Real estate stocks are sometimes relegated to the "widow and orphans" section of investment accounts. They're typically low risk, low excitement and modest returns. At least they were, until the past few years when real estate stocks first soared, thanks to easy money fueling increased demand, only to then tumble en masse. Many real estate stocks are down 30% or more this year. That presents a great buying opportunity for investors.
My favorite real estate stock is Medical Properties Trust (MPW -0.22%). Medical Properties is a niche REIT that owns and leases buildings to hospital operators. It was founded to pair the REIT's real estate and financing experts with hospital operators, which traditionally have the expertise to run a hospital but not the knowledge necessary to secure the large amount of financing necessary to build one.
Medical Properties offers investors an enticing combination of growth, value, yield, and economic resilience. Like most real estate stocks, it's down this year -- currently by about 34%. Investors who can hold their nose in the short run will likely reap good gains in the long run. Let's discuss why Medical Properties is a good value now.
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Growth and value
Medical Properties is in growth mode. It has more than doubled its total assets since 2019 and acquired an additional $12 billion in properties during that time. Revenue is up from $850 million in 2019 to $1.5 billion in 2021.
Thanks to that growth profile, the stock has outperformed other healthcare REITs over the last three-, five-, and 10-year periods. Usually investors have to pay up for growth stocks, but this year's stock price drop may have provided an opening for bargain hunters.
The REIT trades for a price-to-earnings ratio (P/E) of 8.4 and a price-to-book value (P/B) of 1.05. It's five-year averages for the two ratios are 17.56 and 1.46, respectively. As recently as 2021, it traded at a P/E of 24.61., If the shares were to revert to the mean multiple, that would entail a stock price increase of almost 300%.
Wall Street is certainly down on the stock, but is it warranted? The problem may be future growth potential.
As interest rates rise, it becomes harder and more expensive for the REIT to finance new hospital acquisitions. Management believes that it will be able to make between $1 billion and $3 billion in new purchases this year, but the total will depend on how much it is able to finance with equity. That means potentially selling existing properties or through joint ventures.
The REIT likely won't grow as fast over the next few years as it did over the past five, but it's priced at the moment for no growth at all.
Yield
Medical Properties' current dividend yield is 7.3%, an amount that would be appetizing to even the most aggressive growth investor. The REIT has paid a dividend in each quarter since October 2004. In that time, the dividend has grown from $0.10 per share to $0.29 per share. It's not amazing dividend growth, but remember, the REIT is focused on expanding its business as well as paying dividends.
Let's use the dividend payout ratio to determine if the dividend is sustainable. Over the past 12 months, Medical Properties has paid out a total of $1.16 per share in dividends and earned $1.87 in diluted earnings per share. That means it paid out dividends equal to 62% of its net income. There's plenty of room to keep paying dividends.
We can also compare the dividends paid to the REIT's funds from operations (FFO), which is an industry-specific measure for cash flow. In 2021, Medical Properties earned adjusted FFO of $1.36 per share and paid out $1.12 per share in dividends. According to a recent management presentation, it has grown adjusted FFO and its dividend for 10 straight years.
Economic resilience
The final part of our analysis is the REIT's economic resilience. It may surprise you that I'd be writing that about a stock that is down 34% in six months, but remember, it's what's happening to the business that matters. If the stock price falls 34% and the business is still generating the same cash flow, it just means the stock could be undervalued.
Medical Properties is uniquely set up to withstand both an economic recession and a prolonged inflationary period. It can do both because its tenants have significant pricing power -- ensuring their ability to keep paying rent -- and they are essential businesses.
In economic downturns, people still need to go to hospitals. If prices go up, people still need to pay for their healthcare. Medical Properties is unlikely to experience the level of vacancy that other REITs would in a recession, and it has price escalators built into its leases to benefit from inflation.
