Medical Properties: A Stock for Long-Term Dividend Investors (NYSE:MPW)

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Investment thesis

Medical Properties Trust (NYSE: MPW) is a self-managed real estate investment trust (REIT). They acquire and develop healthcare facilities and lease them to operators under long-term net leases where the tenant bears most of the maintenance costs. Although not their main line of business, they also provide mortgage loans to the operator, securing real estate assets.

Medical Properties Trust has grown rapidly since its inception in 2003 and now has investments in 437 facilities with 46,000 licensed beds in the United States, Europe, Australia and South America. In times of uncertainty and high inflation, a quality REIT like Medical Properties Trust is a great place to put your money. I believe Medical Properties Trust is an excellent investment for the long-term dividend investor because:

  • Medical Properties Trust posted exceptional results in 2021, surpassing the record performance of 2020.
  • Medical Properties Trust continues to grow rapidly, while simultaneously reducing exposure to its main tenant (Steward Health).
  • They have very strong cash flow and the dividend is safe. Their inflation-protected leases provide additional insurance for shareholders.

Excellent 2021 results for MPW

Medical Properties Trust reported profits in early February, and they were outstanding. Normalized Adjusted Operating Funds (AFFO) per share for 2021 was $1.75, indicating double-digit growth over 2020. This is noteworthy given that their 2020 AFFO was up 17% year-on-year annual. Looking at revenues across all segments, billed rents increased by 25%, linear rents increased by 52%, finance leases decreased by 2%, and interest and other income increased by 18%.

Medical properties Financial results

Financial result (SEC)

This solid performance is a testament to the superb business model and the quality of their management team. In a year filled with many challenges covering labor shortages, office closures and outbreaks of new variants of Covid, the achievement of results by Medical Properties Trust is truly remarkable. Not only have they managed current operations well, but they have also completed numerous acquisitions in 2021 to fuel additional growth.

Aggressive but well controlled growth

Over the past decade, Medical Properties Trust has grown very aggressively. Their gross assets grew by 31% annually between 2010 and 2020, and they show no signs of slowing down. They started 2021 with a $1 billion+ investment in one of the UK’s leading behavioral health providers (Priory Group). In October 2021, they acquired 18 additional behavioral health hospitals and a stake in operator, Springstone LLC. Additionally, they acquired 5 general acute care hospitals in South Florida from Tenet Healthcare.

Medical Property Trust Growth Trajectory

Growth trajectory of Medical Properties Trust (Medical Properties Trust Investor Relations)

These acquisition targets follow a very aggressive growth plan, which remains well controlled. They add geographic diversity (32 different states in the US and around the world) and functional diversity (general acute care, behavioral health, inpatient rehabilitation, etc.). In addition, they have actively reduced exposure to their main tenant (Steward Health), which now represents less than 19% of their portfolio. This well-diversified portfolio offers great operational stability and reduces the risk of overexposure to a particular region or single trader.

Medical Properties strong cash and risk management

In recent years, their AFFO has grown well and the pace of growth is accelerating. The AFFO growth rate for 5-year CAGR, 3-year CAGR, and 3-year CAGR is 3.74%, 6.01%, and 13.22%, respectively. Reflecting this strong cash flow growth, the dividend has kept pace. The 5-year dividend growth rate was 4.24%, and they just announced another 4% dividend increase in mid-February. Given their aggressive growth trajectory, I expect the dividend payout to continue to grow for the foreseeable future.

Another area where Medical Properties Trust takes care to manage risk is by including an inflation protection clause in its lease structure. Almost all of their leases contain some sort of rent escalation, and about 90% of agreements have inflation-adjusted escalations. As we are all very familiar with inflation these days, this inflation-protected lease provides an extra layer of assurance to shareholders.

I really find this clause insightful. We’ve been living in a sub-3% inflation environment for a few decades at this point, so I haven’t thought about that clause too much before. However, I now understand that having this type of clause in their lease structure shows the experience and thoroughness of the management of Medical Properties Trust.

Medical Property Trust Lease Structure

Medical Properties Trust Lease Structure (Medical Properties Trust Investor Relations)

Medical Properties - Inflation Protected Leases

Inflation protected leases (Medical Properties Trust Investor Relations)

MPW Share – Fair Value Estimate

Based on price versus AFFO, the Medical Properties Trust is significantly undervalued by the market. Their AFFO price ratio is 14.6x, which is well below the industry median of 20.0x. Based on the price/FFO ratio, a similar undervaluation is observed. Given Medical Properties Trust’s superb growth trajectory and strong cash flow, I believe this undervaluation is unwarranted and expect its stock price to appreciate near the median of the sector. This price move would represent stock appreciation of around 25% as well as a strong dividend yield of 5.7%.

Risk

Although Medical Properties Trust is doing an excellent job of managing its portfolio and reducing the risks associated with tenant concentration, their largest tenant, Steward Health, still represents 19% of the portfolio. Therefore, an underperformance of Steward Health would have a material negative impact on Medical Properties Trust. However, Steward performs very well with near 3x coverage. Meanwhile, Medical Properties Trust continues to reduce its exposure. Therefore, I believe that this risk of tenant concentration is managed.

Medical Properties Trust’s aggressive growth trajectory is very exciting to watch as an investor. However, aggressive growth means heavy borrowing, and Medical Properties Trust does not have a strong balance sheet. They are highly leveraged ($10.91 billion vs. cash $459 million) and their leverage ratio (134%) is one of the highest in the peer group. Therefore, the investor should pay attention to his level of indebtedness and his ability to service the debt.

Conclusion

Medical Properties Trust presents an excellent investment opportunity for a long-term dividend investor. They’ve grown at a rapid pace for a while, and I expect them to continue to do so. They have diversified their portfolio geographically and functionally to reduce risk. AFFO has made good progress and I expect them to increase their dividend payout in line with their past rate (~4%). Investors should monitor the balance sheet as well as the performance of Steward Health given their relatively high exposure. I expect a 25% upside on top of the 5.7% dividend yield going forward.

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