Better Buy: Welltower Inc. vs. National Health Investors Inc.

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Healthcare real estate is shaping up to be a compelling investment opportunity over the coming decades, and there are several different healthcare real estate investment trusts, or REITs, that can allow investors to get a piece of the action. Two senior housing-focused REITs are Welltower (NYSE: HCN), the largest player in the industry, and National Health Investors (NYSE: NHI), a smaller company with lots of room to grow.

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Here's a closer look at the opportunity in healthcare real estate, as well as these two companies, to determine which could be the better buy now.

A huge opportunity in healthcare real estate

To make a long story short, the U.S. population is expected to age rapidly over the coming decades. The ongoing retirement of the massive baby boomer generation, combined with advances in medicine that allow people to live longer lives, is expected to cause the senior citizen population in the U.S. to roughly double by 2050.

Older age groups are forecast to grow even faster. In fact, the 85-and-older age group is expected to double by 2036.

Seniors use healthcare facilities more often than the rest of the population and tend to spend more when they do. The growth in the older population will create a need for more healthcare facilities -- particularly senior housing, the focus of the two REITs compared here.

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Welltower and National Health Investors: The quick version

Welltower is the oldest and largest REIT focused on healthcare properties. Founded in 1970, the company has grown tremendously over the years and now has a portfolio of 1,384 healthcare properties. Seventy percent of the portfolio is made of senior housing properties, with outpatient medical facilities and long-term/post-acute-care properties making up the rest. Ninety-three percent of the portfolio's rental income is derived from private-pay revenue sources, which are generally more stable and predictable than government reimbursements.

National Health Investors is a significantly newer and smaller company, about one-eighth of Welltower's size by market cap. Most of the company's 216 properties are senior housing or skilled nursing facilities, and the company also has some medical office buildings and other property types in its portfolio.

Dividends and performance history

Both stocks pay similar dividend yields. Welltower and National Health Investors currently yield 4.9% and 4.8%, respectively.

It's tough to find much to complain about when you look at Welltower's performance history. The stock has generated total returns of about 4,650% over the past 30 years (13.7% annualized) and has increased its dividend almost every single year since its 1971.

National Health Investors is significantly newer, founded in 1991, and its long-term performance history is impressive as well. For an apples-to-apples comparison, National Health Investors has averaged 13.5% annualized total returns since its IPO, while Welltower has averaged a slightly better 13.9%. Over the past decade, the company has outperformed Welltower by a wide margin, with total returns of 381% versus 219%. The stock also has a strong record of dividend increases, with the payout more than doubling since its IPO.

In a nutshell, both stocks have a strong performance history and pay similar dividends, so it's tough to declare one as having a superior history.

Which is cheaper?

So far, we've seen that Welltower and National Health Investors are pretty evenly matched when it comes to dividends and performance, and the biggest difference between the two is Welltower's size. Now, let's look at valuation.

Company

Recent Stock Price

2017 FFO Guidance

P/FFO (Midpoint)

Welltower

$72.20

$4.15-$4.25

17.2

National Health Investors

$80.03

$4.70-$4.72

17.0

Just like the other areas, there isn't that much of a difference here. Welltower is slightly more expensive in terms of price-to-FFO, but almost negligibly so.

Better buy now?

To be clear, this comparison could go either way, and I'm confident that long-term investors will do well with either of these REITs. Having said that, I like investing in sector leaders, so if I were going to buy one today, it would be Welltower.

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Matthew Frankel has no position in any of the stocks mentioned. The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.