CA - Better High-Yield Healthcare REIT Buy: Medical Properties Or Physicians Realty

Summary

• Medical Properties Trust, Inc. and Physicians Realty Trust are both high-yield healthcare REITs.
• Their share prices were both down sharply in 2022.
• We compare them side by side and offer our take on which is a better buy at the moment.

Both Medical Properties Trust, Inc. ( MPW ) and Physicians Realty Trust ( DOC ) are high-yield healthcare real estate investment trusts ("REITs"). Both also saw their share prices plunge in 2022:

In this article, we will compare them side by side and offer our take on which one is a better buy at the moment.

Medical Properties Vs. Physicians Realty - Balance Sheet

MPW's balance sheet is not great, as it earns a junk rating by S&P, though only one notch below investment grade at BB+. However, it also has a negative outlook on that credit rating, so it could face a downgrade to two notches below investment grade in the near future if it does not take measures to shore up its financial outlook. As S&P recently stated :

Medical Properties Trust's increased exposure to its top tenant Steward, as well as the heightened concerns around Steward's indeterminate credit quality, have pressured our view of its business risk...Though not all of the details surrounding the situation have been disclosed, Steward's failure to deliver its 2021 audited financial statements and address its ABL facility in a timely manner, along with its need for continued financial support from MPW over the past year, have further called into question the credit quality of Medical Properties Trust's largest tenant.

On the other hand, its balance sheet appears to be solid for the foreseeable future - provided that Steward continues to pay rent - thanks to FFO interest coverage of 2.19x and EBITDA interest coverage of 3.61x. Its current ratio is also very conservative at 5.80x.

DOC, meanwhile, boasts a BBB (stable outlook) credit rating from S&P. Its balance sheet has minimal corporate level debt maturing through 2024, and no mortgage debt until $60 million matures in 2024. As a result, it is in excellent position to weather the current rising interest rate environment. On top of that, its funds from operations ("FFO") interest coverage ratio is 3.82x and its EBITDA interest coverage ratio is 4.39x. As a result, DOC is on rock-solid financial footing, and we give it the clear edge here over MPW.

Medical Properties Vs. Physicians Realty - Business Models

Despite all of the press highlighting the risky nature of its business fundamentals, MPW's business model is actually quite conservative in nature for the following reasons:

(1) It has withstood numerous macro challenges (including the Great Financial Crisis and COVID-19) and delivered outperformance of the broader REIT sector ( VNQ ) over time, even after including the massive selloff this past year:

(2) It is competitively positioned as the clear leading investor in hospitals, resulting in access to deal flow, sector expertise, partnerships with large alternative asset managers like Brookfield ( BN , BAM , BBU ), and cost of capital advantages over potential competitors.

(3) It employs conservatively constructed contracts with tenants. These typically involve master triple net leases that give it senior positioning in the capital stack and considerable bankruptcy court protection. Its triple net leases mean that MPW has very little in the way of operating or capital expenditures on its assets and it also has put CPI-based escalators in most of these contracts that are among the very best in the industry. As management said during MPW's recent Q2 earnings call :

We estimate that our cash rents will increase in 2023 over 2022 by about $57 million as a result of our inflationary escalators. That's an average increase across the portfolio of approximately 4.4%. Applying an estimated and arbitrary blended capitalization rate of 6.5% to this incremental cash results in the equivalent of about $875 million of additional leased real estate, for which we have 0 cost of capital.

So, in capital markets that are temporarily squeezing investment spreads, we are very pleased with the built-in improvements in yield that we expect beginning early in 2023. And of course, that's on top of the previously disclosed 2022 escalation.

(4) Its hospitals are carefully underwritten to be highly profitable at the asset level, with solid cash flow coverage of rents. Furthermore, these hospitals are almost universally considered mission-critical and are in locations where if the current tenant was forced to vacate the property, it could very likely re-tenant the property at similarly attractive terms.

That said, it does have tenant health and concentration risks, especially in the wake of selling some non-Steward operated assets in recent quarters. As a result, it is pretty heavily concentrated in Steward operated properties even as it provided a $150 million loan to Steward in Q2 2022 to support its ongoing financial solvency. As a result, MPW cannot be assigned a low-risk label, but if it can navigate its Steward risks, it is not high-risk either.

DOC, meanwhile, is conservatively positioned. It employs a triple net lease model as well and has a high portfolio leased rate of 95%. It also generates 97% of its rent from medical office buildings. However, unlike MPW, its tenants are much healthier, and it derives 66% of its rent from investment grade tenants. It also has very few near-term lease expirations, with the vast majority coming in 2026 or later.

While this obviously paints a very stable cash-flow profile for DOC, it lacks inflation-linked rent escalators, so it is not a great pick to insulate your passive income stream against inflation. Nevertheless, thanks to its strong risk management practices, DOC has significantly outperformed VNQ over time:

Medical Properties Vs. Physicians Realty - Dividend Outlook

When it comes to commitment to growing its dividend, MPW stands head and shoulders above DOC:

That said, moving forward, analysts expect MPW to slow its dividend growth significantly given its tenant solvency issues. Through 2026, MPW is expected to grow its dividend per share at a meager 1.8% CAGR, while DOC is expected to grow its dividend per share at an only slightly better 2.3% CAGR.

Medical Properties Vs. Physicians Realty - Valuation

DOC looks undervalued based on a plethora of metrics. For example, its EV/EBITDA of 16.57x is below its five-year average of 17.50x. Moreover, its price to funds from operations ("FFO") ratio is 14.19x at the moment - below its five-year average of 15.91x - and its price to AFFO (adjusted FFO) ratio is 14.93x compared to its five-year average of 17.38x. Last but not least, its forward dividend yield is 6.16%, which is well above its five-year average of 5.38% while its price to NAV is 0.90x, below its five-year average of 0.97x.

MPW looks even cheaper on both a comparative basis as well as relative to its own historical averages. Its EV/EBITDA of 12.50x is well below its five-year average of 14.44x. Furthermore, its price to FFO ratio is 7.02x at the moment, below its five-year average of 11.11x, while its price to AFFO ratio is 9.04x compared to its five-year average of 13.76x. Its forward dividend yield is 9.43%, which is significantly above its five-year average of 6.25%, and its price to NAV is 0.72x, way below its five-year average of 1.13x.

Investor Takeaway

Physicians Realty Trust is the clear winner for investors looking to sleep well at night ("SWAN") while collecting an attractive and safe dividend. Between the current yield, slight likely valuation multiple expansion, and low single-digit annualized per share growth in intrinsic value, Physicians Realty Trust appears poised to deliver ~10% annualized total returns in the coming years with relatively low risk.

In contrast, Medical Properties Trust, Inc. is not a sleep well at night REIT given the risks and uncertainties tied to its tenants like Steward. However, the total return potential here is enormous, as it could easily return 25%+ per year in the coming years if it can successfully navigate the issues faced by its tenants. As a result, we rate Physicians Realty Trust to be a Buy and Medical Properties Trust, Inc. to be a speculative Strong Buy.

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