trust (NYSE: DOC). While Physicians Realty has still declined this year -- shares are down about 8% -- Community Healthcare has rallied nearly 6%.
Here's a look at which of these two relative outperformers is a better buy right now.
The investment thesis for Community Healthcare Trust
Community Healthcare Trust currently owns 131 properties in 33 states, comprising 2.8 million square feet of space. It primarily leases its real estate to healthcare operators focused on delivering outpatient services, with the bulk of its portfolio consisting of medical office buildings (34.3% of ABR), behavioral inpatient acute (15.9%), inpatient rehabilitation facilities (14.5%), physician clinics (11%), and specialty centers (10.4%).
Meanwhile, the REIT focuses on owning healthcare properties outside of urban areas in the western mountain states, along the southeastern coast (including Florida) and the south-central region of Texas, because these areas are where the population should grow the fastest over the next 20 years.
The company's existing portfolio has held up well during the pandemic. Overall, it has signed rent deferral agreements with 20 tenants, representing less than 1% of its annual rent, which it expects to receive by year end.
Meanwhile, the company has continued to grow its portfolio by acquiring additional properties. It bought seven during the second quarter and one land parcel adjacent to an existing property for additional parking for $21.5 million. The REIT has signed definitive agreements to purchase five more properties totaling $70.6 million that should close by the middle of next year. It also signed term sheets to buy 10 more properties for $45.7 million that could close by year end.
And it has lots of financial flexibility to continue acquiring properties, thanks to its conservative balance sheet and ability to sell stock opportunistically.
Community Healthcare Trust's focus on nonurban population growth areas has paid dividends (quite literally) for its investors. The company's steady string of acquisitions has grown its cash flow, allowing the REIT to increase its dividend -- which currently yields 4.6% -- every quarter since its initial public offering (IPO) in May 2015.
Given its healthy financial profile and focus on nonurban population growth markets, this REIT should have no trouble continuing to expand its portfolio and dividend.
The investment thesis for Physicians Realty Trust
Physicians Realty Trust owns 268 properties, consisting primarily of medical office buildings (MOBs), which are 93% of its NOI. It focuses on acquiring or developing off-campus outpatient facilities leased to high-quality healthcare systems (60% have an investment-grade credit rating).
This focus on partnering with financially strong tenants paid dividends during the height of the pandemic. Overall, the REIT collected 98% of the rent it billed in the second quarter, and it received more than 97% of its rent in July.
Because of that, the REIT was able to continue paying its dividend, which currently yields 5.26%. That makes it stand out in the sector, since many other REITs (including several focused on the healthcare sector) opted to reduce their payouts because of cash flow concerns.
Dividend stability has been a hallmark of Physicians Realty Trust since its IPO in July 2013, as it has primarily focused on maintaining its payout. Overall, it has averaged a small dividend increase about every other year. While the REIT hasn't grown its dividend quite as regularly as Community Healthcare Trust, it has expanded its funds available for distribution growth by 17% since 2015, which has put its dividend on a more sustainable level by reducing its payout ratio.
When combined with the REIT's investment-grade balance sheet, its steadily improving payout ratio gives it the financial flexibility to continue making investments that will grow its cash flow.
A healthier outcome for investors
While Community Healthcare and Physicians Realty both are focused on owning healthcare-related real estate, they offer investors different opportunities. Community Healthcare has a very diversified portfolio focused on fast-growing, nonurban areas. On the other hand, Physicians Realty primarily owns medical office buildings leased to high-quality healthcare systems.
While both of those strategies have paid dividends for investors, Community Healthcare's plan has delivered a better overall outcome. Not only has Community Healthcare increased its dividend with more consistency, but it has also vastly outperformed its peer since its IPO (a more than 211% total return by Community Healthcare vs. 39% for Physicians Realty).
While that past success is not a guarantee for the future, Community Healthcare seems to have a winning strategy, making it the better buy between the two these days.