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Is Medical Properties Trust Inc. a Buy?

By Matthew Frankel, CFP® – Nov 14, 2018 at 8:17AM

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This healthcare REIT has performed well recently -- but is it still a good stock to buy?

In the midst of recent stock market volatility, healthcare REIT Medical Properties Trust (MPW -5.66%) just reached a brand-new 52-week high.  

Despite this fact, the stock could still be a bargain. Healthcare real estate is a massive addressable market, and there's lots of room for the market to get even larger. Plus, Medical Properties Trust still trades for a relatively cheap valuation. Here's a closer look at this healthcare real estate company and why it could still belong on your watch list.  

Stethoscope on countertop with person in scrubs in background.

Image Source: Getty Images.

What Medical Properties Trust does 

Medical Properties Trust is a real estate investment trust, or REIT, that invests in healthcare real estate. Specifically, Medical Properties Trust exclusively invests in acute care facilities (hospitals), which it leases to tenants on a long-term triple-net basis.  

If you aren't familiar, a triple-net lease is a form of lease agreement common among freestanding commercial properties, under which the tenant is responsible for property taxes, insurance, and most maintenance costs -- in other words, most of the variable costs of property ownership. And these agreements typically have long initial terms, with annual rent increases, or escalators, built in. In fact, only 44 of Medical Properties Trust's 264 properties have lease expirations within the next 10 years.

Why healthcare real estate? 

There are a few good reasons to invest in healthcare real estate. From an income investor's perspective, healthcare real estate is a rather defensive type of investment, which is great for income security. In other words, during tough economic times, consumers can stop shopping at malls, tenants go bankrupt, and rental income can fall. On the other hand, healthcare facilities (hospitals, in particular) are needed no matter what the economy is doing. And the long-term nature of Medical Properties Trust's triple-net leases helps to provide even more stability. 

From a long-term-growth standpoint, there are very compelling reasons to invest in healthcare properties as well. For one thing, there are extremely favorable demographic trends at play. The senior citizen (65 and older) population in the U.S. is expected to roughly double over the next 35 years as the massive baby boomer generation ages. Older people use healthcare more often than younger ones, and also tend to spend more when they do. So, there should be a steady stream of growth in the industry for decades to come. 

In addition, there's a lot of room for consolidation in the current market. Less than 15% of the $1.1 trillion worth of healthcare real estate in the United States is REIT-owned, and hospital properties have an especially high rate of health system and/or physician ownership. Medical Properties Trust specializes in buying existing properties and leasing them back to operators, so there's lots of room for growth in that avenue. 

The bottom line is that although Medical Properties Trust has already grown impressively, reaching over $6 billion in assets in just over a decade, there's still plenty of room to grow. This combination of growth potential and income security is rare to find in the stock market. 

Dividends and valuation 

Medical Properties Trust estimates that its funds from operations, or FFO, will come in at $1.36 per share for the full year. FFO is the best metric to assess a REIT's earnings, so let's take a look at the company's dividend and valuation in that context.

As of this writing, Medical Properties pays an annual dividend rate of $1 per year, which translates to a yield of just over 6% based on the current share price. This generous yield represents just 74% of the full-year FFO forecast, a very manageable payout ratio for a REIT. In fact, this is on the lower end of the spectrum. 

From a valuation standpoint, Medical Properties Trust trades for 12.4 times FFO, well below the average dividend stock.  

Know the risks

Now, Medical Properties Trust isn't without risk. Just to name a few: 

  • Rising interest rates tend to pressure REITs -- the 10-year Treasury yield is a good indicator. If it rises significantly, you can expect Medical Properties Trust to fall. 
  • There's a fair element of tenant risk. Medical Properties Trust's portfolio is concentrated in just a few major tenants, and if one of them were to go bankrupt, it could be a major negative catalyst. 
  • There's the risk that the market for acquisition opportunities dries up. As I mentioned, a big part of the healthcare real estate investment thesis is the possibility of growth. 

Is it a buy? 

No stock that offers a big dividend and has lots of upside potential is without risk, and Medical Properties Trust is no exception. However, with lots of growth potential, defensive-natured assets, a strong dividend coverage ratio, and a cheap valuation, Medical Properties Trust's reward potential appears to outweigh the risks.  

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

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