The 5.5% dividend yield healthcare REIT we review in this report is attractive. Its dividend is well covered (82% payout ratio) and is likely to grow (considering this year’s double-digit FFO per share growth expectation). We also like the company’s track record of delivering normalized FFO per share growth of nearly 9% over the last 10 years. In this report, we review the health of the business, valuation, risks, dividend safety, and then conclude with our opinion on investing.

Overview: Medical Properties Trust (MPW)

Medical Properties Trust Inc. (MPW) is a healthcare-focused REIT that owns hospital properties globally. Its portfolio consists of 446 properties and ~47,000 beds spread across 9 countries. It is the second-largest hospital bed owner in the US, with properties in 32 states. The properties include 208 general acute care hospitals, 112 inpatient rehabilitation hospitals (IRFs), 20 long-term acute care hospitals (LTACHs), 48 freestanding ER/urgent care facilities (FSERs), and 58 behavioral health facilities. Per the graphic below, the portfolio is well diversified across geographies and operators. Further, no single property accounts for more than 3% of the company’s total pro forma gross assets (of $22.3 billion as of June 30, 2021).

For a little more perspective on the company, MPW generated nearly 83% of its revenues from General Acute Care Hospitals in 2020. This concentration could be a cause for concern, especially during the pandemic where patients may delay medical procedures. However, MPW has receive virtually all of its rent payments (barring about 2% of its annual rent and interest payments in 2020). In fact, the MPW’s funds from operations (FFO) increased in 2020.

Also worth noting, Medical Properties Trust leases these General Acute Care Hospital facilities to operators under long-term net leases, meaning the tenant bears all costs, including maintenance, repairs, utilities, and taxes. And the majority of leases are long-term with initial terms of 10 to 20 years (and 99% of leases have inflation-based or fixed annual rent escalators).

Sources of Growth

MPW has multiple attractive sources of growth. First, rising healthcare spending in the US is a contributor. For example, according to data from the Centers for Medicare and Medicaid Services, healthcare spending in the US is expected to grow at a CAGR of 5.4% through 2028, reaching $6.2 trillion. And healthcare expenditures will account for 19.7% of the GDP in 2028. MPW notes that operator-owned hospital real estate in the US alone is estimated at $500-$750 billion, of which a relatively small part is owned by REITs. This translates to significant expansion potential for MPW through ongoing acquisitions.

Acquisitions continue to fuel MPW growth and remain an integral part of its growth strategy going forward. For perspective, over the last decade (2010-2020), MPW has increased its Gross Assets at a CAGR of 31% primarily through acquisitions. This has resulted in a nearly 20x increase in funds from operations (FFO) during the same period. While the acquisitions have been funded by selling new units (leading to dilution), FFO per share is what matters, and it has experienced growth (up 16.4% YOY in H1 2021), suggesting accretive acquisitions.

Regarding acquisitions, in early July 2021, MPW acquired a network of four hospitals with nearly 500 beds in Los Angeles (from Pipeline Health for $215 million). The facilities are located in densely populated areas with high barriers to entry and are essential to the communities they serve. The properties are subject to a 20-year master lease with multiple extension options. And in June 2021, MPW acquired 18 inpatient behavioral hospitals and five general acute care hospitals, all of located in the US (and with a weighted average cap rate of ~8.7%, further demonstrating the company’s ability to deliver strong returns).

Healthy Dividend Growth

MPW has a strong track record of dividend growth. For example, it has increased its dividend for the last eight consecutive years (from $0.80 per share in 2012 to $1.08 per share in 2020, implying a healthy CAGR of 3.6%). It’s also on track to increase its dividend by 3.7% this year. And considering the yield is 5.5% with only an 82% payout ratio (in Q2)—MPW is compelling if you are an income-focused investor.

Also worth noting (and comforting), MPW has already secured $3.6 billion of new investments this year (slightly more than it closed in 2020), and it’s on track to grow normalized FFO per share at a double-digit rate (for 2021). And the company will likely provide an upward revision to normalized FFO per share guidance (to better reflect the impact of recent acquisitions).

Additionally, MPW has ample liquidity and a strengthening balance sheet to fund any dividend shortfall. For example, net debt to EBITDA sits at around 6.7x, and management expects to bring that number down to around 6.0x (through planned dispositions and JV transactions). Also, as of Q2-21, MPW has almost $1.1 billion in liquidity (with $720 million of available cash and additional $515 million expected to come from repayment proceeds and sale of certain assets). And the overall debt maturity schedule remains manageable, with limited near-term maturities (only 22% of total debt maturing until 2024). These metrics give us increased confidence in MPW’s ability to sustain and grow the dividend.

Valuation:

On a Price to FFO basis, MPW trades at ~15.4x (TTM adjusted FFO), and above a group of healthcare REIT peers. MPW also has a slightly lower dividend yield. We view these metrics as an indication of MPW’s relatively lower risk portfolio, and validation of its acquisition-led strategy—which continues to result in outperformance versus peers.

Risks:

Concentration risk: Even though no single property is more than 3% of the company’s gross assets, MPW still faces concentration risk. For example, Steward Health Care System is MPW’s largest tenant with approximately 27.5% of the REIT’s total revenue. And while this represents significant exposure to one tenant, MPW is working to further diversify its total portfolio. Should a larger tenant face heightened financial challenges, it could lead to future cash flow interruption.

Also, MPW generated nearly 83% of its revenues from General Acute Care Hospitals in 2020, and this concentration is a risk (for example, patients could delay visits during covid). However, as mentioned, MPW has collected virtually all of its rent payments (barring about 2% of its annual rent and interest payments in 2020).

Higher leverage: At 6.7x EBITDA, MPW’s higher leverage is a risk factor. We are encouraged by the company’s strategy to reduce leverage (through dispositions and joint ventures), but it remains a risk. For example, variability in market interest rates could compound challenges. Specifically, the US Federal Reserve has continued to keep interest rates low (and we expect a continuation of that policy), however dramatically rising rates could increase interest costs for MPW. Further, REITs are often seen as an alternative to bonds, and higher interest rates could mean decreased demand for REITs (thereby causing a decline in the share price).

M&A risk: MPW is highly dependent on acquisitions to fuel growth. Over the past decade, MPW has acquired multiple assets and expects to continue its inorganic growth strategy. However, failure to integrate acquisitions could adversely impact operations. Also, this strategy could be dilutive to existing shareholders depending on how accretive acquisitions prove to be.

Conclusion:

While MPW does face challenges, we are highly encouraged by the improving operating environment, strong investment trends and its solid track record of operations. MPW has increased its dividend eight years in a row, and it has solid liquidity and strong dividend coverage. Further, we believe the company’s acquisition strategy is prudent and the shares are attractive. We do not currently own shares of MPW, but it is high on our watchlist. And if you are a long-term income-focused investor, Medical Properties Trust is worth considering for a spot in your portfolio.

Healthcare REIT: 5.5% Yield, Healthy Growth