Medical real estate investment trusts (REITs) combine two relatively stable, recession-proof industries: healthcare and real estate.
Spending on healthcare in the United States reached $4.1 trillion in 2020 and, thanks in part to an aging population, it's estimated to reach $6.2 trillion by 2028, according to the Centers for Medicare and Medicaid Services. While increased interest rates have put a damper on home sales lately, medical REITs manage commercial real estate, such as hospitals and doctor's offices. The tenants for these REITs are dependable payers and deliver consistent cash flows to the companies.
Medical REITs are considered good long-term investments because they offer above-average dividends. The average S&P 500 company's dividend yield is 1.82%. In comparison, Medical Properties Trust (MPW 2.65%) has a dividend yield of 9.16%, and Physicians Realty Trust (DOC) has a yield of 6.75%.
A high yield is great, but there are plenty of other factors that should go into determining which of these medical REITs is a better buy. Let's take a look at some of them.
The case for Medical Properties Trust
Medical Properties Trust's business has geographical diversity. It owns 434 hospitals in 30 states, seven European countries, Australia, and South America. Its leases are generally long-term, with an average of 17.6 years remaining on its properties. Its tenants are not the type to leave on a whim, as their businesses are connected to communities.
The company's stock has dropped about 45% so far this year. There are solid reasons for the drop, though. Investors are concerned in general about REITs because the rise in interest rates will make it more expensive for them to purchase new properties. The other concern is that Medical Properties Trust's largest tenant, Steward Medical Group, has had financial difficulties.
Steward, based in Dallas, operates 39 hospitals across 11 states. In Medical Property Trust's third-quarter report, it said that Steward has made repayments of $450 million for COVID-19-related advances and had received $70 million in Texas Medicaid reimbursements due the company. Medical Properties said that Steward, with those cash drains out of the way, should be cash-flow positive going forward. Still, with 36% of its properties connected to Steward, that company's finances remain a concern.
There's reason to believe that, even with Steward's difficulties, Medical Properties is underpriced. It has a price-to-funds from operations (P/FFO) ratio (based on the midpoint of expected FFO per share this year of $2.00) of 6.4 as of its recent share price. Compare that to a 16.2 P/FFO ratio for the popular REIT Realty Income, and Medical Properties appears to be a steal. That de-risks the stock a bit, considering its high dividend. What's more, Medical Properties has increased its quarterly FFO per share by 52% over the past three years.
The company raised its quarterly dividend by 4% this year to $0.29, the 10th consecutive year it has increased its dividend. It has an adjusted FFO (AFFO) payout ratio of 81%, safely giving it room for more increases.
Its financials show continued growth. While revenue in the third quarter was down 9% year over year to $352.4 million, its other numbers were encouraging. It said it had AFFO of $272 million, or $0.45 per share, up from $263 million and $0.44 per share in the same period last year.
MPW FFO Per Share (Quarterly) data by YCharts
The case for Physicians Realty Trust
Physicians Realty Trust owns 290 medical office buildings, most of which are on the campuses of hospitals or other healthcare facilities. The company's stock has held up better than Medical Properties Trust, only sliding about 23% so far this year.
Because of that, the stock's P/FFO ratio, based on its FFO so far this year, is 13.7 -- higher than Medical Properties Trust's multiple but still inexpensive for a REIT.
The company, in its third-quarter report, said it had revenue of $131.5 million, up 14.1% year over year. Its AFFO was $61.4 million, up 5% over the same period a year ago, and AFFO per share was $0.26, which was flat when compared to the third quarter of 2021. In the quarter, 94.9% of the company's portfolio was leased.
While its business seems to be more stable, its dividend is less generous. The company has kept its quarterly dividend at $0.23 per share over the past five years. It's also at more risk with an AFFO payout ratio of 88%.
For now, an easy choice
Despite its difficulties with Steward, or maybe in part because of them, Medical Properties Trust is the better buy of these healthcare REITs for now.
The stock is more sensibly priced. Its dividend is more generous, yet more likely to grow and better protected. The company has also shown better AFFO per share growth than Physicians Realty Trust.
