Forget Medical Properties Trust: This Resilient Healthcare Real Estate Giant Is Built to Survive the Next Downturn

Medical Properties Trust (NYSE: MPT) is one of the more popular healthcare REITs. Its high dividend yield has a lot to do with that. At 5.9%, it's well above the REIT sector average (over 4%) and the S&P 500's level (more than 1%).

The driving factor behind that big dividend yield is the REIT's weaker financial profile, which has weighed on its valuation. That could put its survival at risk if there's a major market downturn. It's why investors seeking resiliency should forget Medical Properties Trust and consider investing in top healthcare REIT Welltower (NYSE: WELL) instead.

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Still not back to full health

Medical Properties Trust has struggled mightily over the past several years. Tenant bankruptcies and higher interest rates have put pressure on its balance sheet. That forced the hospital owner to cut its dividend twice and sell assets to repay debt.

The REIT replaced bankrupt tenants with several financially stronger operators. It has also strengthened its financial position and balance sheet. That has allowed it to start returning more money to investors. Medical Properties Trust has begun rebuilding its dividend and is repurchasing some of its beaten-down shares.

While it has made significant progress, its leverage ratio remains very high at 8.5 times (well above the sub-6.0 times considered safe for a REIT). As a result, it's not the safest REIT to invest in these days.

A much healthier REIT

Welltower towers over other REITs. It's the largest REIT by market cap at over $145 billion (compared to $3.5 billion for MPT).

While it's also a healthcare REIT, it has a very different investment strategy compared to Medical Properties Trust. Whereas Medical Properties Trust invests primarily in hospitals, Welltower owns senior housing properties. It owns over 2,900 seniors and wellness housing communities across the U.S., Canada, and U.K.

Aside from its massive scale, a big differentiator between these two healthcare REITs is Welltower's much healthier financial profile. It has a low 3.0x leverage ratio, which supports its strong credit ratings (A-/A3). The company's much healthier balance sheet puts it in a strong position to withstand the next downturn.

Welltower's combination of scale and financial strength enables it to capitalize on investment opportunities. The company invested $11 billion last year to acquire over 900 seniors housing communities. It partially funded those new investments by selling more than 300 of its outpatient medical properties. The new properties are growing 10 times faster than the properties it sold. Welltower's stronger financial position enables it to sell non-core properties to fund higher-return investments. In contrast, Medical Properties Trust has had to sell properties to shore up its financial foundation.

The leading REIT also takes a much more hands-on approach to its real estate. Welltower is steadily shifting its portfolio from investing in properties secured by long-term leases to properties it operates in partnership with leading healthcare companies. It has transitioned much of its portfolio to best-in-class regional operating partners through win-win partnerships. Welltower provides them with an end-to-end operating platform (Welltower Business System) that helps them become better operators. This strategy of working with the best and helping them become better will strengthen Welltower's ability to navigate the next downturn. Additionally, its operating properties drive much faster earnings growth compared to its leased real estate. It expects to deliver more than 15% same-store net operating income growth from its senior housing operating properties in 2026, compared to low single-digit growth at its leased properties.

A much stronger healthcare REIT

Medical Properties Trust has battled to survive over the past few years as higher interest rates and tenant issues have taken a toll. Given its high leverage ratio, it might not survive if there's a severe downturn. On the other hand, Welltower's ability to survive the next downturn isn't in question. Its combination of scale, best-in-class operating partnerships, and an elite balance sheet positions it to thrive during the next economic storm.

Matt DiLallo has positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.