Long-term investors should seek companies with proven business models and large addressable markets. One industry with a particularly large addressable market is the hospital real estate market, which is estimated to exceed $1 trillion in the U.S. alone.
Medical Properties Trust (MPW 2.65%) is a real estate investment trust (REIT) that owns and leases out hospitals. But should you buy the stock? Let's dig into the company's fundamentals and valuation to answer this question.
Image source: Getty Images.
A long growth runway in a steady industry
Medical Properties Trust, with 438 facilities and 46,000 total licensed beds in 32 U.S. states and eight other countries, is one of the largest owners of hospitals in the world. About 60% of the company's $22.3 billion in real estate is in the U.S., while the remaining 40% is scattered throughout major European countries, Australia, and South America.
General acute-care hospitals make up most of the company's properties (72.5% of total assets). The remainder is split among behavioral health facilities (11.5%), inpatient rehabilitation hospitals (9.2%), other facilities (4.1%), long-term care hospitals (1.5%), and urgent care facilities (1.2%).
While Medical Properties Trust's hospital real estate portfolio is one of the largest in the world, the company's portfolio is barely 1% of the U.S. hospital real estate market. This should create a decades-long growth runway for the company in an exceptionally dependable industry.
Medical Properties Trust's contracts with hospitals are absolute net leases, which means the hospitals bear responsibility for all costs of the property and cut monthly base-rent checks to the REIT. These contracts are on 10-year to 20-year initial lease terms, with multiple five-year extensions in the U.S. and even longer terms in international markets.
Better yet, 99% of Medical Properties Trust's leases have inflation-based or set annual rent increases, which makes the company resistant to inflation.
And best of all, hospitals rarely tend to shut down due to the essential nature of the services they provide to patients. For context, the U.S. had 6,090 hospitals in 2019. Of those, just 21 shut down in 2020 -- less than 1% in the first year of the COVID-19 pandemic. This translates into a reliable stream of cash flows for Medical Properties Trust.
Medical Properties Trust also closed on $3.9 billion in investments during 2021. This led adjusted funds from operations (AFFO) per share to increase 13.2% year over year to $1.37 in 2021. And it's important also to note that this was on top of 14.2% AFFO per share growth in 2020. Simply put, not even the worst pandemic in a century -- or all the disruptions to hospitals that came with it -- could stop Medical Properties Trust from posting impressive growth. That's exactly why I think it's fair to label Medical Properties Trust and its business model as recession- and pandemic-proof.
The dividend is well covered
Medical Properties Trust's dividend yield is a market-crushing 5.5%. When a yield is that high, it often means that the payout is in jeopardy of being cut. But Medical Properties Trust appears to be the exception to this rule.
That's because Medical Properties Trust's dividend payout ratio was 81% last year. While Medical Properties Trust retains just under 20% of its AFFO, this should be enough for the company to keep financing property acquisitions and growing AFFO per share. This is especially the case because the REIT was able to increase AFFO per share in two of the most challenging years for hospitals in recent memory.
This likely explains why the company's board was comfortable enough to recently raise the quarterly payout 3.6% from $0.28 to $0.29 per share. This is the eighth straight year that Medical Properties Trust has raised its dividend.
A solid buy for income investors
Investors looking for a high-yielding dividend stock that can consistently increase its dividend should consider Medical Properties Trust. Yield-focused investors can pick up shares of Medical Properties Trust at a price to AFFO per share ratio of 15. This is an attractive valuation for a REIT that grew its AFFO per share at a double-digit clip -- even throughout the first two years of the COVID-19 pandemic.
