Ventas (NYSE: VTR) is a leader in the healthcare-focused real estate investment trust (REIT) niche. Though peer CareTrust (Nasdaq: CTRE) is much smaller and more focused, it has managed to do something Ventas has not during the coronavirus pandemic. Here's a comparison of these two healthcare REITs and a look into which might be the better buy today.
Most people who buy REITs do so because they are specifically structured to pass income to shareholders in the form of dividends. Thus, dividend yields are a good place to start this comparison. Currently, Ventas' dividend yield is 3%, and CareTrust's is a much more generous 4.4%.
For comparison, using Vanguard Real Estate Index ETF as a proxy, the average REIT has a dividend yield of around 3.2%. So if you want to maximize the income generated by your portfolio, CareTrust easily takes the lead. However, there's more to the dividend story than dividend yield.
The coronavirus pandemic made 2020 a very bad year for many landlords in the healthcare space. Ventas, for instance, was forced to cut its dividend by a whopping 43%! We'll dig deeper into why below, but the key takeaway here is that CareTrust didn't have to cut its dividend last year. In fact, the company increased its dividend in 2020 and has already increased it again in 2021. So once again, CareTrust comes out on top with regard to dividends.
2. The core portfolio
On the surface, Ventas' dividend cut versus CareTrust's increase might come as a bit of a shock. Indeed, Ventas is one of the most diversified healthcare REITs in the industry. Rents from properties like medical offices, research labs, and hospitals balance out the 44% from senior housing assets.
Alternatively, nearly 85% of CareTrust's business is in the senior housing space, with a heavy nursing home component. The rest of its properties are "multi-service campuses,'' which provide a range of support services for seniors.
In 2020, assets like medical offices and research properties generally held up better than senior housing. So, at first glance, it might not make sense that Ventas was the dividend-cutter. However, the difference lies in the companies' focuses.
CareTrust concentrates on net lease properties; whereas, around a quarter of Ventas' top line is tied to senior housing operating portfolio (SHOP) assets, meaning Ventas owns and operates the asset (though it hires others to do the day-to-day work).
The property-level performance of SHOP assets flows directly to Ventas -- and in 2020, that was a terrible thing as the pandemic hit senior housing especially hard. CareTrust's tenants, however, had to bear the brunt of that hit because their obligation to pay their rent didn't change. Thus, CareTrust actually weathered the storm better than its larger, more diversified peer.
Although it seems that CareTrust is the winner here, there actually isn't one. CareTrust is highly focused, and Ventas is diversified, so it really comes down to personal preference. While diversification didn't always pan out for Ventas in 2020, you know diversification is good for your portfolio, and it's usually pretty good for REITs, too. The pandemic just threw a wrench into the world's normal operations.
3. Long-term trends
That said, the demographics supporting the healthcare REIT space haven't been changed by the pandemic. On the contrary, the older population is growing and will need increasing levels of support over time. So the backstory for both CareTrust and Ventas remains strong.
CareTrust is focused more on the senior-housing side of things, while Ventas has branched out into more growth-oriented sectors (specifically medical office and research properties). As a result, both REITs will likely see material benefits from the aging of the population. However, CareTrust's growth will mostly come from portfolio growth, suggesting a slow and steady path is likely from here. And that's not meant to be a knock on the REIT in any way.
On the other hand, Ventas has material turnaround potential built into its portfolio, thanks to the hit its SHOP business took in 2020. Indeed, as the senior housing industry gets back on its feet, CareTrust will benefit from stronger tenants but won't see a material boost to its rental income.
The improving performance of Ventas' SHOP assets will flow directly into the REIT's income statement, meaning the next couple of years will likely be relatively strong as Venta's SHOP business bounces back.
Conservative types will probably prefer CareTrust's slow and steady model. However, more aggressive investors looking for a way to play the recovery in senior housing might find Ventas' SHOP exposure perfectly suited to their needs.
If you have owned Ventas throughout the downturn, it's probably not worth jumping to CareTrust at this point. Yes, CareTrust's stock performance has been better than Ventas', but Ventas' recovery potential is notably better, thanks to the SHOP component.
The final call
If you are comparing CareTrust and Ventas, there's only one easy answer. If you want consistent dividends, CareTrust has a better record. However, things get a bit more complicated from there. On the one hand, CareTrust isn't likely to be a rapidly expanding company, given that acquisitions will probably be its main driver of growth.
On the other hand, Ventas' business includes fast-growing medical office and research components and has turnaround potential to look forward to in its SHOP portfolio. Thus, as mentioned, conservative investors will probably prefer CareTrust's outlook, while more aggressive types will likely trend toward Ventas.