Anyone watching Thursday’s trading session, which saw the S&P 500 lose almost 6% in a single day, knows that the current market volatility can be a difficult to stomach on a day to day basis.
One area that investors can take comfort is in a safe and reliable dividend. A company that offers a high and safe dividend yield could thus be a good bet, and I believe Medical Properties Trust (MPW, Financial) is one such company.
Company background and quarterly highlights
Medical Properties is the only pure play hospital real estate investment trust, or REIT, in the world. The trust was founded in 2003 and had its initial public offering in 2005. Medical Properties owns more than 300 properties leased to more than 30 different operators in the U.S., Europe and Australia regions.
Source: Medical Properties’ Investor Relations
Nearly two-thirds of the trust’s properties are located in the U.S., with the United Kingdom making up the second largest component of the portfolio. Medical Properties had total pro forma gross assets of $16.5 billion at the end of 2019. The trust has a market capitalization of nearly $10 billion.
Medical Properties reported its first quarter earnings results on April 29. Funds-from-operation, or FFO, increased 19.4% to 37 cents, though this was 2 cents lower than analysts had expected. Revenue increased 63% to $294 million, which was $15 million lower than expected. Revenue was much higher year-over-year due to several large acquisitions that were completed since the first quarter of 2019.
Medical Properties has been busy on the acquisition front and added several properties during the first quarter. In total, Medical Properties added $861 million worth of hospitals spread out over the U.S., Spain and Portugal during the first quarter. The trust also closed on its previously announced acquisition of 30 acute care hospitals in the UK. The final purchase price was $2 billion. Showing how such an acquisition can benefit Medical Properties, FFO would have been higher by 2.4 cents per share had this acquisition been paying rent for the entire first quarter.
Medical Properties appears well suited to deal with the ongoing Covid-19 pandemic. The trust has $500 million in cash as well as a $1.3 billion revolving credit facility at its disposal. Medical Properties stated that its tenants paid 96% of rent and loan payments in May, which was the same percentage as April.
Dividend and valuation analysis
Following several years of a stagnant dividend, Medical Properties has increased its dividend every year since 2013. The trust’s typical pattern over this time is to raise its dividend by 1 cent per share every quarter. This continued when Medical Properties raised its dividend by for the payment made April 9, giving the trust seven years of dividend growth.
Medical Properties has raised its dividend by an average of:
- 3.9% per year over the past three years.
- 3.8% per year over the past five years.
- 2.4% per year over the past 10 years.
The most recent increase is very much in-line with the short and medium-term increases. Investors should expect to continue to see a 4 cent raise per year each year due to the trust’s historical consistency.
While the annual raise may not be exciting, Medical Properties offers a 5.6% dividend yield today. The trust has averaged a 6.8% yield since 2010. If the trust were to average the current yield for all of 2020, it would be the second lowest average annual yield since 2010. Only last year’s average yield of 5% would be lower. Still, today’s yield compares very favorably to the 2% average yield that the S&P 500 currently provides.
In addition, Medical Properties’ dividend is on solid ground. For the year, the trust should distribute $1.08 of dividends per share while generating an estimated $1.60 in FFO. This gives Medical Properties a FFO payout ratio of 68%. Not only is this below the trust’s average payout ratio of 82%, is extremely low for the REIT sector as a whole. Even better, Medical Properties’ FFO payout ratio has generally declined in a straight line from 111% in 2011 to just 73% last year. The payout ratio looks even more impressive when you factor in that Medical Properties has issued 270 million new shares of stock to help fund acquisitions.
In the first quarter, Medical Properties paid out $138 million of dividends while producing $107 million of free cash flow for a payout ratio of 129%. This figure would imply that the dividend could be in jeopardy of being cut, but investors should look at the larger picture when judging dividend safety. Last year, Medical Properties distributed $412 million of dividends while generating $494 million of free cash flow for a payout ratio of 83%. From 2016 through 2018, dividends paid totaled $909 million and free cash flow equaled almost $1.1 billion for a payout ratio of 83%.
As you can see, the long-term free cash flow payout ratio, though high, paints a much better picture of dividend safety. As stated above, REITs often have high payout ratios due to the nature of their structure. So as long as future payout ratios look closer to the 2016 to 2019 average, the dividend should be safe.
Even after rising more than 4% on Friday, shares of Medical Properties are still down 8.2% for the year. The stock currently trades hands at $19.38. Shares have a forward price-to-FFO ratio of 12.1 when using expected FFO for the year. The stock has an average price-to-FFO ratio of 12.2 since 2010. Therefore, I think a price range of 11 to 13 times FFO could be a good target range for the stock. This gives shares a target price range of $17.60 to $20.80. Shareholders could be looking at a downside of as much as 9.2% to a gain of 7.3% using the valuation target range and expected FFO for the year.
Final thoughts
Medical Properties is a fairly young REIT, but it is the only pure-play hospital trust in the world. The trust has been very active over the years acquiring strategic properties all with the goal of growing its business. This has allowed Medical Properties to raise its dividend for the past seven years even as the share count went up by an annual average of 14% over the last decade. While the most recent quarter saw a spike in the free cash flow payout ratio, the longer-term picture looks much more stable. The trust also has an extremely low payout ratio for a REIT. Shares are trading with a valuation nearly identical to its 10-year average, so share price gains from here might be limited, but the stock’s 5.6% yield looks both attractive and safe. For income investors, Medical Properties could be a solid investment option.
Author disclosure: the author does not have a position in any stock discussed in this article.
Read more here:
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