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Is Medical Properties Trust a Good Fit for a Retirement Portfolio?

Sep 20, 2020 by Matthew DiLallo

Rising healthcare costs are a major concern of retirees, especially since most are on a fixed income. According to a report by HealthView Services Financial, a healthy 65-year-old couple who retired in 2019 can expect to spend more than $387,000 on healthcare costs in retirement, with the annual tally projected to rise from $12,286 the first year to $34,268 by the time they reach 85.

One of the companies that will benefit from this trend of rising healthcare costs is hospital real estate investment trust (REIT) Medical Properties Trust (NYSE: MPW). Here's a look at whether that makes it a good fit for a retirement portfolio.

A history of healthy growth

Medical Properties Trust is the global leader in hospital real estate. It currently owns 390 properties with approximately 42,000 beds across nine countries. It's also the second-largest hospital bed owner in the U.S., with properties in 34 states. Medical Properties Trust leases these facilities to hospital operators under long-term, absolute net leases, meaning the tenant bears all costs, including maintenance, repairs, utilities, and taxes.

The company typically purchases hospitals via sale-leaseback transactions with the operators. That provides them with cash to expand their practices while enabling Medical Properties to generate steady income to fund its dividend, which currently yields 5.8%.

The REIT has grown its portfolio at a 30% compound annual rate over the last decade by using a combination of retained cash after paying the dividend, stock sales, and new debt to purchase hospitals. That fast-paced portfolio expansion has created lots of value for shareholders.

Overall, Medical Properties has grown its normalized FFO by an 8% compound annual rate over the past decade, which has allowed it to increase its dividend in each of the last seven years. That has enabled the REIT to significantly outperform the S&P 500 and other REITs throughout its history.

Can Medical Properties' upward trend continue?

Medical Properties Trust's ability to grow shareholder wealth over the years has made it a great investment, with its steadily rising dividend ideal for retirees. However, since past performance doesn't guarantee future results, retirees need to take a good look at the probability that the REIT can continue delivering results for investors.

One of the keys to its success in growing FFO and the dividend in the past has been its ability to make accretive hospital acquisitions. Overall, it has increased its asset base from $1.4 billion in 2010 to $17.3 billion as of the middle of 2020.

While there's no way to predict the future, that upward trend seems likely to continue, given the massive addressable market for hospital real estate. There is between $500 billion to $750 billion of operator-owned hospital real estate in its estimation, which provides it with a significant opportunity set to continue making accretive acquisitions.

Meanwhile, the company should have plenty of financial flexibility to keep making deals. For starters, despite its buying binge, the REIT has maintained a strong investment-grade-rated balance sheet, backed by a low leverage ratio currently right at its targeted level.

On top of that, it has a reasonably conservative dividend payout ratio of less than 65% of its FFO, which enables it to retain cash to help fund deals. Finally, the company can also sell stock and bring on joint venture partners to help close deals, which it has had lots of success doing in the past. Because of these factors, it should have no problem finding the funding needed to keep acquiring hospitals.

It's about as good a fit as retirees will find

Medical Properties seems like the perfect fit for a retirement portfolio. For starters, it benefits from the very thing most retirees are trying to combat: rising healthcare costs. That should add to what's already a massive growth opportunity set for the company. Combine that likelihood of continued growth with the REIT's attractive yield, and it certainly seems like an ideal stock for a retirement portfolio.

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Matthew DiLallo owns shares of Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.