Why I think it’s the best real estate stock
Real estate stocks are sometimes relegated to the “widows and orphans” section of investment accounts. They are generally low risk, low excitement and modest returns. At least they were, until recent years when real estate stocks first soared, thanks to easy money fueling increased demand, only to then tumble en masse. Many real estate stocks have fallen 30% or more this year. This represents an excellent buying opportunity for investors.
My favorite real estate stock is Medical Properties Trust (MPW 1.42%). Medical Properties is a niche REIT that owns and leases properties to hospital operators. It was founded to match REIT real estate and financing experts with hospital operators, who traditionally have the expertise to run a hospital but lack the knowledge to secure the significant financing needed to build a hospital. .
Medical Properties offers investors an attractive combination of growth, value, yield and economic resilience. Like most real estate stocks, it’s down this year – currently around 34%. Investors who can hold their noses in the short term will likely reap good long-term gains. Let’s see why Medical Properties is a good value now.
Growth and value
Medical Properties is in growth mode. It has more than doubled its total assets since 2019 and acquired an additional $12 billion worth of properties during that time. Revenues have grown from $850 million in 2019 to $1.5 billion in 2021.
Thanks to this growth profile, the stock has outperformed other healthcare REITs over the past three, five and ten-year periods. Usually, investors have to pay for growth stocks, but this year’s decline in stock prices may have provided an opening for bargain hunters.
The REIT trades for a price-to-earnings (P/E) ratio of 8.4 and a price-to-book (P/B) of 1.05. Its five-year averages for the two ratios are 17.56 and 1.46, respectively. As late as 2021, it was trading at a P/E of 24.61. If the shares returned to the average multiple, it would cause the share price to increase by almost 300%.
Wall Street is certainly down on the title, but is it justified? The problem may be future growth potential.
As interest rates rise, it becomes more difficult and more expensive for the REIT to finance new hospital acquisitions. Management estimates it will be able to make between $1 billion and $3 billion in new purchases this year, but the total will depend on what it can finance with equity. This potentially means selling existing properties or through joint ventures.
The REIT probably won’t grow as fast over the next few years as it has over the past five years, but its price is currently showing no growth at all.
Medical Properties’ current dividend yield is 7.3%, an amount that would be mouthwatering for even the most aggressive growth investor. The REIT has paid a dividend quarterly since October 2004. During this period, the dividend has increased from $0.10 per share to $0.29 per share. That’s not amazing dividend growth, but remember that the REIT is focused on growing its business as well as paying dividends.
Let’s use the dividend payout ratio to determine if the dividend is sustainable. Over the past 12 months, Medical Properties has paid a total of $1.16 per share in dividends and earned $1.87 in diluted earnings per share. This means that she paid dividends equal to 62% of her net income. There is plenty of room to continue paying dividends.
We can also compare the REIT’s dividends paid to funds from operations (FFO), which is an industry-specific measure of cash flow. In 2021, Medical Properties achieved an adjusted FFO of $1.36 per share and paid $1.12 per share in dividends. According to a recent management presentation, it has increased its adjusted FFO and dividend for 10 consecutive years.
The last part of our analysis is the economic resilience of the REIT. It may surprise you that I’m writing this about a stock that’s fallen 34% in six months, but remember, it’s what happens to the company that matters. If the stock price drops 34% and the company still generates the same cash flow, it just means the stock might be undervalued.
Medical Properties is uniquely designed to withstand both an economic downturn and a period of prolonged inflation. It can do both because its tenants have significant pricing power – ensuring their ability to keep paying rent – and they are essential businesses.
In times of economic downturn, people still have to go to the hospital. If prices go up, people still have to pay for their health care. Medical Properties is unlikely to experience the level of vacancy that other REITs would experience in a recession, and it has built in price escalations into its leases to benefit from inflation.