Is Medical Properties Trust a Buy?

Is Medical Properties Trust a Buy? Medical Properties Trust (NYSE:MPW) is a relatively young REIT that has caught the attention of investors seeking high yields from real estate investments. This trust specializes in a lucrative real estate niche and seems to offer considerable income potential.

 

Medical Properties Trust is a REIT that focuses on healthcare facilities. The company engages in development and acquisition of properties that include hospitals, surgical centers and rehabilitation centers.

 

MPW describes its approach as a “pure play hospital investment strategy.” The trust does not appear to engage in real estate dealings outside of the healthcare field. The company does, however, extend mortgage loans secured by hospital properties and other lines of credit via its subsidiaries.

 

In Q1 2022, MPW reported total revenues of $409.8 million. In the same quarter of 2021, the trust brought in just $362.8 million. The primary driver of this revenue was billed rent, which rose from $213.3 million in 2021 to $263.4 million in 2022.

Net income for the quarter was $1.05 per share, massively expanding upon the $0.28 per share in Q1 2021. Normalized funds from operation also rose by 12 percent year-over-year, advancing from $0.42 to $0.47 per share.

 

Medical Properties Trust also continued to expand its portfolio, adding $370 million in total new investments. This was somewhat offset by the liquidation of two under-rented properties, though MPW received $86 million in proceeds from the sale.

 

The company expanded its portfolio with four new hospitals in Finland to end the quarter with properties in 10 countries. As of Q1 reporting, the company’s total gross assets were valued at $22.2 billion and included some 440 properties.

 

From a yield perspective, MPW is quite impressive. The stock offers a yield of 6.34 percent, corresponding to an annual dividend of $1.16 per share.

 

Over the past five years, the dividend has grown at a respectable CAGR of 4.24 percent. The trust does, however, have a short track record of dividend increases that only goes back eight years.

 

So, while MPW is obviously a strong performer in terms of yield, it’s not yet clear whether it will be able to keep its performance up over several more years or decades.

 

The main risk of MPW from an investment perspective is that it does not have the long history of dividend increases offered by the most popular REITs. This isn’t to say, of course, that Medical Properties Trust is a poor investment or that it will not achieve such a track record in the future. For now, however, the trust hasn’t been around long enough to prove itself the way other REITs have.

 

The company also carries a slightly high debt-to-equity ratio of 1.13. This isn’t too concerning, especially for a company that is rapidly expanding a portfolio of high-value real estate. Over time, it would be preferable to see MPW reduce this ratio to below 1.0 and rely more heavily on cash flow to finance future projects.

 

Investors should also consider the risks associated with MPW’s mortgage and lending activities. Default risks and interest rate concerns can both cause mortgage REITs to pare back dividends.

 

MPW isn’t a strict mortgage REIT, but it does engage in a mixture of equity and mortgage activity. Rent still accounts for the lion’s share of the trust’s revenue, but this part of the business does introduce some additional risks.

 

One of the most intriguing aspects of Medical Properties Trust is its relatively low price-to-earnings ratio. The company’s P/E ratio stands at 9.64, making it a low-multiple investment by almost any standards.

 

The low earnings multiple is especially prominent when compared to the P/E ratios of major REITs such as Realty Income (66.54) and Prologis (25.64). It’s also noteworthy that both of these trusts have lower yields than MPW.

 

MPW also appears to have at least the potential to deliver strong returns over the next year. The median target price among 13 analyst forecasts places the stock at $23, a 30.4 percent gain over the current price of $17.64. The lowest price target is $18, pointing to a low probable downside.

 

On the surface, MPW looks like a very strong candidate to buy for future income. The trust’s shares are priced at a low multiple to earnings, its yields exceed those of more prominent REITs and its growing international footprint gives it a degree of diversification.

 

The fact that the stock itself has upside price potential makes it even more appealing, as investors could see returns in multiple ways.

 

The catch, however, is in Medical Properties Trust’s short track record.

 

With only eight years of consecutive dividend increases, there’s no telling whether MPW will go on to become an excellent long-term performer or begin to slow down and plateau in the coming years.

 

The most popular and stable REITs have raised their dividends over the course of multiple decades. While MPW certainly could go on to do the same, its history is simply too short to draw long-term conclusions.

 

This makes MPW a slightly risky play, but the risks are far from unacceptable given the yield and potential growth. By focusing on real estate for a lucrative high-growth industry, MPW delivers considerable revenues and is unlikely to see the kind of headwinds that retail REITs may experience thanks to the growth of eCommerce.

 

Medical Properties Trust isn’t the safest REIT around, but it may be a good one to consider adding to the income-generating portion of your portfolio if you don’t mind a bit of uncertainty.

 

Like most REITs, MPW is definitely in the buy-and-hold category. Investors who are willing to buy in early, remain patient and reinvest their dividends could see substantial rewards as the company continues to grow.

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