A Heath Care Company Hits a Growth Spurt
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
No matter where you stand on the great heath care debate, one thing is sure -- it is going to keep costing us a lot of money to stay healthy. Compound that with us getting older, heavier and, well, there just seems to always be more of us, and it’s a recipe for profitable industry growth. So when things ache or pieces break, we’ll continue to go to that bedrock health care facility, our local hospital.
As one of the largest owners of hospitals in the country, Medical Properties Trust (NYSE: MPW) stands to benefit from this continuation of hospital utilization. However, Medical Properties doesn’t have to worry about keeping the docs happy nor about the drama that’s going on over in trauma. They just sit back and collect the rent checks and leave the hospital operations in more capable hands.
CEO Edward Aldag says that, “high quality hospitals, like those Medical Properties Trust invests in, will remain a cornerstone of the U.S. health care system.” These assets, which form the cornerstone of MPT’s portfolio, is in fact (unlike their health care focused brethren) the only asset type in their portfolio. Health care REITs like Ventas (NYSE: VTR) or Health Care REIT (NYSE: HCN) both own hospitals, but on average only about 7% of their assets are invested directly into these cornerstone assets.
While there is nothing wrong with owning medical office buildings or senior housing communities, by focusing solely on hospitals, MPT has positioned themselves to grow their funds from operations while also owning more secure assets that traditionally have a much higher lease coverage ratio of 5.5 times. These safer cornerstone assets have the ability to withstand the twists and turns of any economic cycle and generate stable returns for owners like MPT. As they’ve grown their asset base they’ve been able to generate some really nice returns. This past quarter as their newly acquired assets began to hit the bottom line, they were able to grow their earnings to the tune of 37% in this past quarter.
This growth came in the form of a reported $0.22 a share of funds from operation, up from just $0.16 year-over-year. This growth spurt, which saw a 46% increase in revenues, was accomplished as some of their $1 billion of investments since 2010 started to finally hit the bottom line. They expect to end the year with $0.85 a share in funds from operations while really hitting their stride in 2013 at $1.06 a share. That 2013 number doesn’t include any new investments, so it could grow even more. If their past is any indication, I don’t think they’ll be done growing their hospital count any time soon.
In the most recent quarter they added a $100 million investment in an acute care hospital as well as a $26 million investment in a post-acute care facility. In addition to these, the company commenced two inpatient rehabilitation facility development projects: a $16.6 million 40-bed facility in Indiana and a 26-bed facility for $9.4 million in Texas. Finally, the company is anticipating another $200 million in fourth quarter acquisitions. Oh, this is on top of the $400 million they’ve already invested this year. Not bad for a company with $2 billion of assets and reason we should see more growth ahead.
While much of their recent grow has been in acquiring hospitals from smaller operators in need of a cash infusion to heal their balance sheets, their tenants rank among a who’s who of hospital operators. Community Health Systems (NYSE: CYH) is the second largest for-profit hospital chain in the US. This $11 billion health care giant owns many of their hospitals, but they are also a tenant of MPT. So is the $4 billion Healthsouth (NYSE: HLS), which is one of the largest post-acute care and rehab hospitals in the US. Having tenants like this gives a lot of stability to their rent rolls and provides opportunities for future growth as their relationship could lead to future deals.
I’ve recommended buying shares in my “No Drip, No Mess” virtual portfolio to the tune of a 3.6% allocation for this income focused portfolio. If there has been one thing ailing the company it is the fact that they had to cut their dividend during the financial crisis and haven’t raised it since. I think for that we might finally be looking at an increase in that payout sometime in 2013 as their payout ratio will drop from its current 91% to around 75%. Aldag somewhat alluded to that in their earnings press release by saying, “as we continue to execute our growth strategy and drive the payout ratio down, we believe we are well positioned to continue to support initiatives that will enhance shareholder value.” Maybe it’s just me but I believe that their dividend is also about to hit a growth spurt.
latimerburned owns shares of Medical Properties Trust. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.