Medical Properties vs. Healthcare Actual Property: My Purchase One Returns 14.3% (MPW)

Healthcare spending will enhance materially, as healthcare spending in the US alone is predicted to develop by 8% of GDP between 2018 and 2040. Each Medical Properties Belief (NYSE: MPW) and Healthcare Realty Belief (NYSE: HR) represent two REITs within the state that, whereas they share some similarities, they’ll provide traders very totally different complete return profiles till the tip of the present financial tightening cycle. Medical Properties final introduced a quarterly money dividend $0.29 per share, in response to its earlier cost and 14.3% ahead yield. Healthcare Realty’s final quarterly dividend cost was $0.31 per shareadditionally in accordance along with his earlier cost and meant a ahead yield of 6.4%.

Crucially, the 790 foundation level dividend unfold is constructed on a major confounding of medical properties. The post-pandemic years of tenant issues mixed with a fast enhance within the Fed funds fee and successive quick stories. Healthcare Realty sports activities quick curiosity of three.72 p.c and its frequent inventory is down 27 p.c since final yr its fusion with the Healthcare Belief. The $7.4 billion REIT has struggled to comprehend the synergies of its merger and final reported fourth-quarter 2022 earnings that missed twice.

Medical Properties has a brief curiosity of 5.6 instances or 20.73% and a market cap of $4.85 billion, down 62% from final yr. That is in distinction to the dividend cost schedule, which has been broadly steady, rising at a 3-year compound annual progress fee of three.71%. This compares to a peer group’s 3-year CAGR of 0.83%. Healthcare Realty’s quarterly payouts have been roughly flat over the identical interval, regardless of disruptions within the timing of payouts on the again of the merger, which skewed its payout pattern. The REIT’s one-time particular dividend cost of $4.82 after the merger has once more skewed its dividend CAGR numbers, however its quarterly payout was $0.315 per share in 2020Q1.

Property portfolios

Medical Properties has grown its dividend through the pandemic years, and the Birmingham, Alabama-based REIT basically represents a transparent threat paradigm past what Healthcare Realty gives. To be clear, Medical Properties lately confronted a brief name that places it at a good worth of $3 per share. This could imply a 63 p.c drop from the present degree. It’s presently pursuing litigation towards these claims, and each different week appears to see extra bears. This isn’t a sleep properly in a single day REIT and Healthcare Realty is the plain selection by way of stability.

Nashville, Tenn.-based Healthcare Realty went public in 1993 and primarily owns medical workplace buildings adjoining to hospitals. This REIT owned 721 properties in 35 states totaling roughly 42 million sq. ft on the finish of the fourth quarter of fiscal 2022. Healthcare Realty differs from Medical Properties in that it has refined its portfolio primarily towards multi-tenant, on-campus medical workplace buildings. It additionally focuses solely on the US, with Dallas, Seattle and Los Angeles making up its three largest markets, which collectively account for 20.2% of its medical workplace constructing portfolio.

Medical Properties focuses on acute care services leased with triple internet leases. This REIT had 444 properties in ten international locations and 44,000 licensed beds on the finish of the fourth quarter. The US and UK fashioned the highest two markets with a mixed 81.9% share of complete property, with Australia, Switzerland and Germany making up the following three largest geographies. Nonetheless, the REIT has lately bought $803 million value of property in Australia.

Medical Properties’ two largest tenants, Steward and Prospect Medical, are presently within the midst of monetary difficulties. Customary & Poor lately downgraded Medical Properties to BB, about two notches beneath funding grade, as a result of Steward’s headwinds. Nonetheless, and maybe one of many important errors traders make when shopping for REITs, Medical Properties shouldn’t be a personal fairness fund. Consequently, its tenants merely have to satisfy all of the phrases of their leases whereas persevering with to do enterprise. The revenue of unstable tenants is irrelevant if they’ll nonetheless pay the lease. In fact, the inventory market undervalues ​​REITs, which have a reasonably unstable tenant base, however revenue issues right here.

E-book worth, FFO and payout ratio

Medical Properties’ dividend has been on the rise because the first and final minimize through the 2008 monetary disaster. That is almost 15 years of regular and uninterrupted dividends, a formidable file that has been misplaced to the bears and could be maintained regardless of Steward’s troubles. The REIT may very properly minimize its presently massive revenue, however even a $0.08 per share discount within the payout would nonetheless see its dividend yield double digits.

The ebook worth of Healthcare Realty was $7.49B on the finish of 2022Q4. That was about $19.89 per share, down from $20.30 per share within the third quarter, however up from $14.52 per share within the year-ago quarter. The REIT reported income of $338.06 million within the fourth quarter, up 72.7% from a yr in the past and lacking the consensus estimate of $5.94 million. FFO was $0.42, beating consensus estimates by $0.02 and up 7.7% quarter-over-quarter from $0.39 within the third quarter. Critically, Healthcare Realty is buying and selling at close to parity with its ebook worth, with its frequent inventory presently altering fingers at $19.37 per share.

Medical Properties’ ebook worth on the finish of the fourth quarter was $8.6 billion, or about $14.38 per share. That was down from $14.74 per share within the third quarter, however up 1.7% from $14.14 per share a yr in the past. Due to this fact, Medical Properties is buying and selling at a considerable low cost to its ebook worth, with a present share worth of $8.10 per share. This low cost remains to be 34.5% when utilizing the decrease tangible ebook worth (“TBV”) per share of $12.36, which strips out intangibles. TBV is extra necessary right here as a result of the REIT plans to report a $300 million write-down of intangible property tied to the lease of 5 Utah hospitals presently leased to Steward to a higher-rated tenant. This isn’t a money expense, so it has no affect on FFO.

Medical Properties final reported fourth-quarter income of $380.48 million, down 7% from the year-ago quarter, however beating consensus estimates by $7.49 million. FFO per share within the fourth quarter was $0.43, consistent with consensus, however down from $0.45 within the third quarter and $0.04 per share from $0.47 a yr in the past. The REIT guided for FFO per share of $1.50 to $1.65 in 2023, beneath the analyst consensus of $1.75 however sufficient to cowl $1.16 in complete dividends via 2023.

Healthcare Realty’s final quarterly dividend represented a wholesome payout ratio of 73.8% towards its FFO within the fourth quarter. This compares to Medical Properties’ revenue ratio of 67.4 p.c. That is why I am in Medical Properties Belief at about $8 a share and can seemingly add at the least 2x to that place within the coming months. The aim of this project was to not take part in one of the crucial controversial battleground REITs because the pandemic, however so as to add healthcare publicity to my nascent revenue portfolio, which is primarily targeted on housing REITs and distressed most well-liked shares. There will likely be extra volatility for Medical Properties primarily based on its 2023 Q1 earnings, however its dividend historical past is commendable and could be maintained.