Omega Healthcare Vs. Medical Properties Trust, Which Is The Superior Healthcare REIT?

Summary

• I'm putting Omega Healthcare Investors and Medical Properties Trust head to head to answer the question which is the better investment today?
• My findings and conclusions may surprise you as I wouldn't have predicted how the analysis unfolded if you gave me multiple tries.
• I am basing my analysis across their income statements, balance sheets, and dividend metrics to determine the outcome.

Funtap/iStock via Getty Images

REITs are a fantastic way for investors such as myself to gain exposure to real estate since I have no intention of becoming a landlord. There are three types of REITs, including equity, mortgage, and hybrid REITs, then many sectors, including office, retail, industrial, lodging, residential, healthcare, self-storage, infrastructure, data centers, and specialty that they invest in. One of the sectors I am very interested in is healthcare, and I have invested in both Omega Healthcare Investors (NYSE:OHI) and Medical Properties Trust (NYSE:MPW). I wrote dedicated articles on both companies, OHI's can be found here, and MPW's here. After the OHI article, I was asked how it compared to MPW, and after the MPW article, I was asked how it compared to OHI. These companies are similar but different as OHI invests in Skilled Nursing and Assisted Living Facilities, where MPW invests in Hospitals. I thought it would be interesting to take a numbers-driven approach and make OHI vs. MPW the next in my head-to-head comparison series.

For those of you who are unfamiliar with how I analyze companies in this series, here is a brief overview. I am going to take a numbers-driven approach and compare growth metrics along with the sheer size of what each company is generating. I will be comparing OHI and MPW's income statements, balance sheets, and dividends. Within each category, I will be looking at several sections and awarding a point as I go through my analysis to determine which company is a better investment today, in my opinion. Here is an overview of everything I will be looking for:

• Income Statement
  • Revenue & Growth
  • Operating Income & Growth
  • Net Income & Growth
  • Operating Income Margin
  • Net Income Conversion Ratio
  • Funds From Operations (FFO) & Growth
• Balance Sheet
  • Total Real Estate Assets
  • Total Assets
  • Total Equity
• Dividend
  • Dividend Payout & Yield
  • Dividend Payout Ratio
  • Dividend 5-Year Average Growth
  • Annual Dividend History

This will be a thirteen-point analysis with no bias as it's strictly by the numbers. I am also a shareholder of both companies, so there isn't any favoritism. I have no idea who will be the winner as I will be crunching the numbers on the fly as I write this article. I actually find these articles incredibly interesting because even I get surprised at the outcomes. I went into two specific articles, willing to bet I knew who the winner would be, and the outcome in my Apple (AAPL) vs. Microsoft (MSFT) and Altria (MO) vs. British American Tobacco (BTI) articles were not what I was expecting. Let's crunch some numbers and get after it.

Section One: The Income Statement

As a side note, I will be using the Trailing Twelve Months (TTM) on the income statement to represent 2021 for both MPW and OHI.

For the TTM, MPW has generated $1.34 billion in total revenue, an increase of $800.2 million (111.95%) over the previous five years and $542.6 million (67.94%) in the past three years. MPW has had a five-year revenue growth rate of 20.87% and 20.17% in the past three years. OHI generated $913.1 million in total revenue in the TTM, an increase of $12.3 million (1.35%) in the past five years and $31.4 million (3.56%) in the past three years. OHI has had an average five-year growth rate of 0.33% and 1.25% in the past three years.

(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

MPW is the clear winner as they generate more revenue and have been growing the business than OHI, which has been relatively flat over the past five years.

MPW - 1

OHI - 0

Next was getting into the total operating income. In the TTM, MPW generated $903.1 million in operating income, which grew by $529.4 million (141.66%) over the past five years and $327.70 million (56.95%) over the past three years. MPW has an average operating income growth rate of 20.2% over the past five years and 17.43% for the previous three years. OHI is a completely different story as in the fiscal year 2016, they generated $578.1 million in operating income and haven't been able to get past that number. In the past five years, operating income has decreased by -$101.3 million (-17.52%) and has declined by -$26.6 million (-5.28%) in the past three years. OHI has a negative operating income growth rate in both categories as well.

(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

Once again, MPW is the clear winner in operating income.

MPW - 2

OHI - 0

Next, I am looking at the total net income each company produces. It looks like MPW had an anomaly in 2018 as it's the only year where the net income came in at over $1 billion, which I will speculate was due to a sale of a property. In the TTM, MPW has generated $514.2 million of net income, which is an increase of $139.5 million (37.23%) in the past two years. Over the past three years, MPW has generated $1.32 billion in net income. In the past two years, OHI has seen its net income declined by -$111.7 million (-32.75%). In the past three years, OHI has generated $729.8 million in net income.

(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

Once again, MPW is the winner as they are generating more net income and growing their net income at a quicker pace than OHI.

MPW - 3

OHI - 0

Before I get into the operating income & net income conversion ratios, I want to look at FFO. This is a passage from one of my previous articles on Seeking Alpha about Realty Income (O), where I explain why FFO is important to review when it comes to REITs.

A typical REIT income statement analysis is different from how I would look at a company such as Apple. The Internal Revenue Service has specific provisions a company must comply with to be classified as a REIT. To qualify as a REIT, the company must invest at least 75% of its total assets in real estate, cash, or U.S Treasuries and earn at least 75% of gross income from rents, interest on mortgages on physical property, or real estate sales. REITs are required to pay a minimum of 90% of their taxable income to shareholders in the form of dividends. Due to accounting rules requiring REITs to charge depreciation against an asset, Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) are important metrics to consider.

I will create a hypothetical scenario to demonstrate how FFO and AFFO are used to evaluate REITs. REIT ABC buys a building for $5,000,000 and decides to spread the depreciation over 20 years evenly. Each year $200,000 would be deducted from the asset value in depreciation expense ($200,000 * 20 years = $5,000,000). In year 10, REIT ABC's balance sheet would carry a value of $2.5 million for the value of the building as $2.5 million in depreciation has been deducted. Annual depreciation would be considered a line item within the fiscal year's expenses even though the $200,000 wasn't capital spent as it's a charge from depreciation. As a non-cash charge, the annual $200,000 from depreciation wasn't actual capital spent, which is why FFO and AFFO become an important metric to review.

Since REIT ABC isn't actually spending its capital for the depreciation charges in the expense items, the FFO metric adds the depreciation chargeback to ABC's net income to compute ABC's FFO. ABC's cash flow is better represented by FFO than net income, but it captures cash flow in its entirety because it doesn't incorporate the capital expenditure spent to acquire the building. By incorporating capital expenditures, the AFFO gives a more complete picture of ABC's cash flow.

MPW has sequentially increased its FFO over the past five years, and that's exactly what we want to see as REIT investors. Over the past five years, MPW has increased its FFO by $586 million (231.32%) and $354.60 million (73.07%) for the past three years. MPW has an average annual growth rate of 28.52% for its FFO over the past five years and 20.89% in the past three years. OHI has generated $545 million in FFO for the TTM, which has been trending down since its 2016 & 2019 years when it exceeded $600 million. In the past two years, FFO has trended negatively by -$94.80 million (-14.81%).

MPW once again is the winner as it generates more FFO, and it's been increasing over the years.

MPW - 4

OHI - 0

Now I am going to move into the operating income & net income metrics. MPW has fantastic operating income margins as it's generated an operating income margin of 67.33% in the TTM. Over the past three years, its average operating income margin has been 67.62%. OHI also generates a nice operating income margin as it has posted a 52.22% margin in the TTM. Over the past three years, OHI has had an average operating income margin of 54.02%.

While OHI is much closer and this category isn't a blowout, MPW is the winner.

MPW - 5

OHI - 0

The net income conversion ratio is the last category on the income statement I will review. This allows me to see the percentage of each dollar that flows to the bottom line. MPW has a current net income conversion ratio of 38.34%, and its average over the past three years has been 38.46%. OHI posted a net income conversion ratio of 25.12% in the TTM, and their three-year average has been 26.57%.

Once again, MPW is the clear winner

MPW - 6

OHI - 0

(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

Section Two: The Balance Sheet

Before I start crunching the data, I have to say I am shocked MPW swept every category on the income statement analysis I just did. This rarely happens when I do these articles, and I thought it would be more of a fight between the two companies. I am interested to see how the balance sheet is going to play out.

To start things off, I am looking at the total real estate assets of each company. MPW has $11.20 billion in total real estate assets, which has increased by $4.22 billion (45.32%) over the past five years and $1.9 billion (20.38%) in the last three years. Over the past five years, MPW has had an average annual growth rate of 10.67% and 6.71% in the last three years. OHI has $7.19 billion in total real estate assets, which has decreased by -$7.2 million (-0.10%) in the last five years and in the more recent three years increased by $286 million (4.14%).

This is a no-brainer; MPW is constantly increasing its real estate assets while OHI is going sideways. MPW starts off this section with a point.

MPW - 7

OHI - 0

MPW has $18.75 billion in total assets, and this has increased by $4.28 billion (29.57%) over the past five years and $3.3 billion (21.35%) in the last three years. MPW has an average annual growth rate of 5.37% in the last five years and 6.72% in the past three years. On the other hand, OHI has been stagnant as its total assets have increased by only $26.7 million (0.27%) over the last five years.

MPW is the winner as its steadily increasing its total assets

MPW - 8

OHI - 0

Now that I have seen the amount of real estate and total assets each company has on the books, I need to look at the total equity. MPW has $8.12 billion in total equity on the books and an increase of $1.05 billion (14.9%) in the last three years. On the other hand, OHI has $4.15 billion in total equity on the books, and it's decreased -0.46% (-$19.10 million) in the last three years.

Stunned and shocked are understatements as I am awarding MPW the last point in the balance sheet section. MPW now has a clean sweep in the first two sections of this analysis. MPW has almost double the amount of equity on the books, and it's increasing rather than decreasing. It's hard to deny any of the point allocations this far.

MPW - 9

OHI - 0

(Source: Steven Fiorillo) (Data Source: Seeking Alpha)

Section 3 - The Dividend

The final section I will be looking at is the dividend to round out this analysis. MPW trades at $21.03 per share and pays a dividend of $1.12 for a forward yield of 5.38%. OHI trades at $36.28 and pays a dividend of $2.68 for a forward yield of 7.17%.

OHI is finally getting the point as it pays a larger dividend which yields more than MPW's, but this doesn't mean it's a better dividend by any means, and that's why I have three more categories to review.

MPW- 9

OHI - 1

The next thing I am looking at is the payout ratio. MPW has a payout ratio of 64.26%, while OHI's is 81.05%. I would consider MPW's a great payout ratio given its yield and OHI's respectable. OHI still has a decent amount of room for increases left in the tank, so I am not concerned about their high yield but, MPW gets the point.

MPW- 10

OHI - 1

Next, I need to look at growth rates. MPW has a five-year average growth rate of 4.33% on its dividend, and OHI's is 3.02%. Due to the size of their dividends, this works out to almost the same. OHI's dividend would increase by $0.081 next year, while MPW's would increase by $0.049 based on these averages. Given that OHI is almost double the price of MPW, the dividends are growing by roughly the same amount, so I am calling it a tie.

MPW- 10.5

OHI - 1.5

Now I need to see the dividend history. MPW has increased its dividend for eight consecutive years with no indication that this will stop in the future. OHI has increased its dividend for seventeen consecutive years, and 2021 could mark its eighteenth dividend increase. Based on its history, I am going with OHI for its dividend history.

MPW- 10.5

OHI - 2.5

(Source: Omega Healthcare Investors)

Summary

MPW swept OHI in both the Income Statement and Balance Sheet review. OHI has the more powerful dividend and picked up 2.5 points than MPW's 1.5 in the dividend category. Overall, this was a landslide for MPW, and I wouldn't have expected this outcome.

(Source: Steven Fiorillo)

Conclusion

My analysis is completed, and the results are in. First, let me reiterate I am a shareholder of both companies and had no idea what the outcome would be as I did the analysis on the fly as I wrote this article. I am still shocked at the outcome. I have two determinations from this analysis. First, MPW is a superior investment today compared to OHI. Its business is growing, and it simply has better metrics across the board. From a dividend investment, you really can't go wrong with either company. Both have fantastic yields, and the dividends are supported by low payout ratios and respectable dividend history. If you're looking for the better investment of the two, MPW, it is my pick, hands down. I believe there is more room for capital appreciation while generating a large yield. If you're looking for just income, OHI has a larger dividend that is supported, but I would anticipate that it may just move sideways as it has over the past five years.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OHI, MPW, AAPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. Investors should conduct their own research before investing to see if the companies discussed in this article fit into their portfolio parameters.

Comments

[aimepic]

OHI has trouble with rent collections sold out @$33.00

[Ocrrhacker]

Good call. MPW has greatly outperformed OHI this past week.

[JackieDan]

good article.

[sky4it2012]

I read your article thanks, very good.

Here is another thing Steve. I was looking at buying OHI because of there assisted living properties. Peak is selling theres. Look at BKD, the largest skilled nursing company, is losing money. GENN sells for a quarter a share.

The nursing home market looks like its in taters. I am wondering how OHI keeps profitable?

But in the long term skilled nursing facilities is a great market. I know a guy whose parents where in nursing homes. They paid 25,000 a month for both of them to stay.

Steve, which company stands to benefit the most when nursing homes make a comeback?Because that is where I want to be. I am just not that fond of what MPW does.

[theheckwithtech]

I concur with this article and have been accumulating MPW.

[Alduin]

Thanks for this concise comparison. Good work.

[user1416]

No mention of debt, tenant credit quality, tenant concentration or if MPW's income came from acquisitions. I would much rather hold BDCs than either of these names.

[arnold.bird]

@user1416 “MPW's income came from acquisitions”

REITs grow mainly by acquiring properties.

[user1416]

@arnold.bird Yes, and acquisitions come with debt- which also wasn't mentioned. And apples-to-apples comparisons usually include some mention of organic growth and recurring revenue. Fluff article.

[Cantfixstupid]

@user1416 "I would much rather hold BDCs than either of these names." I have MPW and recently sold OHI. MPW has no share price growth and OHI is declining. Last year I bought MPW and WPC which have produced very small gains compared to BDCs bought during the same time frame. I constantly have to force myself to keep the REITs thinking I need some real estate exposure but total return over the last year is definitely weighted to BDCs.

[time1]

@Steven Fiorillo

Thanks for the article. But trying to understand why have you not compared debts and it's impact on future until debt is paid off ?

Total Liabilities 5year 2016-2020

As of 31-Dec 2016 2017 2018 2019 2020
OHI -> 5,091 5,218 5,146 5,661 5,656
MPW-> 3,170 5,200 4,297 7,439 9,490

For MPW debt has tripple. Almost flat for OHI.

Please share your views on the debt. Does MPW debt sound concerning ? No, why ? Yes, why ?

TIA!

[time1]

@Steven Fiorillo any thoughts on the debt ?

[Redshift79]

Although they are both healthcare REITs they are very different from one another. Perhaps MPW would be more comparable to something like DOC, which would compare hospitals to doctors offices, or OHI to LTC which are both senior living/nursing home centered. In any case I found your comparison of these two insightful.

[Bag Man]

And no mention of DEBT in the entire article. Jeez.

[V1adimir]

Great analysis. Thanks.

[jvsmith42]

There is a math error in the depreciation example. Twenty years of depreciation at $200,000 per year does not total to $5,000,000.Thanks for the article, but as others have commented, per share metrics should have been provided. A discussion of risk factors, especially the financial condition of their tenants would have been helpful. In that regard, I believe that while both OHI and MPW have significant risk, MPW has more risk.

[DiamondPortfolios]

Own MPW..thanks for this article and analysis.

[theheckwithtech]

I never buy OHI over $30, which has served me well over the years. Just began accumulating MPW this year.

[Adream]

Don't get why comparison is not done more in a /share basis though. Am I wrong or you compare income in absolute term? But then it's just bigger = better ? But for REITs that are usually quite dilutive /share basis comparison make more sense IMO.

[liuysdr]

Thanks for the nice analysis! I own both. How about the quality of the management team at each of the se two companies which can‘t be measured by numbers?

[RealRural]

@liuysdr That definitely plays a role, but that evaluation is so subjective not sure how you could differentiate the teams. Essentially results are the metric that management is evaluated by, no?

Having invested in both, I think both have excellent management teams, but MPW's Aldeg has been a visionary in seeing the hospital space as ripe for investment and that theme has more opportunity than SNF right now, as well as more growth at higher cap rates. MPW might hit a wall down the road but it has extensive networking and relationships in the hospital sector and a reputation that gives it an advantage.

[Kenmare]

@RealRural One metric I have used successfully in the past as a kind of proxy to assess management quality is Return on Invested Capital. It's not perfect but at least it gets at the quality of management's capital allocation decisions.

[Majestic2020]

Thank you for your work.

[Bag Man]

Growth in revenue, operating income and net income are all rather immaterial to a REIT investor.

[HW12]

MPW out performs OHI near term because of the Pandemic.

Once the Pandemic is over, OHI will pick up the steam. The best way is to buy both. But if you ask me, I would bet in the next 2 to 3 years, OHI will outperform MPW in total returns (div plus price appreciation), it is not MPW is not as good, it is because MPW was and is still less impacted by the pandemic. So MPW will go on its normal course but OHI will come out of abnormal to being normal when that happens, OHI will outperform MPW. Still the best way to invest is to own a portfolio so you capture opportunities in all areas.

[RealRural]

@HW12 I think you will lose that bet. The headwinds in the SNF space after the many failures of SNFs in the pandemic, resulting in law suits and re-evaluation of how poorly they are operated, are going to persist. Labor shortages are going to be exacerbated, the huge amount of bailout funds from COVID relief packages will taper off, and there is broad effort to reform an industry that revealed serious shortcomings.

In short, far more upheaval in SNFs than in major metro hospitals and specialty care facilities.

[time1]

@RealRural so what is going to happen to the old people and increasing aged population ? where will they go ?

[Ron Turnbull]

@time1 the bone factory where they will be recycled and replaced with new hoomans

[DonP111]

I own both, and I like both, so at this point in time I'm keeping both.

[arnold.bird]

@DonP111 I dumped all my OHI after the recent earnings report. OHI is about to break out of a bear flag and is heading for 30/sh and perhaps a bit lower.

MPW is one of the best bargains in the stock market right now. It takes all my strength not to buy more. It’s one of my biggest positions.