Medical Properties Trust (MPW -2.62%) and Physicians Realty Trust (DOC) are two of the larger real estate investment trusts (REITs) that specialize in owning and leasing healthcare facilities. Medical Properties Trust owns 440 hospitals in 31 states and 10 countries; Physicians Realty Trust owns 290 medical office buildings in the United States.
Medical Properties Trust should benefit from the expected increase in spending on healthcare in the U.S. The most recent Centers for Medicare & Medicaid Services National Health Expenditure report concludes that annual growth in national health spending is expected to average 5.1% from 2021 to 2030, reaching nearly $6.8 trillion by 2030. Physicians Realty also counts on that trend, in addition to the growing use of outpatient facilities.
Healthcare REITs struggled in 2022, with their shares dropping 22.2%, according to data from the National Association of REITs, which tracks the industry. In March, the sector saw a drop of 5.2%. Medical Properties' shares are down more than 21% this year, and Physicians Realty has seen its shares drop less than 1% in that period. Is it time to buy the dip on either stock? Let's see.
Medical Properties may have offer value now
Medical Properties' shares rose nearly 8% this week after the company announced first-quarter earnings. Revenue of $248.2 million was down 5%, and adjusted funds from operations (FFO) of $178.9 million were down 18% over the same period last year. But the stock is still down more than 54% over the past 12 months, so anyone buying it right now would still be buying on the dip.
There are plenty of reasons to purchase the stock, but the most obvious is its dividend. In Thursday's earnings call, the company announce it is keeping its quarterly dividend at $0.29 a share, which means an inflation-slaying yield of around 13.5%. The company has raised its dividend for 10 consecutive years. With a yield that high, it could make sense for long-term investors to lock that in now -- but with a few caveats.
There's no guarantee the company won't lower its dividend down the road. The company's normalized funds from operation (NFFO) payout ratio is about 78%. However, that should still leave plenty of funds to cover the dividend. And knowing the importance of the dividend to investors, cutting it would still likely be a last resort.
Also, investors should know that the company was hit by scathing reports from short-seller Viceroy Research. However, Medical Properties Trust is suing the firm in response -- and there may have been a lot more smoke than fire in the reports.
The other major caveat is the general macroeconomic climate the company is dealing with right now. While hospital systems are pretty safe tenants, a few of the company's tenants have struggled. That has gotten investors' attention, but so far the company has been able to get back rent from struggling tenants, and when it chooses to sell properties, it hasn't lost money.
But to continue to grow, Medical Properties Trust will have to borrow. And for now, interest rates have risen enough to make that painful. A REIT survives on the difference between what it pays in interest for its loans and what it can charge its tenants. The company's ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of 7.7 is a bit high, but not out of hand.
The environment for hospital systems is improving now that the COVID-19 pandemic has ebbed. Medical Properties Trust's own finances also look stronger than they were a quarter ago. In the fourth quarter, the company reported $0.21 in FFO per share. In the first quarter, that grew nicely to $0.31.
Physicians Realty is pricier, but there's less risk
Physicians Realty closed out 2022 on a strong note with annual revenue of $371.7 million, up 13.3%, and quarterly revenue of $93.5 million, up 11.7% year over year. The company's quarterly FFO of $61.5 million was flat compared to the same period last year, and its yearly FFO of $250 million represented a rise of 7.3%.
The company has used that financial strength to whittle its debt down by 4.5% to $1.9 million. That has left it with a safer debt-to-EBITDA ratio of 5.8.
The only area where Physicians falls short compared to Medical Properties Trust is its quarterly dividend of $0.23, which delivers a yield of around 6.38%. That is better than the rate of inflation and the average healthcare REIT's yield of 5.20%, but less than half of Medical Properties Trust's yield. The company also hasn't raised its dividend since 2017. The dividend's NFFO payout ratio is 89%, actually higher than Medical Properties Trust, but certainly still safe.
Physicians Realty Trust's top 10 tenants are responsible for only about 30% of the annualized base rent, which means the company's exposure is less because it has strong tenant diversity. Compare that to Medical Properties Trust, which has one tenant, Steward Health Care, which operates 41 buildings and is 9.3% of the REIT's portfolio.
Physician's stability has drawn investors, and its estimated 2023 price-to-FFO ratio of 14.3 is almost double Medical Properties' multiple of 6.
Taking the long view
Both of these REITs are solid long-term choices, as are healthcare REITs in general, even if we sink into a recession. There's a lot more uncertainty around Medical Property Trust's business right now, but the company has been fiscally conservative, and at the stock's current price -- and considering its high dividend yield -- it's worth buying on the dip. Much of the concerns about the company are already baked into the stock's price.
Physicians Realty Trust isn't really in that big a dip. It's certainly pricier than Medical Properties Trust when you look at its price-to-FFO ratio. But that higher price is warranted because the company's finances are actually still seeing growth and the company has less debt. It's definitely a good long-term play with solid upside, especially for those who are less risk-adverse.