While it's easy to assume that healthcare companies -- especially operators of hospital systems -- are in a bulletproof industry, that's not necessarily so.
Operating margins fell rather sharply overall during the fall, according to a report from health management consultants Kaufman Hall, primarily because of rising labor costs. That issue, of course, has been building throughout the pandemic, and the shutdown of profitable elective procedures at times hasn't helped either.
However, healthcare still remains an imperative, and there are still nice options for real estate investors to commit some cash to stocks in this industry that can be counted on to provide a nice flow of passive income and a decent shot at share-price appreciation over time.
Here are two healthcare real estate investment trusts (REITs) to consider buying that may provide financial comfort for many years to come. One presents a particularly strong case for a buy and hold, while the other merits consideration, too, based on its own long history of steady performance.
Different paths to solid payouts
As the chart below shows, these stocks have performed fairly well over the past decade, but not equally well. MPW has hung in there with the S&P 500 for total return during that time, while UHT has stayed pretty level with the Vanguard Real Estate Income Fund ETF, a REIT index exchange-traded fund, over that same period.
As you can see in the chart below, though, it's not been a great start to the year, especially for Medical Properties Trust. But let's take a quick look at why I think this REIT's long-term prognosis remains good.
Medical Properties Trust
Medical Properties Trust is one of the world's largest owners of hospitals (along with a fair number of behavioral health and urgent care clinics). Granted, its market cap of about $13.5 billion by definition puts Medical Properties Trust in the large-cap camp, but just barely. And it offers that nice mix of growth and stability of a relatively smaller operation compared with the more volatile nature of many much larger growth stocks.
As for growth, the company said in its year-end report that it saw net funds from operations (FFO) surge by about 24% in 2021, to $1.04 billion from $831 million in 2020. It also completed $3.9 billion in investments during the past year. Stability is served by the long-term nature of its portfolio's net leases -- 10 to 20 years with multiple 5-year extensions -- nearly all of which have inflation-based or fixed annual rent escalators.
The stock of the Birmingham, Alabama-based REIT is lately yielding about 5% at a share price of about $20.45, and it has raised its dividend for nine straight years, including by 12% in the past three years. A payout ratio of about 57% based on 2022 estimated earnings also makes that dividend yield look quite sustainable.
Universal Health Realty Income Trust
Then there's Universal Health Realty Income Trust, a Philadelphia-based REIT that boasts a diversified portfolio of acute care and rehabilitation hospitals, sub-acute and medical office facilities, free-standing emergency departments, and childcare centers.
It has 73 properties in 21 states, far smaller than the more than 400 that Medical Properties Trust owns across the country and overseas, but this trust's long-term record is still notable in at least one regard: its payout.
This REIT isn't a component of the S&P 500, so it can't be a Dividend Aristocrat, but it still has an impressive dividend track record: 37 straight years of increases producing a current yield of about 4.98%
Despite a market cap of only about $785 million, the REIT hasn't escaped notice from the big money. Institutional investors that increased their holdings in the latter months of 2021 include Vanguard Group and Bank of New York Mellon.
What's the attraction? A payout ratio of about 88% based on cash flow is a bit high, but the company did report year-to-date FFO of $38 million in the third quarter, up about 10% from the first three quarters of 2020. The REIT also reported continued growth in net income from several of its key properties.
Is it hammer time for these hammered stocks?
I'm primarily focused on income in my investing and both of these stocks have long records of dividend growth from portfolios that look positioned to keep that going.
Both these stocks took a beating in recent months. Their earnings reports don't reveal any obvious reasons why, so I may end up chalking this one to the whims of Wall Street.
Medical Properties Trust is one of my favorite stocks and is my largest holdings and I see no reason not to add to it over time. I'm considering Universal Health Realty Income Trust, too, but want to see more, including its fourth-quarter and full-year 2021 reports, when they come out around Feb. 24. Its long-term total return is not particularly impressive, but its dividend record is, and that's an important thing when it comes to REITs. Slow and steady isn't all bad.