2023-10-28 01:16:33 ET
Summary
- Medical Properties Trust's Q3'23 earnings report has instilled new confidence in investors, causing the REIT's share price to soar 16%.
- The REIT did not announce a dividend cut, and dividend coverage remained solid. Medical Properties also raised its NFFO guidance, against expectations.
- Asset divestitures will remain a key theme going forward for Medical Properties Trust.
- Even if MPW were to lose 25% of NFFO due to asset sales, the valuation would be very attractive for turnaround and dividend investors.
Shares of Medical Properties Trust ( MPW ) have seen a steep downside revaluation in 2023 and since I last covered the healthcare REIT in August. While the share price is down big over concerns of high debt in a rising-rate world, payment issues with tenants and potential asset sales, Medical Properties’ Q3’23 earnings report has instilled new confidence in investors… causing the REIT’s share price to soar 16% on Thursday.
I believe the healthcare REIT is on a good path after it reported third-quarter earnings and management expressed confidence in its business model and long term growth prospects. The REIT also raised its guidance, did not announce a sequential dividend cut, which some investors likely expected, and dividend coverage remained solid. Shares remain an absolute bargain based off of NFFO, even under the assumption that the REIT will lose cash flow associated with additional asset sales!
Previous rating
I rated Medical Properties as a strong buy in August, after the REIT cut its dividend. Looking back, the call may have been a bit too early, but I have cost-averaged down in the last two months (my current cost base is $5.20) and I will buy more if shares tank again. My original take on MPW can be seen here: Strong Buy After The Dividend Cut .
Given the progress the REIT has been making in terms of asset sales and other factors that I discuss in this article, I believe the share price remains too depressed. Medical Properties' dividend is well-supported by FFO and I don't expect a second cut in the near-term.
Asset divestitures will remain a key theme going forward
Earlier in October, the REIT announced that it sold the remaining four properties in its Australian hospital facility portfolio to HMC Capital. The hospital REIT said that it would use the proceeds (AUD$470M, roughly US$298M) from the sale to repay its revolving credit facility and to increase its cash availability.
Medical Properties sold three hospitals in the third-quarter… which lowered the property count in the REIT’s portfolio to 441 at the end of the September quarter. The largest investment category is still represented by general acute care hospitals. Given recent asset sales, I consider it likely that the REIT will sell more assets going forward... which should also lead to a contraction in funds from operations (I discuss my assumption about FFO declines further below in the valuation section).
No sequential dividend cut, strong dividend coverage
The REIT’s management explicitly stated that it sees its business model as “strong and stable” and I believe the earnings report backs this statement up in a number of ways. First of all, Medical Properties reported, to the relief of many investors, that Prospect Medical, a struggling tenant, resumed making rental payments in September and October.
Secondly, Medical Properties disclosed normalized funds from operations (NFFO) of $225.5M in Q3’23, showing a decline of 17% year over year. However, the $0.38 per-share in NFFO resulted in a payout ratio of 39% (50% based off of AFFO), a low percentage that suggests that the August dividend cut of almost 50% has taken pressure off of the REIT.
Raised guidance for FY 2023
Medical Properties actually raised its NFFO guidance for FY 2023 from a range of $1.53-1.57 per-share to $1.56-1.58 per-share. The raise in guidance was unexpected and underscores the REIT's comments about the resilience of its business model.
MPW has an extraordinarily cheap valuation even under the application of a 25%-safety discount
The valuation of Medical Properties can only be described as depressed. The REIT has guided for $1.56-1.58 per-share in NFFO which implies a NFFO multiplier factor of 3.3X, but I said earlier that the REIT might decide to sell more assets (and lose associated FFO) down the line in order to repay its large debt ($10.2B as of the end of the September quarter).
Assuming a generous 25% reduction in NFFO to account for future asset sales, the forward annualized level of normalized FFO may be closer to $1.15-$1.18 per-share. With a market cap of $3.1B (share price of $5.16), MPW would be valued, transaction-adjusted, at 4.4X normalized FFO. In other words, even at a much lower NFFO level that specifically accounts for declines in NFFO due to additional asset sales, investors pay a deeply distressed FFO multiplier.
A ~$1.15 per-share annualized NFFO level also implies a dividend payout ratio of only 52%... so even under the assumption that the REIT will divest more assets going forward, the dividend at a current rate of $0.15 per-share may not get cut again.
Risks with Medical Properties
The risk with Medical Properties relates to the performance of its tenants. Those tenants that fall behind on making rent payments pose a risk to the healthcare REIT as well as its dividend. Right now, however, I believe the dividend is sufficiently covered by NFFO, even under the aggressive assumption that MPW could lose 25% of its FFO due to further asset sales. What would change my mind about the REIT is if it were to see a larger NFFO decline or other tenants started to pose a cash flow risk.
Final thoughts
Medical Properties’ third-quarter earnings release showed that the turnaround has already begun and management confirmed its positive long term outlook as well as conveyed its confidence in its growth prospects and the current restructuring. The 16% after-earnings share price surge signals that investor confidence could be on the brink of coming back more broadly as well.
Based off of NFFO, Medical Properties handsomely covered its $0.15 per-share dividend and the fact that Prospect Medical has resumed making rent payments is another favorable development. As is the raised NFFO guidance. Importantly, even under the assumption that MPW may sell more assets in order to lower its debt/leverage, I believe the valuation multiplier factor is extremely low... and indicates potential for investors to earn excess returns if the turnaround continues on its current path!
For further details see:
Medical Properties: The Turnaround Is Here