MPW - Medical Properties Trust: Compelling Value Proposition At 13.2% Dividend

2023-05-03 08:30:00 ET

Summary

• Medical Properties Trust outearned its dividend with AFFO in Q1’23 and declared a new quarterly dividend of $0.29 per share.
• The portfolio is well-diversified and optimized. Recent transaction to shed Australian hospital assets streamlines portfolio.
• I see a 100% upside in MPW’s valuation based on AFFO over the long term.

Medical Properties Trust, Inc. ( MPW ) reported first-quarter earnings last Thursday, and the results show that the hospital real estate investment trust is capable of maintaining its high 13.2% dividend yield.

The REIT paid out its dividend with adjusted funds from operations, and Medical Properties Trust declared a new $0.29 per share dividend, posing a problem for short sellers.

I believe that Medical Properties Trust is vastly undervalued, and that the stock has the potential to rise as market sentiment toward the trust improves.

Because Medical Properties Trust's stock is cheap based on funds from operations, and the 1Q-23 earnings release contained no new information that passive income investors should be concerned about, I believe MPW's valuation could increase by 100% in the long run.

Portfolio Transformation Ongoing

Medical Properties Trust recently announced the sale of its Australian hospital assets for AUD $1.2 billion in order to simplify its portfolio and refocus on the healthcare markets in the United States and Europe.

The transaction's implications were discussed in my recent article titled Medical Properties Trust Now Has A Catalyst . To compensate for the sale of its Australian hospital assets, Medical Properties Trust spent £44 million on 5 behavioral health facilities in the United Kingdom and €70 million on three post-acute facilities in Germany during the first quarter.

Overall, MPW's portfolio structure did not change significantly in 1Q-23, and the trust's focus remains on General Acute Care Hospitals and Inpatient Rehabilitation Facilities, which account for 81% of the trust's revenues.

AFFO Still Sufficient To Cover MPW's Dividend

In the first quarter, Medical Properties Trust covered its dividend with adjusted funds from operations, which goes a long way toward assuring passive income investors that the dividend is secure.

The hospital REIT earned $0.30 per share in adjusted funds from operations from its hospital portfolio, outperforming its dividend by $0.01 per share, and declared a new $0.29 per share dividend for the second quarter.

Based on AFFO, Medical Properties Trust's 1Q-23 pay-out ratio was 97%, while the twelve-month pay-out ratio was 85%. Despite the fact that the trust's funds from operations have decreased due to asset sales, I believe the dividend is reasonably well covered.

Short sellers Need To Watch Out

Medical Properties Trust is a heavily shorted stock because short sellers expected the trust to cut its dividend as a result of ongoing portfolio restructuring and asset sales, which reduced the trust's adjusted funds from operations. MPW's short ratio is close to 20%.

If MPW can maintain its dividend and generate AFFO upside through accretive acquisitions in its core markets, I believe investors will see a short squeeze and possibly a power rerating of the trust's stock.

Why I Think Medical Properties Trust Is Undervalued

In the first quarter, Medical Properties Trust's hospital real estate portfolio generated $0.30 per share in adjusted funds from operations. On an annualized basis, the stock is currently valued at 7.3x adjusted funds from operations based on a stock price of $8.77. Other hospital operators are selling for much higher AFFO multiples, and I believe investors are missing out on this mispricing.

In my previous article on MPW, I predicted that the REIT could earn $1.35-1.40 per share in 2023, giving MPW an AFFO multiple of 5.8x, indicating a very high margin of safety.

Despite the stock's recent uptrend, I am reaffirming my AFFO expectations following the trust's 1Q-23 earnings release and continue to believe that investors are getting a fantastic deal. Medical Properties Trust is valued at 6.4x AFFO based on its stock price of $8.77.

Physicians Realty Trust Inc. ( DOC ) is valued at an FFO multiple of 13.9x, but the trust's portfolio is not transitioning or restructured. As a result, Physicians Realty Trust poses less risk to passive income investors, reflecting higher rerating potential for MPW. If Medical Properties Trust's stock rerates to Physicians Realty Trust after portfolio optimization, I believe it could see 100% valuation upside without becoming overvalued.

Even though the stock has gone up by approximately 10% since I last covered the healthcare real estate investment trust, the valuation is still compelling, and so is MPW's 13.2% dividend yield.

Why Medical Properties Trust Could See A Lower/Higher Valuation

Medical Properties Trust is a well-managed and diverse hospital REIT with international exposure, particularly in Europe. Medical Properties Trust's adjusted funds from operations would most likely suffer if the trust had to sell more assets.

A dividend cut would also harm Medical Properties Trust's capital growth prospects, but in my opinion, the likelihood of this happening is quite low.

My Conclusion

Short sellers should exercise caution: Medical Properties Trust covered its dividend with adjusted funds from operations in the first quarter, and despite asset sales challenges, I believe MPW is a compelling value proposition for passive income investors, primarily because the trust earns its dividend and recently declared a new $0.29 per share dividend.

I believe the dividend is sustainable, and while asset sales reduce short-term AFFO performance, they are necessary to stabilize the REIT's portfolio. As a result, in my view the 13.2% dividend yield makes MPW a Strong Buy for passive investors.

For further details see: