Founded in 2003, Medical Properties Trust (MPW) is the only pure-play hospital real estate investment trust (REIT) today. With 20 years of experience, it enjoys specialized operating and investing knowledge within its niche, writes Ben Reynolds, editor of Top 10 REITs.
MPW owns a well-diversified portfolio of over 400 properties which are leased to over 30 operators. The vast majority of its assets are general acute care hospitals and are well diversified geographically, with properties in 29 states to mitigate the risk of demand and supply imbalances in individual markets. On top of its U.S. portfolio, Medical Properties maintains a strategic exposure to key European markets, including Germany, the UK, Italy, and Australia.
In the fourth quarter of 2022, Medical Properties saw its revenue decline by 7% over the prior year’s quarter and its Normalized Funds From Operations (NFFO) per share dip 9%, from $0.47 to $0.43, primarily due to poor performance of Prospect’s Pennsylvania hospitals.
The REIT provided guidance for NFFO per share of $1.50 to $1.65 in 2023, implying a 13% decrease at the midpoint. As the REIT has a good record of beating estimates, we expect it to exceed its guidance, with NFFO per share of $1.70 this year.
Medical Properties is offering an abnormally high dividend yield of 14.3%. It has a healthy payout ratio of 68% but its net debt of $8.1 billion is 165% of its market cap. Moreover, the net debt to annual EBITDA is standing at 7.3, which is far above our comfort zone. It is thus evident that the dividend has elevated risk.
Medical Properties has an exceptional growth record, as it has grown its FFO per share every single year over the last decade, from $0.72 to $1.82, for 10.9% average annual growth. The trust expects its aggressive acquisition pipeline to combine with its defensive net-leases to drive growth. It should continue to find attractive opportunities thanks to its extensive geographic reach into developed and aging populations. Management is now focused on acquiring U.S. properties, after a couple of years of strong growth overseas.
Based on expected 2023 FFO per share of $1.70, Medical Properties trades for a price-to-FFO ratio (P/FFO) of 4.8. Our fair value estimate for this REIT is a P/FFO of 10.0. An expanding P/FFO multiple could boost shareholder returns by 16.0% per year. We also expect an annual decline of FFO per share of -0.6%, while the stock has a 14.3% dividend yield. We thus expect total annual returns of 22.8% over the next five years.
Recommended Action: Buy MPW.
