Attention REIT Investors: Don’t Miss this 7% Yield

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As an investor you can spend hours, days, or even years studying a stock only to buy it and have it under perform.  Then there are those other times when you seem to buy at the perfect moment, as the stock goes on a tear as soon as you add it to your portfolio.  For me, Medical Properties Trust (NYSE: MPW) is that stock…both of them. 

Back in June I added shares of the company to my virtual “No Drip, No Mess” Portfolio as I was looking to add the company's generous 9% dividend to the portfolio.  I’ve personally owned the company for many years at a higher cost basis, but I knew the company well and thought that its dividend was safe.  My virtual purchase of a 3.6% position in the company came at around $9 a share.  With shares now over $11.50 each, I’m sitting on a 27% gain and have collected two dividend payments.

While this is by far the best performing position in the portfolio, now is not the time to sell.  After all, the company's story is getting even better than when I recommended the stock.  Their recent quarterly earnings report shows an improving financial picture, with many reasons to continue to hold for the long term.

In the most recent quarter revenues jumped by 55% year-over-year, while funds from operations jumped 71% on an income basis and by 39% on a per share basis.  The more important metric for income investors was that the dividend payout ratio fell to 80%, or an 11% improvement from the prior quarter.  For a while now the company has paid out more than they earned, and that necessitated a dividend cut a few years back.  Now the ratio is to the point where that dividend should be on the rise, as they expect the ratio to fall below their 75% target next quarter.

Medical Properties' portfolio continues to grow, as they’ve invested $781 million dollars in real estate year to date.  In the last quarter they sold two properties for $42 million, which was 27% over their cost basis, while adding $210 million in assets for the quarter and agreed to fund another $149 million in acquisitions and developments. 

One of the more interesting developments was the announcement of a $100 million deal to provide sale/leaseback financing for up to 25 freestanding emergency room facilities.  I think this is a very important development because some markets are starting to see a shift in how urgent care is delivered.  In a recent SWOT Analysis, I mentioned shifting delivery systems as a potential threat to hospitals.

With their improved balance sheet and income statement, Medical Properties Trust is now in a position to grow their already above average dividend.  A sampling of top REITs from retail (Simon Properties Group (NYSE: SPG)), residential (AvalonBay Communities (NYSE: AVB)), office (Boston Properties (NYSE: BXP)), and industrial (Prologis (NYSE: PLD)) shows just how big Medical Property’s dividend is when compared to these industry leaders.  Take a look at this chart, which compares yield:

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MPW Dividend Yield data by YCharts

Now look at how they compare against Price to Book Value:

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MPW Price / Book Value data by YCharts

As you can see Medical Properties is one of the cheapest when compared to price to book, which is why it's one of the highest yielding REITs.

Bottom Line

Despite a 27% gain over the past few months I think the company's shares still have some room to run, especially if they’re able to raise that dividend next year.  With a forward payout ratio below their internal target of 77.5% I think that an increased dividend is likely. 

Finally, a benefit of the increased share price is that it gives the company currency to fuel their growth.  They could use a combination of equity and debt, if needed, to acquire a larger portfolio of hospitals without it being as dilutive as it would have been when shares were lower.  Medical Properties remains my favorite REIT for both income and capital appreciation. 

latimerburned owns shares of Medical Properties Trust. The Motley Fool has no positions in the stocks mentioned above. 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.

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