Key Points
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REIT stocks offer investors access to pools of Real Estate rent roll income without the headaches and responsibilities of having to manage physical real estate or its corresponding paperwork.
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MPW, which deals with medical industry properties, and IIPR, which handles cannabis business properties, are two REITs that have often been compared due to their health care sector similarities.
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Both companies are actively remediating weaknesses and past deficiencies in their business models to solidify their fortunes going forward.
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Modern societies have evolved their notions of land ownership into the current industry known as real estate. Primarily focused on land and/or structures built on land, the real estate industry has been the source of wealth for many people, including President Donald Trump, who is famous for his Manhattan luxury penthouse buildings, commercial office skyscrapers, and hotel resorts.
Physical real estate is not without its drawbacks. Maintenance, utilities, and other management responsibilities are crucial for upholding value, and real estate development entails a host of other challenges. There are also liabilities with having considerable wealth tied up in a single property, and liquidity can become an issue, since real estate sales can often take unpredictably long periods of time to close.
Real Estate Investment Trusts (REIT) are one solution. By raising significant amounts of money from the capital markets, REITs allow for acquiring multiple properties to generate rent rolls for income. The tradeoff for REITs being allowed to access funds from the public is a requirement that 90% of profits be remitted back to shareholders in the form of dividends. This makes REITs a very attractive income source for retirees and income oriented investors.
REITs that specialize in properties tied to specific industries can realize economies of scale and industry honed skill sets in their management responsibilities and requirements. Two that have generated comparisons between them are Medical Properties Trust (NYSE: MPW) and Innovative Industrial Properties (NYSE: IIPR).
Medical Properties Trust
Medical Properties Trust is a REIT that is focused on the medical care industry, using sale leasebacks to build its portfolio of hospitals across the USA.
Headquartered in Birmingham, Alabama, Medical Properties Trust primarily owns properties focused on the medical and healthcare industries. Spanning 9 countries (mostly Americas and Europe), 396 separate properties, 53 commercial tenants and over 39,000 hospital beds, MPW has built its business model by providing the following services for its clients:
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Sale/Leasebacks for hospitals to leverage its cash position more efficiently.
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Direct investment in operators for expansion, new equipment, additional doctors, and new programs and services.
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Provide tax savings through lease amount deductibility.
With few exceptions, all of MPW’s leases are NNN leases. Some of its operators include: Advanced Diagnostics, Ernest Health, Healthcare Systems of America, Priory Group (UK), NHS UK, and Swiss Medical Network, among others.
A few years ago, Medical Properties Trust took a hit to its revenue base when a couple of major tenants declared bankruptcy after previously defaulting on rent. The primary tenant, Steward Health Care, had previously sold properties to MPW that had generated profits. The company was even forced to cut its dividend, and the stock declined. The stock went down from $23.25 in 2022 to its recent $5-6 region.
MPW has since found other tenants for those properties, and has plugged the hole in its revenue stream. Given the defensive nature of hospitals and healthcare, the resolution on this revenue gap should be able to capitalize on the stability of the sector and the anticipated demand growth as the tail end of the Baby Boomers are now officially senior citizens.
Current yield: 5.83% (at time of writing).
A majority of MPW stock is in the hands of institutions: 62.26% of total shares. The top 5 are:
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BlackRock Inc. – 14.98%
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Vanguard Group Inc. – 13.84%
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State Street Corp. – 5.41%
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Geode Capital Management, LLC – 1.77%
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UBS Group AG – 1.56%
A number of Mutual Funds and ETFs are also holding MPW stock. The top 5 are:
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iShares Trust – iShares Core S&P Small Cap ETF – 6.12%
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Vanguard Specialized Funds -Vanguard Real Estate Index Fund – 3.63%
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Vanguard Index Funds – Vanguard Total Stock Market Index Fund – 2.69%
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Vanguard Index Funds – Vanguard Small Cap Index Fund – 2.14%
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Vanguard Index Funds – Vanguard Extended Market Index Fund – 1.51%
Innovative Industrial Properties
Innovative Industrial Properties owns real estate that is leased to businesses involved in various aspects of the cannabis and CBD industry.
The legalization of cannabis caused an explosion of activity in cannabis and CBD related businesses akin to throwing a match into a fireworks factory. However, the regulatory parameters for cannabis and its by-products vary from state to state, which can limit the growth potential of businesses that are product oriented.
Acknowledging the botanical requirements for cannabis cultivation, in addition to the various processing, packaging, and marketing needs, San Diego based Innovative Industrial Properties wisely saw an opportunity: rather than deal with the various regulatory entities for cannabis and CBD, take a proven model like commercial real estate and gear it up specifically for this new industry. By going the REIT route, IIPR has been able to rapidly expand its scope and reach in providing factories, offices, and outlets for its clients in the cannabis industry.
The IIPR business model is similar to MPW’s: the execute sale/leaseback deals with their client that provide cash for their clients’ businesses while the steady rent roll income can flow to IIPR and its shareholders for dividends. IIPR’s service is especially in high demand for cannabis entrepreneurs, since many investors will still avoid the industry, viewing it like other vice industries – tobacco and alcohol – or even worse, due to new studies on psychotropic drugs and their long-term effects.
Expanding to 19 states, 109 properties, and 31 different tenants, the company has a real estate portfolio that stands at a $2.4 billion valuation. Exceeding the REIT 90% payout requirement with a current 93% payout ratio, IIPR’s cash flow has been more than sufficient to comfortably support its high dividend, which is currently at a yield of 14.41%.
IIPR has been on a healthy dividend growth clip of over 24% annually. However, it too has suffered its share of defaulting clients, in this case, PharmaCann, which defaulted on rent for some of its locations. As PharmaCann comprises 17% of IIPR’s rent revenue, their recent difficulties display the risks inherent in the volatility of the cannabis industry, which can still impact IIPR’s future, despite its relatively robust performance thus far. As 38 states and several US territories have legalized cannabis use, IIPR still has considerable growth potential.
From a stock perspective, 73.28% of IIPR stock is held by institutions. The top 5 are:
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BlackRock Inc. – 17.84%
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Vanguard Group Inc. – 15.61%
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State Street Corp. – 5.92%
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Pacer Advisors, Inc. – 2.2%
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Charles Schwab Investment Management – 1.64%
Mutual Funds and ETFs holding IIPR stock are also plentiful. The top 5 are:
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iShares Trust – iShares Core S&P Small Cap ETF – 6.18%
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Vanguard Specialized Funds -Vanguard Real Estate Index Fund – 3.86%
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Vanguard Index Funds – Vanguard Total Stock Market Index Fund – 3.12%
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iShares Trust – iShares Russell 2000 ETF – 2.62%
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Vanguard Index Funds – Vanguard Small Cap Index Fund – 2.55%
Dividend Stability vs. Higher Payouts
Higher but potentially riskier payouts vs. lower but more stable ones? This is the ultimate question when comparing MPW and IIPR.
When comparing Medical Properties Trust and Innovative Industrial Properties, the latter clearly wins when it comes to dividend amount. IIPR’s 14.41% yield is more than double MPW’s 5.83% yield, and IIPR has yet to stop increasing its dividend, signaling confidence from management that its growth prospects remain strong.
Conversely, the cannabis industry is still new, and is still subject to the whims of state government policies. The present HHS scrutiny of longstanding medical, pharmaceutical, and nutritional practices is finding some alarming research notes indicating their contributions to health hazards. Should updated studies on long-term cannabis use indicate the presence of previously undetected or unlinked health problems the entire cannabis industry can be upended and revaluated. IIPR will understandably be impacted accordingly, should this be the case.
Hospitals, on the other hand, are benefiting from improved digital technology for more comprehensive and individualized health care. The increased health care needs for aging Baby Boomers will fuel hospital growth, and MPW’s business model should likely continue to prosper, now that it appears back on track from its earlier stumbling block.
At the end of the day, investors will have a choice between current higher dividend payouts with the higher sector risk, or lower dividends with a more reliable and steadfast industry.
The post Better High-Yield Dividend Stock: Medical Properties Trust (MPW) Vs. Innovative Industrial Properties (IIPR) appeared first on 24/7 Wall St..
