The market’s tantrums have created a big opportunity in a defensive healthcare REIT. Medical Properties Trust (NYSE:MPW) is now at the low end of its valuation range and set to embark more dividend increases.
In our experience, it is rare to get growth at a very cheap price. When that happens, it is usually with a very high risk. So when we find a low-risk defensive healthcare REIT producing growth and trading at a ridiculously low multiple, we do get excited.
MPW owns and leases acute care hospitals and inpatient rehabilitation services. It has over 269 properties in 5 countries, which are leased to over 30 operators. The company recently signed definitive agreements to acquire the real estate interests of 11 hospitals across four states to be operated by Steward Health Care in a deal worth $1.4 billion. Let us tell you why this is the steal of the decade.
1) The extremely well-covered dividend
MPW currently yields 7.3%, and the dividend results in a payout ratio of just 74%. With an average lease term of over 10 years and comfortably staggered debt maturities, the dividend is safe as it can get.
2) A dividend hike is definitely in the cards
At the high end of the 2018 guidance, the payout ratio for MPW will drop to 66%. We think that is pushing the margin for cushion, and the company will definitely hike its dividend next year. Additionally, based on REIT rules requiring payout of 90% of net income, MPW will be brushing against this limit as well if it does not hike.
3) A very underappreciated history of growth
Between 2011 and 2018, MPW will have delivered FFO growth of 9.4% compounded. That is quite a performance for any company, but is even more impressive for a REIT due to the high dividend payout that restricts internally available funds.
Source: MPW’s annual reports
Additionally, MPW delivered this growth while diversifying into Europe during this time frame and having to contend with a rapidly depreciating euro between 2014 and 2016.
4) A valuation that is extremely compelling
Sentiment swings like a pendulum, and often companies can do really well for long periods of time and not be rewarded for the success. The 8-year chart of MPW is a good case study for this.
Looking at the forward FFO multiple, MPW traded as low as 9X FFO in 2012 before rocketing to a 16X multiple. Currently, it is still at the low end of its range, and we think the odds are high that this growing FFO will get noticed. Going forward, we think MPW will deliver twice the growth of the stock market, at half the multiple and definitely much lower risk. That creates a large valuation gap, which should at least get partially filled.
We have found no comparable healthcare REIT that has recently delivered such growth and still trades so cheaply. The closest, in our opinion, would be Omega HealthCare Inc. (NYSE:OHI), but OHI has delivered such growth at the expense of deteriorating rent coverage of its underlying tenants, while MPW’s tenants still boast a 3X+ EBITDAR coverage. While the sub-sectors are different, the numbers are what the numbers are, and there is no doubt in our minds as to which is the riskier stock. On our scale of 1-10, where 1 would be “Avoid like the bubonic plague” and 10 would be “Buy like this is Apple (NASDAQ:AAPL) in March 2009,” I would rate MPW an 8, and it made it to our top pick in our global REIT portfolio.
Note: Please note that this is not financial advice. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
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Disclosure: I am/we are long OHI, MPW.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Dividend Hike Coming From This Undervalued Healthcare REIT – Medical Properties Trust, Inc. (NYSE:MPW)