Ben Reynolds is a leading specialist in income generating strategies; in his Top 10 REITs newsletter, the advisor highlights two current favorites among health property real estate investment trusts.
Founded in 2003, Medical Properties Trust (MPW) is the only pure-play hospital real estate investment trust (REIT) today. It owns a well-diversified portfolio of over 400 properties which are leased to over 30 operators.
Most of its assets are general acute care hospitals and are well diversified geographically, with properties in 29 states to mitigate the risk of demand and supply imbalances in individual markets. Medical Properties also has exposure to key European markets, including Germany, the UK, Italy, and Australia.
The medical industry is generally resilient to recessions, making Medical Properties a fairly defensive stock. Thanks to its conservative funds from operations (FFO) payout ratio of ~64% and sufficient liquidity levels, the dividend is considered safe in the absence of a severe downturn and MPW continues to grow it at a solid annualized rate.
That said, investors should keep an eye on its privately held primary tenant – Steward – which is potentially facing financial difficulties and could eventually threaten the REIT’s dividend safety.
Medical Properties has an impressive growth record, growing its FFO per share every single year over the last decade at a near 8.0% CAGR. Management expects its aggressive acquisition pipeline to combine with its inflation-linked net-leases to drive growth.
An expanding P/FFO multiple could boost shareholder returns by 12.9% per year. We also expect annualized FFO per share growth of 0.4%, along with the 9.4% dividend yield. We therefore expect annualized total returns of 18.8% over the next five years.
Healthcare Realty Trust (HR) was founded in 1992, and has grown from a portfolio of 21 healthcare facilities to now being invested in over 700 properties in the U.S. The Trust’s portfolio primarily consists of multi-tenant, on-campus medical office buildings that provide stable occupancy, high tenant retention, and reliable growth.
Last July, Healthcare Realty completed its strategic combination with Healthcare Trust of America and created a superior medical office building REIT. The combined company boasts improved market scale, increased diversification, and a stronger, more flexible balance sheet.
Acquisitions will be the main growth driver for Healthcare Realty. Additionally, a joint venture with TIAA allows for the trust to continue investing larger amounts of capital by diversifying its funding sources. Also, the trust predicts that average in-place rent increases, and future annual contractual increases for leases will further bolster FFO growth.
Healthcare Realty trades at 12.4 times AFFO estimates for 2022, which is below our estimate of fair value at 18.0 times AFFO. This implies an 8.0% annualized tailwind to total returns. Combined with the 3.0% expected growth rate and 5.9% starting dividend yield, we expect total annual returns of 15.0% over the next five years.