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The United States' population is aging -- fast. In fact, the 65-and-over age group is expected to roughly double by 2050. One great way to capitalize on this trend is through healthcare, or, more specifically, the growing need for healthcare facilities -- already a trillion-dollar market. The "big three" healthcare REITs are Welltower (NYSE: HCN), HCP (NYSE: HCP), and Ventas (NYSE: VTR), and they could be just what your portfolio needs for decades of growth.
Image source: HCP, Inc. presentation
The biggest and most geographically diverse
Welltower is the largest healthcare REIT in the market, with approximately 1,500 properties. It's also the most geographically diverse of the three companies listed here. In addition to a huge presence in attractive U.S. markets, Welltower has been aggressively expanding into Canada and the U.K. The majority of Welltower's portfolio (64%) is made up of senior housing properties, with significant investments in long-term/post-acute care (20%) and outpatient medical facilities (16%) as well.
In addition to its size and geographic footprint, Welltower has a couple of additional advantages over the competition. First, Welltower's properties are newer than those of its peer group. The company's average senior housing facility is 13 years old, compared with the REIT average of 18. Also, the company's properties are located in affluent areas -- a big advantage, especially for private-pay senior housing. In fact, its average senior housing property is located in an area where the median household income is 50% higher than average.
Welltower has a 45-year history of excellent performance and consistent dividend increases. Over its entire history, Welltower has averaged a 15.8% annualized total return and a 5.8% annual dividend increase. And while the past performance of a stock doesn't guarantee future results, it's hard to ignore this kind of track record -- this means that a $10,000 investment in Welltower's IPO would be worth about $7.4 million today. That's jaw-dropping growth potential.
A play on U.S. senior housing
Ventas is about 200 properties smaller than Welltower but has a lot of similarities. The portfolio is oriented toward senior housing, with smaller holdings in medical office buildings, skilled nursing, and post-acute care properties. Also like Welltower, Ventas' properties are located in areas where the median household income is well above average, and its facilities are significantly newer than the industry average.
Additionally, both have similar investment strategies and are expanding at the same rate. And both REITs even have the same BBB+ credit rating.
Unlike Welltower, however, Ventas hasn't expanded internationally just yet, preferring instead to keep the majority of its assets concentrated in high-barrier U.S. coastal markets. This can be an advantage or disadvantage, depending on how you see it. If you're nervous about what the Brexit might do to Welltower's U.K. portfolio, for instance, you may prefer Ventas' domestic-oriented portfolio.
Ventas also has the clear advantage in recent earnings and dividend growth. The company has grown its FFO by an annualized rate of 11% and has been able to increase its dividend by a 10% rate. Both metrics are more than double the corresponding growth rates of Welltower or HCP.
Source: Ventas investor presentation
A little riskier, but more potential reward
Perhaps the most interesting of these three stocks -- in the short term, anyway -- is HCP. For the moment, HCP has the most diverse portfolio of properties. 40% of the portfolio of 1,200 properties are senior housing, 26% are post-acute/skilled-nursing, 15% are life science, 14% are medical office buildings, and there is a small amount of hospital properties as well.
However, the company's HCR ManorCare properties, which make up nearly all of the post-acute/skilled-nursing portfolio, have been struggling recently. In fact, these properties caused HCP to post a surprise loss in the fourth quarter of 2015 and the stock took a nosedive.
In the wake of this news, the company has decided to spin those assets off into a newly created REIT that will be known as QCP, Inc. The general idea here is that the post-spinoff HCP will be made up of a high-quality portfolio of private-pay assets, which will produce consistent income, and thereby improve credit quality and financial flexibility. And the new REIT will be able to concentrate its efforts solely on maximizing the HCR ManorCare assets.
Source: HCP investor presentation
It remains to be seen just how much value the pending spinoff will unlock, but I have a positive view of this development. HCP has done a great job of consistently creating value for its shareholders in the past and is actually one of the few REITs in the S&P 500 Dividend Aristocrats Index. There will certainly be a transition period as HCP and QCP get used to operating as separate entities, but I have no doubt this will be a good thing for shareholders in the long run.
Which one to choose?
To be perfectly clear, I think that all three of these REITs are excellent long-term investments. And in full disclosure, I own Welltower and HCP in my own portfolio. Nothing against Ventas, but I've been a Welltower shareholder for some time, and their portfolios and strategies are quite similar. Plus, I like the international exposure I get with Welltower.
The bottom line is that these are three rock-solid companies and you won't go wrong with any or all of them. Just be sure you have a sufficient investment time horizon -- say, 10 years or more -- to really let the demographic trends play out and ride out any short-term market volatility.
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Matthew Frankel owns shares of HCP and Welltower. The Motley Fool recommends Welltower. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.