Dr. Dividend’s Financial Freedom Newsletter - Issue #2 - DD on MPW

Have you been looking to protect your portfolio in these uncertain times? Check out my DD on MPW below!

Highlights

- Medical Properties Trust (MPW) is a diversified hospital REIT that is poised to perform well in times of inflation

- MPW pays a hefty 5.74% yielding dividend

- MPW has a worldwide presence, with 231 locations in the US and 207 locations in various other countries

What is a REIT?

A REIT stands for a Real Estate Investment Trust. REITs are companies that own real estate and they are publicly traded on the stock market. A REIT is required by law to: 

• Invest 75% of its total assets in real estate, cash or U.S. treasuries

• Derive 75% of gross income from rents, mortgage interest or real estate sales

• Pay a minimum of 90% of taxable income back to shareholders in the form of dividends

• Be a taxable entity

• Be managed by a board of directors

• Have at least 100 shareholders after 1 year of existence 

• Have no more than 50% of its shares held by 5 or fewer individuals

Thesis

Medical Properties Trust (MPW) is a diversified REIT that owns $22.3 billion worth of real estate in the US and Europe. With their CPI-controlled lease structure, the average person living longer, and the stable demand for healthcare facilities, MPW is poised to benefit in the future, as well as in these current inflationary times.

Positives

MPW has many positive catalysts, and the first one I’d like to bring up is that they have a diversified portfolio of healthcare facilities under their umbrella. MPW currently owns 438 properties including General Acute Care Hospitals, Behavioral Health Facilities, Inpatient Rehabilitation Facilities, Long-Term Acute Care Hospitals, Urgent Care Facilities, and more. MPW operates in 9 different countries, including the United States, Portugal, Spain, Switzerland, Italy, Germany, the United Kingdom, Columbia, and Australia, and their largest holding accounts for less than 3% of revenue. They’re truly a worldwide presence and as an investor, I feel more comfortable knowing that if something catastrophic were to happen in a given country, MPT would likely be able to combat it due to their diversified portfolio. 

By owning healthcare facilities, MPW is poised to take advantage of multiple positive trends. The good news for MPW and its shareholders is that the average person is living longer. The average American lifespan has increased from 69 years in 1960 to 78 years in 2022 and this is important because with people living longer, there will be an increased demand for healthcare facilities. Healthcare facilities are places that we need as a society and the demand for them does not look like it will decrease any time soon. 

MPW is poised to continue growing, even in an inflationary environment like the one we see today. Within their leases which are an average of 17.7 years, MPW builds in what they call CPI-based rent escalators. CPI-based rent escalators are stipulations within the lease agreements that raise the rent a minimum of 2% per year. These raises help us investors combat inflation and the length of their leases provide consistent income for years to come.

Negatives

When researching a potential investment, it’s just as important to know the positives as well as the negatives. Understanding the negatives can help you build a stronger thesis and identify any potential problems before they appear. There are negatives to consider when investing in MPW. For starters, REITs pay out what is called ordinary dividends and they are taxed at up to 37%. For comparison, a qualified dividend paid by a company that is not a REIT like Apple would only be taxed up to 20%. There’s a real possibility of leaving dividend money on the table by going with REITs so keep that in mind.

The other potential negative I see is that healthcare may move more online in the coming years. With the onset of COVID-19, medical tele-health saw a 63x increase and behavioral tele-health saw a 32x increase. These trends may be indicative of a culture shift toward tele-health and it’s something worth watching as a potential shareholder.

The Dividend Breakdown

When I research a stock that pays a dividend, I have consistent criteria that need to be met. I need my dividends to grow steadily, and my dividends need to be safe from a potential cut. I also want to make sure I’m getting bang for my buck with my investment, especially in the REIT sector, where REITs are required to pay out 90% of their taxable income in the form of dividends. To satisfy my criteria, I look at 3 main dividend metrics. 

The first is the dividend growth rate, which measures how much the company grows the dividend from the year past. As a dividend growth investor, I’m looking for my dividends to be consistently raised annually and I look for them to be raised higher than the rate of inflation. MPW over the past 10 years has raised its dividend by 3.51% compounded annually and while that isn’t an eye-popping number, it outpaces the REIT sector median of 3.37%. MPW’s dividend growth rate isn’t going to blow anyone away, however, I’m happy that it’s higher than its peers. REITs only make up about 10% of my overall portfolio, so I’m okay with MPW’s lower dividend growth rate, especially since they provide my portfolio with stability. It’s a trade-off I’m willing to take.

The next dividend metric I use is the dividend payout ratio, which measures the percentage of a company’s income paid out as a dividend. For example, if a company has a net income of $100 and it pays out $35 to shareholders as dividends, it has a 35% dividend payout ratio. Why is this metric important? The closer a company is to paying out 100% of its revenue, the less money they have to raise its dividend. The company would also have little money to reinvest for growth and it would be tough to stay afloat when the vast majority of revenue is being paid out. High dividend payout ratios cause a major problem for us dividend investors because as payouts near 100%, the dividend is more and more in danger of being cut. However, REITs like MPW are a special case because they are required by law to payout 90% of their taxable income.

The last dividend metric I use is the dividend yield, and this is where the, “bang for my buck,” analysis comes in. The dividend yield is calculated as the annual dividend divided by the price per share. For example, at the time of publication, MPW trades for $20.21 per share. They pay a $1.16 dividend per share, resulting in a yield of 5.74%. Why does this matter? Dividend yield shows you what percentage of the money you invested that will be returned to you in the form of dividends. Chasing a high yield is a mistake many beginner investors make (myself included) so make sure you weigh other metrics besides dividend yield. High yield can be a result of a falling share price so be sure to do your own research before investing.

Final Thoughts

After weighing the positives and negatives, I decided to initiate a position in MPW. I believe the company has a wide moat from competition with its extensive, diversified portfolio of healthcare real estate. Their long leases with inflation protection built in, as well as their worldwide presence gives me optimism for the future. I like their 5.74% dividend yield and the exposure to passive real estate ownership it gives me. REITs are a portion of my portfolio I lean on during uncertain inflationary times and I foresee MPW becoming a cornerstone.