I recently invested $500 into Medical Properties Trust (NYSE: MPW), a real estate investment trust (REIT) focused on owning hospital properties. That was the latest in a series of relatively modest incremental purchases of what has become my single largest REIT holding.
Here's why I continue adding to the healthcare REIT and why I think fellow income-focused investors should consider joining me in owning this high-quality real estate company.
A compelling all-around opportunity
While Medical Properties Trust is already my biggest holding in the REIT sector, I felt now was a great time to add to my position. That's because it's such an attractive value proposition these days. One factor driving that view is that Medical Properties' stock price is down about 9% in 2021, even though it's having another excellent year.
Last month, the company reported its second-quarter results, posting 13% year-over-year growth in its normalized FFO-per-share growth. Driving that increase has been a multi-billion-dollar shopping spree as the company has steadily acquired new hospital properties. It closed nearly $3.6 billion of deals in 2020 and has secured more than $3.6 billion of additional investments already this year. Those deals have the REIT on track to generate between $1.72 to $1.76 per share of normalized FFO this year, which would put its full-year total nearly 11% above 2020's level at the midpoint.
With FFO rising while the share price has declined, Medical Properties Trust trades at a more attractive valuation. At my purchase price of $20 per share, I paid 11.5 times the midpoint of its normalized FFO forecast for the year. That's much cheaper than most other REITs, as many currently sell for more than 20 times their FFO.
Another benefit of Medical Properties' declining share price is that it offers a higher yield. It's currently over 5.6%, well above the REIT sector's sub-3% average. Combine that yield with Medical Properties' growth at a value price, and I couldn't pass up on the opportunity to add more shares to my portfolio.
A long history of creating shareholder value
There's no logical reason for Medical Properties' discounted valuation. The REIT has consistently grown shareholder value since its initial public offering (IPO) in July 2005. From its IPO date through the end of May, Medical Properties Trust has produced a more than 555% total return. That's comfortably above the S&P 500's 387% total return during that time frame.
Medical Properties has also outperformed other REITs during that time frame and the last three-, five-, and 10-year periods. Medical Properties' steady returns are one reason why it has grown into my largest REIT holding since I first purchased shares in 2007.
Driving the company's ability to create so much shareholder value over the years is its focus on expanding its hospital portfolio. The company has grown its asset base at a 31% compound annual rate over the last decade by steadily acquiring hospitals, primarily in sale-leaseback transactions with the hospital's operator. These deals typically feature attractive cap rates, making them immediately accretive to its normalized FFO per share, enabling it to steadily grow that key metric.
That has also allowed Medical Properties Trust to routinely increase its dividend. The REIT has raised its payout in each of the last eight years, growing it at a 5% compound annual rate. That's a slower pace than FFO growth, enabling the company to steadily increase its payout ratio, allowing it to retain more cash to fund new acquisitions and strengthen its financial profile.
A great REIT to own for the long term
Medical Properties Trust has done an excellent job growing shareholder value over the years. I believe it can continue enriching its investors in the future as it expands its portfolio, FFO per share, and dividend. That's why I recently bought $500 of additional shares to increase my already sizable position. Medical Properties is such a great opportunity these days, I don't want income-focused investors to miss out.