3 Fast-Growing Medical REITs At Attractive Prices

Happy millennial indian lady doctor in coat with phonendoscope raises hands and shows fingers up — Prostock-Studio/iStock via Getty Images

Thanks to the sell-off in REITs this year, there are a number of strong Medical REITs on sale at attractive prices. Hoya Capital Income Builder makes it easy to spot them.

Although Medical REITs have slightly outperformed the REIT average this year (see chart below), that isn’t saying much, since the average total return for the REIT sector overall YTD is a dismal (-26.01%).

List of 18 REIT sectors, showing Healthcare running in 8th place, with a return of (-24.97)% — Hoya Capital Income Builder

Amid the carnage, the average Yield for the sector has soared to 4.93%, and the average Price/FFO has fallen to just 15.7. Yet there are three Healthcare REITs showing strong growth in revenue and cash flow, that are available at even more attractive prices. Still more remarkably, while most Medical REITs were forced to cut or suspend dividends in response to the COVID crisis, all three of these companies maintained or increased their dividends.

This article spotlights growth, balance sheet, dividend, and valuation metrics for Medical Properties Trust (MPW), Community Healthcare Trust (CHCT), and Global Medical REIT (GMRE).

Medical Properties Trust

Established in 2003 and headquartered in Birmingham, Alabama, MPW owns 434 properties, primarily hospitals (80%), leased to 54 tenants in 10 countries, primarily in the U.S. and Europe. MPW is the second-largest non-governmental owner of hospitals in the world.

map of globe, showing heavy concentration of MPW assets in U.S. and Europe, with small numbers in South America and Australia — Medical Properties Trust website

The company develops new hospitals as well as acquiring, expanding, and renovating existing ones.

pie chart showing data as described in text. — Medical Properties Trust website

The core of MPW’s business model is unlocking the value of hospital real estate for growth, through two mechanisms:

Sale/Leaseback
Investments in hospital operators

This allows hospital operators to improve their financial positions, gain liquidity, reduce taxes, and increase operating flexibility, all while maintaining control over the facility. The weighted average lease is an ultra-lengthy 17.6 years.

pie chart showing MPW asset mix: over 70% general acute hospitals, 10-13% behavior health facilities, 9% inpatient rehab facilities, 11% other — Medical Properties Trust website

Latest quarterly returns showed Adjusted FFO up 6.9% YoY, (5.9% on a per-share basis), and net income per share attributable to stockholders up 27.5%.

The biggest knock against MPW is a lack of diversification in its tenant roster. Its largest tenant accounts for 29.5% of Q3 2022 revenues, and its top 5 account for 58.5%, making the health and success of these operators crucial to MPW’s results.

table of data as described in text — Q3 2022 Earnings Supplemental for Medical Properties Trust

Growth

Although the rate of growth in revenues for MPW slowed sharply this year, and cash flow backpedaled, the 3-year growth rates are FROG-worthy double digits across the board, and continued sizzling, right through the pandemic.

Metric	2019	2020	2021	2022*	3-year CAGR
FFO (millions)	$536	$758	$976	$1075	—
FFO Growth %	—	41.4	28.8	10.1	26.1%
FFO per share	$1.30	$1.57	$1.75	$1.81	—
FFO per share growth %	—	20.8	11.5	3.4	11.7%
TCFO (millions)	$494	$618	$812	$744	—
TCFO Growth %	—	25.1	31.4	(-8.4)	14.6%

*Projected, based on Q3 2022 results

Balance sheet

MPW’s balance sheet is bond rated, but the company’s debt ratio is a little high at 45%. Its liquidity of 1.86, coupled with its double-digit growth rates, qualifies Medical Properties Trust as a bona fide FROG. The weighted average interest rate on the company’s debt is 3.463%, with maturities building to a peak in 2026.

Company	Liquidity Ratio	Debt Ratio	Debt/EBITDA	Bond Rating
MPW	1.86	45%	6.6	BB+
Medical REIT avg	2.02	30%	7.4	—
Overall REIT avg	1.90	25%	6.2	—

Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations

Dividends

MPW pays an inflation-beating 9.83% yield. The company’s 3-year dividend growth rate of 4.4% is far better than the Medical REIT average, and the Dividend Score of 11.19 is nothing short of sensational. With a payout ratio of 60%, the Dividend Safety score assigned by Seeking Alpha Premium is a picture perfect C+.

Company	Div. Yield	3-yr Div. Growth	Div. Score	Payout	Div. Safety
MPW	9.83	4.4%	11.19	60%	C+
Medical REITs	4.93	(-4.3)%	4.32	70%	C
REITs overall	3.86	6.3%	4.61	59%	C

Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium

Dividend Score projects the Yield three years from now, on shares bought today, assuming the Dividend Growth rate remains unchanged.

Valuation

At a Price/FFO ratio of just 6.5, and a 27.6% discount to NAV, Medical Properties Trust is dirt cheap.

Company	Div. Score	Price/FFO ’22	Premium to NAV
MPW	11.19	6.5	(-27.6)%
Medical REIT average	4.32	15.7	(- 2.9)%
Overall REIT average	4.61	17.1	(-15.0)%

Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations

Bottom line: MPW

MPW offers a practically irresistible combination of strong growth, inflation-beating dividends that are unlikely to be cut, and dirt cheap price.

Community Healthcare Trust

Founded in 2014, and headquartered in Franklin, Tennessee, small-cap CHCT owns over 160 medical facilities totaling some 35 msf (million square feet) spread across 34 U.S. states, currently enjoying 90.8% occupancy.

map of U.S., showing CHCT assets most concentrated in Texas and Illinois, along with Ohio and Florida, but spread across 34 states, including all but 3 of those east of the Mississippi River — CHCT website

About 30% of CHCT’s revenue comes from MOBs (medical office buildings), with 16% from AIBs (acute inpatient behavior facilities), and another 19% from IRFs (inpatient rehab facilities). The full breakdown is shown below.

pie chart and table, depicting data as described in text. — CHCT Q3 2022 Earnings Supplemental

The core of CHCT’s business model is leveraging the personal relationships between the management team and a wide array of medical providers, built up over many years in the medical real estate business, to discover off-market or lightly-marketed acquisition opportunities in secondary markets. Thus, they avoid competitive bidding and secure properties at favorable prices, resulting in cap rates well above average.

Latest quarterly results for CHCT show FFO up 4.0% from Q3 2021 (3.6% on per-share basis), and AFFO up 7.2% (6.8% per share), according to the company’s Q3 2022 earnings supplemental. Rental income is up 6.5% and NOI (net operating income) is up 6.7% (5.0% per share). Adjusted EBITDAre is up 6.6%. The company has added a net $53 million worth of properties thru the first nine months of this year, bringing the total portfolio value to $890 million. This is a significantly slower pace than in previous years, but still solid, given the interest rate environment.

The biggest knock against CHCT is its occupancy rate, which was expected to stabilize in the low 90’s, but at times has dipped into the high 80’s, with significant consequences for internal growth. Tenant diversification is also far from ideal, with the top two tenants accounting for 20% of ABR.

pie chart depicting data as described in text — CHCT Q3 2022 Earnings Supplemental