Medical Properties Trust: My Favorite REIT (NYSE: MPW)

Stock Market


Modern Hospital Building

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Thesis

Real Estate Investment Trust (REIT) share prices have recovered as the pandemic subsided along with the resilience of the real estate sector. Medical Properties Trust (MPW) is a REIT, one of the biggest owners of hospitals in the world. Operating in an inelastic demand segment, MPW offers a great return to long-term income investors.

Its stock gained 8.5% in 2021 but has lost a little over 12.5% ​​YTD. At the current share price, the stock’s dividend yield is about 5.45%, and with a TTM based P / FFO Ratio of almost 12, the stock looks extremely attractive for future returns.

REIT Investments: Diversify your Portfolio

REITs must payout at least 90% of their taxable income to shareholders. Therefore, the primary motivation for investors to invest in REITs is the dividend yield rather than growth. REITs deliver total competitive returns based on a steady dividend income and moderate long-term share price appreciation. They are also excellent portfolio diversifiers that mitigate overall portfolio risk and increase maximum returns because of their comparatively low correlation with other assets.

Institutional attitude towards REITS

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REIT returns

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Reit returns

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According to a study by Wilshire Funds Management, adding a range of high income-generating assets, including REITs, to model retirement portfolios would have produced a nearly 40 percent gain in income returns – while maintaining nearly the same total returns and risk profiles as retirement portfolios with more traditional investment allocations.

income return for reits

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Moreover, in these times of high inflation, REITs would be an even better addition to investment portfolios. They have historically performed well during moderate inflation periods compared to low inflation periods in terms of market returns and operating fundamentals. With current inflation levels exceeding 2.5%, the time appears to be ripe for adding REITs to investment portfolios.

The below chart shows that REITs outpaced the S&P 500 by total returns of over 3.9% during periods of moderate inflation. According to the same report, when the Consumer Price Index (CPI) jumped over 5% in Q2 and Q3 2021, REITs’ Same-Store Net Operating Income (SSNOI) outpaced the uptick in annualized inflation by 23 basis points and 187 basis points, respectively.

reit vs market

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Company Overview

Medical Properties Trust, Inc. is a self-advised Healthcare REIT, acquiring and developing net-leased hospital facilities for almost 2 decades. The company owns 438 properties globally, with most of its holdings in the United States, followed by the United Kingdom. The company’s holdings consist of 207 General Acute Care Hospitals, 111 Inpatient Rehabilitation Hospitals, 58 Behavioral Health Facilities, 42 Freestanding ER / Urgent Care Facilities, and 20 Long-Term Acute Care Hospitals.

These properties have average lease terms of 10 to 20 years in the United States, with multiple options of 5-year extensions, while in Europe, 87% of the company’s holdings are set to mature after 2030. These lease terms have a 2% escalation built into them to address inflationary effects. Similarly, the company also banks on long-term fixed-rate debt facilities that make up a huge chunk of its balance sheet. Accordingly, this cash sits at the driving seat of the company’s growth and expansion.

During the 4th Quarter earnings call, Company’s CEO noted that MPW has continued to execute its acquisition strategy to add $ 3.9 billion in its investments across 5 different countries, with 9 different operators, 5 of which were new. In correlation with the company’s Funds from Operations (FFO) and Adjusted FFO (AFFO), this represents the continuation of double-digit growth, “a record virtually unmatched among, not only our peers but the entire universe of REITs with a similar or larger market cap. “

Distribution of portfolio

MPW

High Yield Dividends: Slow but Steady Growth

MPW distributes approximately all its earnings to its shareholders at about a 100% Payout Ratio with 2021 dividends of $ 1.12 per share against a DEPS of $ 1.11 and AFFO of $ 1.37. The company, therefore, relies heavily on managing its debts which I will discuss in the next section.

At the current share price of $ 20.5, the annualized Dividend Yield of 5.65% exceeds the Healthcare Real Estate sector’s average yield of 4.05%, almost double the REIT industry average dividend yield of 2.85% and 4.7 times of S&P 500’s 1.2%.

MPW recently announced a $ 0.29 quarterly dividend ($ 1.16 annualized) for Q1 2022, a 1 penny, or 3.6% QoQ dividend increase. Although a minor increase, the company has continuously increased its dividend distributions in each consecutive year for almost a decade. Its most recent announcement of an increased dividend for 2022 will likely bolster shareholder confidence in the stock. Still, the slow-paced dividend growth may also push prudent investors to survey the REIT market for companies with a better dividend growth rate.

High Debt but No Red Flags

MPW sports a debt-to-equity ratio of almost 134%. 96% of MPW’s $ 11.28 billion debt is fixed, with interest rates between 2.5% and 5.25%, resulting in an interest expense of $ 367 million for 2021. The company’s Net Debt to Annualized Adjusted EBITDA also demonstrates that it would take MPW, on average, 6.4 years to pay back its debt, assuming net debt and EBITDA are held constant. Historically, this ratio has been maintained at the ‘mid-five times range.’ Hence, the company is currently at the upper limits and said it would likely come down to its historical range during the earnings call, which should not be any cause for concern.

The company’s 2021 FFO of $ 811 million gives it a good interest coverage of around 2.5, which lags the industry average of 4.5 but has elegantly maneuvered the minefield of liabilities through meticulous management. For instance, during Q3, the company raised a 3.5% loan to settle a debt with a 6% interest rate. Despite the debt figures being higher than ideal, the risks in this area are outweighed by the rewards.

Valuation

The company has a Price to FFO ratio of about 11.7 times, much cheaper than the Healthcare REIT industry average of 19.78. At the P / FFO of 19.78, the share price would be a little over $ 34, exposing an upside of almost 70%. However, the P / FFO ratio cannot be taken in isolation as a measure of valuation even though it is precedented that companies with lower P / E or P / FFO multiples are usually better rewarded by the stock market.

As the company aims towards double-digit growth in its assets and FFO with consistently growing dividends, potential investors can expect fair returns with double digits by the end of this year, considering the current valuation.

Conclusion

Adding a REIT adds diversity to the portfolio, bringing down the overall portfolio risk and lowering your portfolio beta for optimal returns. With the rising interest rates, the 40-year high inflationary pressures on the economy will ease down and settle into a moderate range, historically perfect for REITs, making the current year exquisitely attractive to add REITs into your portfolio.

MPW’s strategic maneuvering around its debt structure, inflationary protectors in its lease terms, growth, and expansion are telltale signs of strong and meticulous management. The stock’s current valuation is a cherry on top, giving leeway to potential investors for an appealing entry point. As an income stock, MPW is a sound investment for solid and consistent returns, especially for income investors looking for reliable passive income.



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