Better Bear Market Buy: Medical Properties Trust vs. Federal Realty

Stocks have taken a beating this year. The S&P 500 ended the first half down 20.6%, putting it into bear market territory. Real estate investment trusts (REITs) haven’t fared much better, with the sector delivering a negative-20% total return through the end of June.

However, with REIT stock prices falling, their dividend yields are rising. That’s making them more attractive to income-focused investors. Two REITs that offer more enticing dividends these days are Federal Realty Investment Trust (FRT 1.41%) and Medical Properties Trust (MPW -0.25%). Here’s why investors might favor buying one of these REITs over the other in the current bear market. 

Federal Realty Trust deserves consideration befitting a king

Marc Rapport (Federal Realty Investment Trust): I’m not going to argue against buying Medical Properties Trust. I’m an inveterate REIT investor and it’s one of my favorite holdings. However, right now I’d choose to put new money to work with Federal Realty Investment Trust.

Federal Realty is a retail REIT that’s a fraction of the size of the king of this vertical — that being 11,000-property Realty Income (O 0.24%) — but it’s among REIT royalty itself.

That’s because a record of 54 straight years of payout increases make Federal Realty a Dividend King, one of only 44 stocks on the S&P 500 that have raised their annual payout for at least 50 straight years, even through a pandemic that hammered retail real estate.

This Maryland-based operation has a portfolio that, as of the first quarter, comprised 104 properties housing about 3,100 commercial tenants and 3,400 residential units in mixed-use and open-air shopping centers in nine major metro areas: Silicon Valley, Southern California, Chicago, Boston, New York, Philadelphia, Miami, and Washington, D.C.

Federal Realty has targeted affluent areas within these metros for its holdings, just the kinds of neighborhood shopping centers that may prove to be particularly recession-resistant for what’s coming next. An investment grade balance sheet that carries ratings of BBB+/Baa1 also speaks to its resilience.

So far this year, MPT shares are down about 33%, while FRT is down “only” about 28%, and MPT has a commanding lead in yield at 7.21% to 4.35% for Federal Realty. But unless you hold a huge amount of them, those numbers are close enough for most portfolios when it comes to the passive income they produce.

In its 1Q22 earnings report, Federal Realty reported a sharp increase in funds from operations (FFO) from the year-ago quarter and increased its guidance for that critical measure of REIT profitability for the rest of the year. It also reported a record level of leasing activity for the quarter and expansions of existing properties while buying a $200 million property in the Virginia suburbs.

This REIT’s long record of stable management and steady payouts lends confidence to conservative income investors (read: retirees) such as me. Like I said, I’m confident that MPT is a good investment and I don’t intend to sell. But the next time I’m in a position to buy, I plan to give FRT the nod as a proven long-term buy-and-hold itself.

Getting incredibly cheap

Matt DiLallo (Medical Properties Trust):Hospital-focused REIT Medical Properties Trust has tumbled nearly 35% from its recent peak, in part because of the bear market for stocks. I think this sell-off is a great buying opportunity for income-focused investors, which is why I’ve been adding to my already large position in the REIT.

The driving factor is the REIT’s outsize dividend yield, currently clocking in at 7.3%, which has risen as the stock’s price has fallen. That’s significantly higher than the roughly 3.8% average yield across the REIT sector and the 1.5% dividend yield of an S&P 500 index fund. While higher yields are often a sign of a higher risk profile, that doesn’t seem to be the case with Medical Properties Trust. 

For starters, the company has a rock-solid portfolio of high-quality hospital properties leased to healthcare operators under long-term triple net leases. That lease structure makes the tenant responsible for building insurance, maintenance, and real estate taxes, offloading those variable expenses to provide Medical Properties Trust with steady rental income. Meanwhile, it pays out about 80% of its income to investors through dividends, a healthy level for a REIT. That enables it to retain some cash flow for capital projects and acquisitions. In addition, the company has a solid balance sheet with a reasonable leverage ratio, giving it additional financial flexibility for making new investments.

Despite the REIT’s solid portfolio and financial profile, it trades at a low valuation of about 10 times its forward estimate for funds from operations (FFO). That’s about 50% less than the average healthcare REIT. This low valuation multiple is why Medical Properties Trust offers such a high dividend yield.

Another thing I like about Medical Properties Trust is its growth track record. The REIT has increased its dividend for nine straight years, driven by a steady stream of acquisitions. While it will be harder to fund deals now that its stock price has taken such a hit, the REIT has other ways of raising capital to finance new investments, including selling assets and forming joint ventures. Future dividend growth would add to its already attractive income stream. Add in the upside from a potential recovery in its stock price when the market rebounds, and this REIT looks like a great bear market buy. 

Longevity versus yield

Federal Realty and Medical Properties look like attractive buys during the current bear market sell-off. However, Federal Realty might appeal more to investors seeking proven durability in any market cycle. Meanwhile, Medical Properties Trust is likely a more compelling opportunity for those seeking a high dividend yield.