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3 Bargain Medical REITs for Great Dividends in 2022

By Jim Halley – Jan 3, 2022 at 1:20AM

Key Points

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These three medical REITs should benefit from an aging population, all the while rewarding investors with income from dividends.

In today's overheated stock market, it's hard to find value or yield because stocks are so highly priced. Omega Healthcare Investors (OHI 0.96%), Medical Properties Trust (MPW 2.24%), and Physicians Realty Trust (DOC 0.95%) all go against that grain. The three medical real estate investment trusts (REITs) offer high but stable yields at low valuations.

A REIT is required to pay out 90% of its net earnings through dividends to be classified as a pass-through firm by the IRS. This means REITs offer investors some of the best yields on the market. These medical REITs are particularly strong because they focus on long-term leases with quality, investment-grade clients that don't have difficulty paying their rent. All three REITs are currently bargains, with price-to-FFO (P/FFO) ratios below the average of 21.2 times for a REIT.

A pediatrician and assistant examine a young patient in a doctor's office.

Image source: Getty Images

1. Omega Healthcare: becoming a great bargain REIT

Omega Healthcare focuses on skilled nursing and assisted living facilities. The pandemic has been tough on such facilities' bottom lines, but Omega's own financials have already bounced back, even if its shares are down more than 19% this year. The drop has also made the stock undervalued in my opinion, with a P/FFO ratio of 13.5 times, lowest among these three medical REITs.

In the third quarter, the company reported earnings per share (EPS) of $0.58 compared to a loss of $0.40 year over year. Through nine months, the company's reported EPS is $1.62 compared to $0.43 in the same period last year.

Omega's listed FFO in the third quarter of $180.6 million represents an increase of 1,093% year over year, and through nine months, the company said it had FFO of $531.7 million, a rise of 38.9% over the first nine months of 2020.

Omega has raised its dividend for 17 consecutive years, most recently to $0.67 a share, which offers a current a yield of about 9%.

The question, of course, for any high-yielding dividend, is how safe is that dividend? The company collected 99% of its third-quarter rent and despite the high yield, the company's adjusted FFO (AFFO) growth rate of 8.5% since 2004 has allowed it to keep its AFFO payout ratio below 80%, in the safe range for a REIT.

2. Medical Properties Trust: dividend growth for eight years

Medical Properties Trust is the nation's No. 1 nongovernment landlord of hospitals, and it also owns inpatient rehabilitation centers and behavioral health facilities. It owns 440 properties across 32 states and nine countries, with 52 tenants and the largest group of its tenants are its 207 general acute-care hospitals. The stock is up more than 7% this year.

Medical Properties has increased its dividend for eight consecutive years, and after a 3.7% raise this year to $0.28 a quarterly share, it offers a yield of 4.80% and a conservative AFFO payout ratio in the low 80s. Its FFO has increased by 202% over the past five years, the most of these three medical REITs. Its strength and quality of tenants does mean the stock is a little more expensive than Omega Healthcare, as Medical Properties Trust has a P/FFO ratio of 16.8 times, the second-highest of the three.

In the third quarter, the company reported FFO of $171.1 million, up 30.5% year over year. Through nine months, the company said it had $449.5 million in FFO, representing a rise of 39.7% over the same period last year. It also reported EPS in the quarter of $0.29, up 16% year over year, and through nine months, it reported EPS of $0.76, up 24.5% over the same period in 2020.

The company's tenants are large hospitals that rarely have problems paying their rent. The biggest concern I have for Medical Properties Trust is its relatively, but not outrageous, debt-to-EBITDA level of 7.3 times, and the company said on its third-quarter earnings call that it plans to bring that down closer to 6.3 times.

3. Physicians Realty Trust: set up to grow

Physicians Realty Trust specializes in developing, owning, and managing medical office buildings for physicians, hospitals, and healthcare delivery systems. Its shares have climbed 5.9% this year. It's the smallest of the three REITs, with a $4.51 billion market cap, and has the lowest debt-to-EBITDA level (5.13 times), but it's also the most expensive of the trio, with a P/FFO of 18.3 times.

In the third quarter, the company reported $58.1 million in FFO, up 4.3% year over year, and net income of $22.8 million, up 33.8% over the same period in 2020. Its third-quarter net income per share was $0.10, up 42.8% year over year. Through nine months, the company reported net income per share of $0.26, up from $0.23 in 2020.

The company's quarterly dividend has stayed the same since 2017, at $0.23 per share, giving it a yield of 4.88%. The reason the dividend hasn't risen is the company has a relatively high AFFO payout ratio of 93.63%. Fortunately, the company has grown its FFO by 93% over the past five years, and in November, the company said that 95% of its properties were leased.

OHI Funds from Operations (TTM) Chart

OHI Funds from Operations (TTM) data by YCharts

The choice is clear-cut

While I own shares of Physicians Realty Trust, I'm most impressed with Omega Healthcare Investors at this stage. The company has the best track record of dividend raises and the highest dividend yield, and yet it has the lowest AFFO payout ratio of the three. Its price-to-FFO ratio also shows it to be the most undervalued of the three stocks.

Of the other two healthcare REITs, Medical Properties Trust has also increased its dividend on a regular basis, and the size of its tenants gives it some safety, but the company's high debt-to-EBITDA level could slow its growth. Physicians Realty Trust has a strong potential for growth and a low debt-to-equity level, but its high AFFO payout ratio could put the dividend at a risk if the company were to go through a down period.

Jim Halley owns shares of Physicians Realty Trust. The Motley Fool recommends Physicians Realty Trust. The Motley Fool has a disclosure policy.

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