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Is Now a Good Time to Invest in a Medical REIT?

Motley Fool - Sat Jan 21, 2023

Many real estate investment trusts (REITs) saw their share prices slump over the past year. The rise in interest rates did a twofold number on their financials, making it more expensive to borrow money to buy new properties to lease out while some of their tenants struggled to get financing to keep their businesses running.

The Invesco KBW Premium Yield Equity REIT ETF fell more than 16% over the past year. Medical REITs weren't immune as the average drop for the 15 medical REITs listed on the FTSE Nareit US Real Estate Indexes was more than 22% over the same period.

Healthcare companies may face some short-term macroeconomic issues, such as labor shortages and supply chain issues, but thanks to an aging population, U.S. healthcare spending is expected to reach $6.2 trillion by 2028, according to the Centers for Medicare and Medicaid Services. That's why medical REITs often continue to be solid, long-term investments with above-average dividends.

Here are three to consider today: Physicians Realty Trust(NYSE: DOC), Medical Properties Trust(NYSE: MPW) and National Health Investors(NYSE: NHI).

Physicians Realty Trust is a steady stock

Physicians Realty Trust's shares dropped more than 18% over the past year but are up more than 6% the past three months. The REIT specializes in medical office buildings and had, as of the third quarter, 290 properties, of which 94.9% were leased.

The company reported nine-month revenue of $394 million, up 15.3% year over year, and normalized funds from operations (NFFO) per share of $0.26, which was even with the same period last year. The company has kept its quarterly dividend at $0.26 since 2019, giving it a yield of around 6% and a NFFO payout ratio of 85.8%.

The company's tenants have an average remaining lease term of six years. The tenant mix is highly diversified, with its largest tenant, CommonSpirit Health, responsible for only 18.8% of the company's gross leasable space, and 66% of its tenants are investment grade.

Medical Properties Trust is on the rise

Medical Properties Trust owns 435 hospital buildings that it leases to 54 companies throughout the U.S, U.K., Italy, Portugal, Switzerland, Germany, Australia, Spain, Finland, and Colombia. Its average remaining lease length is 17.6 years.

The company's shares are down more than 45% over the past year, but up more than 17% in the past three months. The company took a big hit because one of its biggest tenants, Pipeline Health, went through bankruptcy proceedings and withheld rent on some of its properties.

However, a bankruptcy court recently decided in Medical Properties Trust's favor in that matter. In the decision, Pipeline Health must pay off the rent that it owes on four Los Angeles-area hospitals and two medical buildings, and the master lease term of 17.6 years, along with the lease rate and annual rent escalator, remain intact.

With those concerns allayed, Medical Properties Trust is a more attractive investment, with solid financials and a dividend that yields around 9%. The company raised its quarterly dividend by 3.5% last year to $0.29, the eighth consecutive year it has increased the dividend. The company's adjusted funds from operations (AFFO) payout ratio of 81% is considered safe for a REIT.

In the third quarter, the company reported nine-month revenue of $1.162 billion, up 2.3% year over year, with NFFO of $829.5 million, up 9.5% over the first nine months of 2021. It also upgraded guidance for annual NFFO per share of between $1.80 to $1.82 from $1.78 to $1.82. The guidance compares to its 2021 annual NFFO of $1.75.

National Health Investors' short-term concerns

National Health Investors' stock is down more than 7% over the past year and up a little more than 3% over the past year.

The company operates more than 200 senior-living facilities across 32 states, including independent, assisted, and memory care communities; skilled nursing facilities; medical office buildings; and specialty hospitals.

While the long-term outlook for senior living facilities remains strong, many senior-living centers' financials are down, thanks to consumer concerns that came to the fore during the COVID-19 pandemic, along with increased labor costs and shortages.

The company has kept its quarterly dividend at $0.90 since the second quarter of 2021, when it reduced its dividend from $1.1025. The dividend's yield is around 6.4% with a NFFO payout ratio of 84.9%, within the safety range for a REIT.

Through the first nine months of 2022, it reported revenue of $207.5 million, down 9% over the same period in 2021, and NFFO of $155.5 million, down 4% year over year.

Making the choice for you

Physicians Realty Trust is the safest bet among the three REITs. It's still increasing revenue, and its tenants, which are investment grade, are less likely to default on rents. The company's average remaining lease period, at only a little over six years, is a bit short, and its reluctance to raise the dividend is a negative, but it is also the best REIT of the three to handle a recession if we slip into one.

Medical Properties Trust has a lot more risk, as the last year demonstrated. However, its higher dividend and history of raising dividends, along with improving financials, makes it a solid long-term pick. While the company is less diversified, with Seward Health Care responsible for 26% of its pro forma gross assets as of Sept. 30, the properties that the REIT owns -- hospitals -- are generally stable and can usually find new tenants with little difficulty.

National Health Investors is also a solid long-term pick, but senior housing may not bounce back that quickly, so it is a stock I would stay away from for now, as it could easily fall farther in 2023.

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James Halley has positions in Medical Properties Trust and Physicians Realty Trust. The Motley Fool recommends Physicians Realty Trust. The Motley Fool has a disclosure policy.

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