If you’re looking for a sound REIT in the healthcare space—one with excellent dividend growth potential and hard to find value, then you’ll definitely want to read today’s Wicked Capital company analysis of Medical Properties Trust (MPW)
This analysis was performed for our Wicked Capital passive income portfolio (PIP) that we share on our site with you. There are some key reasons why I’m conducting this analysis and I wanted to quickly share the reasoning behind it and how it fits into our portfolio strategy for our PIP.
First, we have (or I should say, had) a position in InfraReit (HIFR). The company agreed to a purchase by Oncor last fall and that sale has been finalized. This means HIFR no longer exists and we’ll be receiving cash for our holding in the agreed upon amount.
While we could simply let this cash be reinvested back into the current portfolio, we have decided to replace the position with another promising—passive income producing—holding. Thus, the question becomes what exactly to hone in on.
We’re looking to stay in the same “pie”, meaning the real estate subclass of Financials. While I liked the diversity HIFR provided by being an electric-oriented REIT, I wasn’t sold on sticking with that arena [below is a listing of our current real estate diversification].
Given the outlook for healthcare (based on the “silver wave” of the aging populace), we decided to do a deep-dive in that class of REITs to see if we could find a great dividend growth company (with value and quality factor exposure) to increase our concentration in healthcare real estate.
Given the sector rotation into REITs (especially health care related ones), this proved to be a challenging quest. However, I think we found our target in MPW.
So, on with our company analysis…
Founded in 2003, Medical Properties Trust, Inc. (MPW) is a real estate investment trust (REIT) with a market cap of $7.2B. The company focuses on investing in and owning net-leased healthcare facilities, meaning it investments in healthcare real estate and leases the facilities to healthcare operating companies under long-term net leases.
The company’s 2018 Annual Report sums it up eloquently:
In fact, at the close of 2018, the company owned 33,000+ hospital beds in 287 properties (nearly all being licensed hospital facilities) in 6 countries, spanning 3 continents. Interesting fact: MPW is the largest non-governmental owner of hospital beds in the world.
It’s noteworthy that their growth through acquisitions is expected to continue in 2019. The company stated that “Our recently announced agreement to acquire and lease back 11 premier hospitals in Australia… is the first of what we expect to be several major acquisitions in 2019.” (2018 Annual Report). These acquisitions are especially promising given MPW’s intentions to target acquisitions that (a) produce inflation-protected rents, (b) diversify risk, and (c) deliver immediate accretive FFO growth.
This strategy has proven to be exceptionally successful, as demonstrated by the 446% total shareholder returns the company has delivered since its founding:
While this is all encouraging, per our dividend growth investing strategy, we need to examine the company’s metrics in a number of key areas as defined by our factor investing approach—namely, quality (profitability, earnings growth, and debt) and value, along with it’s recent and forward-looking dividend performance.
MPW’s revenues have grown at an impressive 25% CAGR over the past 4 years. Add to this a matching 30% CAGR in earnings per share (EPS). We have adjusted this EPS growth to reflect a large asset sale in 2018. This is why it is important to carefully dissect financial reports to ensure you aren’t getting a distorted picture!
The company appears to be well-positioned for sustainable growth:
Source: MPW 2018 Annual Report
In terms of profitability, MPW has an impressive net margin of 67.5%, and strong performance metrics to match: 22.9% ROE, 10.99% ROA and 11.36% ROI. It is noteworthy that both its gross and net margins rate at the very top of the industry. In fact, the company’s gross margin has exceeded the industry average for each of the past five years.
MPW has a current debt-to-capital ratio of 47% (comfortable) and a 5.5 interest coverage (not excellent, but certainly solid).
We analyzed a lot of other factors, but the above represent a fair and accurate summary of our findings. From a quality perspective, MPW checks all our boxes.
Before looking at the value proposition, let’s take a look at MPW’s dividend performance (not a primary trigger for us, but an important indicator given that we are dividend growth investors).
The stock has a current yield of 5.48% and a 5-year dividend CAGR of 3.55%, with consistent increases (albeit, a small sample size—but, as we’ve pointed out, we place a much higher weight on recent data).
Based on current price and estimated dividend growth, we get the following projected yeilds-on-cost (YOC):
They have a low payout ratio for a REIT—providing plenty of room to grow in the future following their aggressive near-term asset accumulation strategy.
The company’s guidance on and commitment to its dividends were clearly stated in its 2018 annual report: “This year marks our sixth consecutive year of increasing our cash dividend… and we expect to increase it further.”
Thus, our dividend analysis supports our quality findings. So, it’s down to value…
As we’ve stated, finding value in the REIT market (especially in the healthcare space) is very challenging these days. As volatility and recession fears increase, money is rotating into this sector—driving up prices and reducing value.
You may be asking yourself (correctly I might add), why are you seeking value in this sector—doesn’t that run contrary to your sector rotation approach? We don’t typically do this—choosing instead to look for value in sectors feeling rotational pressures. However, this is a long-run play on a specialized component of the REIT space (healthcare) that is based on future demand projections and is one we feel comfortable with making an exception for.
Having said that, MPW also provides a reasonable level of value in our opinion. We are in this for the long-run, and believe, with cost-averaging and the company’s expected future growth/dividend increases, that it provides the kind of value we are looking for—good forward-looking value.
From a trailing PE perspective, MPW is significantly undervalued against both its own 5-year average (-70%) and the specialized REITs industry average (-84%).
From a forward PE perspective, MPW is overvalued against its own 5-year average (+20.1%). However, it remains undervalued within the REIT space (-30.2%), which is important since we are looking for value within this specific industry.
We calculate (and yes, there are different ways to calculate PEG) that MPW is undervalued against its own 5-year average (-11.9%) and against the REIT average (-35.9%) based on a 2-year forward PEG (we prefer to use a 2-year CAGR estimate).
Thus, we feel MPW represents a tremendous value within the industry and to its own trend when growth is factored in.
If you’re looking for a sound REIT in the healthcare space—one with excellent growth potential and hard to find value, then Medical Properties Trust may be for you.
Our analysis finds that that MPW checks all our strategy boxes (growth, quality and value) for our passive-income, dividend investing portfolios. The one caveat might be beta (since its initial offering, it has traded in a rather wide range); however, this factor is offset by exposure to the smaller-cap factor.
If you are intrigued and pondering whether MPW might be a good fit for your portfolio, we encourage you to take the time to do your own deep-dive analysis. Don’t ever take our—or anyone else’s—word for it when it comes to analysis. Fundamental analysis is subjective and we are operating in a probabilistic system—meaning it’s as much an art as a science. Perform your own due diligence and see if you come to the same conclusion as we have.
Best wishes and good investing!
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