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Why Medical Properties Trust Is a Retiree's Dream Stock

By Jim Halley - Apr 27, 2021 at 7:34AM

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It combines growth with a nice total return -- the right combination for most retirees.

Medical Properties Trust (MPW 2.42%) gets a lot of upside out of being a real estate investment trust (REIT), not least because it is investing in a market that nearly everyone expects to grow: healthcare spending. The company buys hospitals and leases them back with long-term, triple-net leases.

In 1970, healthcare costs were responsible for 6.9% of the gross domestic product in the U.S. By 2019, that percentage had risen to 17.7%. Of those numbers, hospital and physician services represented half of the spending. According to data from the Centers for Medicare and Medicaid Services, the compound annual growth rate (CAGR) for healthcare spending is expected to be 5.4% through 2028, reaching $6.2 trillion by then, with healthcare expenditures taking up 19.7% of the GDP in 2028.

Retirees can benefit from that trend by investing in Medical Properties Trust. The company's stock is up more than 45% over the past year. The best thing for retirees, though, is the company's impressive total return, thanks to a nice dividend.

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Quarterly payments you can count on

The company has raised its dividend for eight consecutive years, including a 3.7% bump in February to $0.28 per share, giving it a yield of 4.98%. Between that and the rise in share price, the company's total stock return as of Dec. 31 is 566% since its initial public offering in 2005. It has outperformed the SNL U.S. REIT Equity index by 274% in that period. The dividend appears to be well covered, with an adjusted funds from operations (FFO) payout ratio of 89.34%. That's well within the range of what you might expect of a REIT, which must disburse 90% of its taxable income to shareholders to avoid taxes.

What I like best about Medical Properties Trust is the way it has managed to grow while increasing FFO per share. It has built-in diversification, with 431 facilities in 33 states and six countries across four continents. Acute-care hospitals make up 74% of the company's properties, but Medical Properties Trust also owns property served by inpatient rehabilitation, behavioral health, long-term acute care, and freestanding emergency care facilities.

Where the money comes from

The company's revenue sources include tenants' rent payments, interest income from loans to tenants, and profits from equity interests in some tenants' operations. The biggest piece of the pie is from rent (59%), but Medical Properties Trust also makes a substantial amount from long-term, interest-only mortgage loans to healthcare operators.

The company reported $757.7 million in normalized FFO in 2020, up 40% year over year, with adjusted FFO of $1.21 per share, compared with $1.06 in 2019.

Medical Properties Trust's income is stable -- 86.9% of its leases extend beyond 2030. As mentioned, most of its leases are what's known as "triple-net," which means the tenant is responsible for all maintenance costs, insurance, and utilities associated with the properties.

The biggest concerns

REITs such as Medical Properties Trust are not impervious to what's happening in the general economy. The company's fortunes are grounded in the success of its tenants, and this past year was a difficult one for the healthcare industry. While the COVID-19 pandemic meant more critical-care patients, other medical procedures were delayed. If tenants are forced to default on rent because of business factors, that would be costly for Medical Properties Trust. While the company could rent those facilities out to another tenant, money could be lost in the months that it takes to find a new tenant or to sell the property.

That didn't happen last year. The company said it received all but about 2% of its annual rent and interest payments in 2020, and it has agreements in place to collect the rest -- plus interest.

Medical Properties Trust also has to deal with its own rapid expansion. It grew assets by 16% last year, which should mean more revenue, but also makes the whole enterprise more difficult to manage, with its properties extended to four continents.

Until 2003, MPT operated solely in the United States, but it has been an an expansion binge since then. That year, it added properties in Germany; the following year, it expanded to Great Britain; then, in 2014, it bought properties in Northern Italy. In 2017, it opened an office in Luxembourg to manage its growing European portfolio. In 2019, it bought 11 hospitals in Australia and 13 in Switzerland. Last year, it bought 30 acute care hospitals in Great Britain and expanded to South America by buying two hospitals in Columbia.

Growing FFO shows the company's strength

The company has steadily been increasing its FFO, the most important metric for a REIT. Last year, it reported $831.2 million in FFO, up 49% over 2019. Over the past decade, it has increased FFO by 579%. Though it has frequently sold extra shares to finance its expansion, the company's FFO per share has increased by 69% over that same period and was $1.57 per share in 2020, a rise of 20.7% year over year.

And Medical Properties Trust continues to add to its portfolio. In January, management announced the purchase of behavioral health facilities owned and operated by Priory in the U.K. for 800 million pounds, roughly $1.1 billion. The leases will be 25-year leases with rent escalation clauses.

MPW Total Return Level Chart

MPW Total Return Level data by YCharts

Don't fight a dominant trend

The rise in healthcare spending isn't likely to go down soon. That's why Medical Properties Trust is an inviting dividend stock for retirees. It is well positioned and diversified in a growth industry, and its long-term leases give it stable cash flows to protect its dividend.

While not as safe as many bonds, Medical Properties Trust offers a better dividend yield with stronger growth potential, certainly something that retirees should consider.

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