Real estate has been an excellent way for investors to build wealth over the years. It has turned many into multimillionaires and even churned out a few billionaires. However, it doesn't do that overnight as most big gains from real estate come from long-term compounding.
One real estate company that has done an excellent job growing the wealth of its investors over the years is healthcare real estate investment trust (REIT) Medical Properties Trust (NYSE: MPW). Here's a look at whether it has the potential of minting millionaires in the future.
The millionaire math
Given enough time and rate of return, it's possible to turn a relatively small initial investment into a $1 million payday. For example, $1,000 invested into an S&P 500 index fund should theoretically grow into $1 million in about 75 years, assuming the market maintains its historical average annual return of around 10%. Increase the investment amount or return profile, and an investor can shorten that time horizon considerably.
For example, REITs have generated a 13.3% total return from 1972 through the end of last year, outperforming the S&P 500. If we used that rate of return and bumped up the investment amount to $10,000, it would only take 35 years to become a millionaire.
A look at Medical Properties Trust's millionaire-making potential
Medical Properties Trust has outpaced the return of the S&P 500 since its initial public offering in mid-2005. Overall, it has generated an average annual total return of 11.8%, which has beaten the S&P 500's 9.4% total return during that time frame. That has enabled the hospital-owning REIT to turn a $10,000 investment at its IPO into $53,770. For comparison's sake, $10,000 invested in the S&P 500 at that time would have only yielded a $39,030 return.
Investors who put $10,000 into Medical Properties Trust at its IPO only need the REIT to continue compounding at its historical rate of return for another 25 years to reach $1 million. Meanwhile, those who were to start a $10,000 position today would need the REIT to maintain its current rate of outperformance for 39 years to hit a $1 million payday.
The obvious question is whether the REIT can continue generating above-average total returns. Thus far, the key to the company's success has been its ability to expand its portfolio by acquiring and developing hospital properties. In the last decade alone, the company has grown its assets at a 30% compound annual growth rate, increasing the value of its property portfolio from $1.4 billion in 2010 to $17.3 billion at the end of the second quarter. During that time, the REIT has grown its FFO at an 8% compound annual rate, while increasing its dividend for seven straight years.
Medical Properties Trust currently owns 390 hospital properties spread across nine countries. While that's a sizable portfolio -- it's already the second-largest hospital owner in the U.S. at 224 properties -- it still has plenty of room to grow. According to the American Hospital Association, there are 5,198 community hospitals in the U.S., while globally, Medical Properties estimates that there are $500 billion to $750 billion of operator-owned hospital real estate. Thus, the company still has a significant opportunity set ahead by continuing to acquire hospital properties.
Meanwhile, there is the potential for the company to acquire other healthcare-related real estate in the future. For example, it could take the more diversified approach of fellow healthcare REIT Ventas (NYSE: VTR), which owns medical office buildings, senior living, research and innovation centers, health systems, inpatient rehabilitation and long-term acute care facilities, international hospitals, and skilled nursing facilities. If it went that route, it would have an even larger opportunity set. Because of that, the REIT certainly has the expansion potential needed to continue generating market-beating total returns for many years to come.
What's more, it also has the financial strength needed to continue purchasing healthcare-related real estate. For starters, Medical Properties Trust has a solid balance sheet backed by a reasonably low leverage ratio of 5.5 times debt-to-EBITDA, right around its target level. It also has a fairly conservative dividend payout ratio of around 64% of its FFO this year, enabling it to retain cash to finance growth.
A healthy chance at becoming a millionaire-maker REIT
Medical Properties Trust has done an excellent job creating wealth for its investors over the years as it has outpaced the S&P 500 by a nice margin. It seems possible that the REIT can continue generating market-beating returns in the coming years, given the enormous amount of healthcare real estate that it could potentially acquire in the future. Because of that, it has the potential of turning ultra-long-term investors into millionaires.