MPW - 3 Fast-Growing Medical REITs At Attractive Prices

Summary

• This year's sell-off across the REIT sector has created a lot of bargains. Hoya Capital Income Builder makes it easy to spot them.
• There are three Medical REITs showing strong growth in revenue, dividends, and cash flow, yet available at unusually attractive prices.
• 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 those three companies.

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%).

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.

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

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

1. Sale/Leaseback
2. 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.

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.

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.

*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.

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.

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

The weighted average interest rate on CHCT's revolving line of credit balance of $307 million is 4.47%, and 3.79% on its term loans. The company faces no maturities in 2023, 2025, or 2027.

Dividends

CHCT pays a fatter-than-average 5.08%, and despite a payout ratio of 80%, the dividend gets a safety grade of B- from Seeking Alpha Premium. This company has raised its dividend a quarter of a penny every quarter of its existence, like clockwork.

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

Bottom line: CHCT

CHCT offers an interesting combination of above-average yield and below-average price, with a balance sheet ready for any conditions, and a dividend almost guaranteed to remain the same or increase.

Global Medical REIT

Global Medical REIT is a small-cap net-lease medical office REIT that acquires purpose-built specialized healthcare facilities and leases them to healthcare systems and physician groups with leading market share. The company owns 189 properties totaling 4.9 msf (million square feet), leased to 269 tenants. The weighted average lease term is 6.4 years, and the weighted average cap rate for all acquisitions is a tasty 7.7%.

The top 10 tenants account for only 36% of ABR.

About two-thirds (67.3%) of GMRE's assets are MOBs (medical office buildings). Rehab facilities make up about one-sixth (17.5%).

The company does not focus on any particular geographic area. Texas and Florida lead the way with 18% and 10% of ABR, respectively.

The core of GMRE's business model is using a network of referral agents to locate off-market opportunities with price tags between $5-$20 million, and a highly disciplined selection process, seeking characteristics that will drive occupancy and profitability, targeting $200 million in annual acquisitions. Through September 30, they are right on schedule, with $149 million in 14 acquisitions totaling 583,000 leasable square feet.

According to the company's latest 10-Q , in Q3 2022, GMRE reported revenues up 18.1% from Q3 a year ago, and net income up 118%, thanks largely to some timely and profitable dispositions. FFO was up 2.4%, and AFFO ticked up 4.2%. EBITDAre rose 11.4%, with adjusted EBITDAre up 10.4%. Cash from operations for the first 9 months was up 12.7% YoY.

The biggest knock against GMRE is the financial soundness of its tenant base . However, this company is diligent in vetting its tenants, so any such risk is Medical sector-wide, and not confined only to GMRE.

Growth

GMRE's revenue and cash flow took a step back during COVID, but more than made up for lost time in 2021, before settling back toward more normal FROG-worthy double-digit rates this year.

*Projected, based on Q3 2022 results

Balance sheet

GMRE's balance sheet is neither weak nor particularly strong, coming in almost dead average on liquidity, debt ratio, and Debt/EBITDA. Like CHCT, GMRE is a Tadpole.

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

Valuation

Given its growth rate and robust dividends, GMRE sells at a surprisingly low Price/FFO of 10.7, and a 16.5% discount to NAV.

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

Bottom line: GMRE

GMRE offers a hard-to-resist combination of inflation-beating yield, with dividends that are likely to remain the same or increase, all at an attractive price.

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