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This Healthcare REIT Sees Healthy Growth Ahead

Nov 04, 2020 by Matthew DiLallo
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Healthcare real estate investment trust (REIT) Medical Properties Trust (NYSE: MPW) has been expanding at a healthy pace over the last decade, increasing its assets at a 30% compound annual growth rate. That growth has paid big dividends for investors as the hospital owner has grown its normalized FFO per share at an 8% compound annual rate, enabling it to increase its dividend in each of the last seven years.

The company has hit the accelerator this year thanks to a surge in acquisitions, which helped drive a 24% year-over-year increase in normalized FFO during the third quarter, the fastest growth rate in the REIT sector for a company of its size. That upward trend appears poised to continue given its current deal pipeline.

Another busy quarter

While hospitals have been ground zero for the COVID-19 outbreak, it hasn't had any negative impact on Medical Properties. The company collected nearly 100% of the current rent and interest due during the quarter "as operating conditions continue to approach and, in some instances, exceed pre-COVID levels," according to CEO Edward Aldag in the earnings press release.

Meanwhile, the REIT continues to purchase hospital properties. During the quarter, it bought an inpatient rehab facility in Germany and a hospital in the U.K. and invested $300 million into a medical center in California. These deals brought the company's year-to-date acquisition total to nearly $2.9 billion.

The company has a few other deals on track to close during the fourth quarter, including a $135 million investment in three hospitals in Colombia. On top of that, it expects to complete two U.S. post-acute care development projects and several other small expansion and renovation projects during the quarter. That should bring its 2020 investment total to more than $3 billion. These deals will help drive additional normalized FFO growth in 2021, which should set the stage for another dividend increase.

2021 looks to be shaping up to be another big year

Medical Properties Trust anticipates that its acquisition spree will continue next year. Aldag stated:

Early indications suggest that our 2021 investment pipeline is similar in both size and composition to several years in our recent history. We continue to move forward with several attractive smaller investments, and, as is typical, we are in various stages of progress on significant opportunities with timing that is difficult to estimate.

That suggests the potential for another $3 billion of acquisitions next year.

The company is exploring various non-dilutive funding sources (i.e., not issuing equity) to help finance future deals, including excess cash after paying the dividend, asset sales and mortgage repayments, and new joint venture transactions. Given all those options, CFO Steven Hamner stated on the third-quarter conference call: "We believe we have a number of alternative capital sources to continue our double-digit accretive growth in coming quarters while maintaining our prudent historical leverage target, and avoiding the more expensive and dilutive capital raising strategies during recent market conditions."

In other words, the company doesn't anticipate issuing too much equity to finance this expansion, which should enable it to grow its normalized FFO per share at a double-digit rate again in 2021.

A great combination of yield and growth

Medical Properties Trust has done an exceptional job creating value for shareholders by steadily acquiring hospital-related real estate. It has generated significantly higher total shareholder returns than the market and other REITs, thanks to its steadily growing normalized FFO per share and dividend. Given its currently attractive 5.7% dividend yield and healthy growth prospects, that market-beating performance seems likely to continue, making it a great healthcare REIT to buy these days.

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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.