One factor driving its significant outperformance is the REIT's consistent dividend growth. It has increased its dividend every quarter since its IPO. That makes it stand out in the sector, as several of its peers have reduced their payouts this year because of the impact of COVID-19 on their operations.
Among those hardest hit by the pandemic were healthcare REITs with large portfolios of senior living communities. For example, industry leaders Welltower and Ventas (NYSE: VTR) reduced their dividends by 30% and 43%, respectively, in 2020 due in large part to lower occupancy and higher costs at their senior housing operations. As a result, their share prices have both declined more than 25%.
One of the keys to Community Healthcare's strength amid the storm was the overall diversification of its portfolio. Instead of owning volatile senior living properties, the company focuses on owning 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%). These properties held up very well during the pandemic, as tenants only requested rent deferrals equating to less than 1% of the REIT's annual rental income, which most agreed to pay by year end.
Can its best-in-class growth continue?
Given Community Healthcare's past success, one could argue it has been the best medical REIT since its IPO five years ago. However, that doesn't necessarily mean it will continue thriving in the years ahead.
On the one hand, it's impossible to predict the future. For example, large healthcare REITs like Ventas and Welltower started shifting their portfolios to senior living communities because demographic trends suggested they could capture outsized growth. However, the pandemic might have significantly altered that business, since people could be reluctant to move into a place where they can't visit family during a future health crisis.
Still, demographics play a significant role in the future of healthcare and, thus, demand for healthcare-related real estate. That's leading Community Healthcare to focus its investment approach on regions where the population is growing at an above-average rate. Its strategy centers around buying healthcare properties in nonurban areas in the western mountain states, along the southeastern coast (including Florida), and in the south-central region (including Texas).
These areas tend to be off the beaten path for most real estate investors, enabling Community Healthcare to buy off-market or lightly marketed properties and earn higher cap rates. Because of that, it has a large, addressable market opportunity with limited competition.
Meanwhile, the REIT has lots of financial flexibility to continue making acquisitions. It has a healthy balance sheet with a stated policy to keep debt at a low level. It also has a reasonable dividend payout ratio of 81% of its AFFO during the second quarter.
While it has a solid financial profile, the REIT lacks the scale advantages of some of its larger peers. For example, it has yet to tap the corporate bond market and thus doesn't have an investment-grade credit rating, which would enhance its ability to raise capital from investors.
Meanwhile, its decision to stay away from urban areas means focusing on smaller healthcare operators instead of larger entities. That suggests it will have to rely on a steady string of bit-sized acquisitions each quarter as opposed to completing a couple of needle-moving opportunities every few quarters.
It's right up there with the best
On the one hand, Community Healthcare lacks the scale of its larger peers, which could affect its ability to raise capital and grow in the future. However, it has delivered peer-leading dividend growth and total returns since its IPO. That outsized growth appears poised to continue for the foreseeable future, which certainly makes this REIT seem like one of the best in the healthcare REIT space.