2023-08-20 11:24:18 ET
Summary
- Medical Properties Trust has pulled back heavily following second-quarter earnings that reignited fears around the dividend.
- The company is now trading at the steepest-ever discount to tangible book value since it became a public company.
- This 50% discount will likely prove to be unsustainable in the long term with a move back to tangible book value forming the primary long-term bull case.
When the pandemic hit in early 2020 and stay-at-home orders quickly shuttered our old world, I wrote Beware The Prophets Of Doom to spell out the flaw of chaotic events being overemphasized in the short term. To be clear, Medical Properties Trust ( MPW ) is facing headwinds that have materially ramped up its volatility, with a possible dividend cut now looming. This is meant to be a stable ticker whose business is buying real estate with leverage and using the net income to pay its shareholders quarterly dividends. The selloff has gone too far, and bears with their sale of every 1 in five shares now proclaim themselves as Cassandras.
To the bears, the shorts, and even those with no skin in the game, how much of a discount is too much? MPW is currently swapping hands at a roughly 50% discount to its tangible book value of $8.31 billion as of the end of its fiscal 2023, second quarter. The REIT's second-quarter tangible book value per share was $13.89, just under $7 ahead of the commons, with MPW now trading at around 50 cents on the dollar for its steepest-ever discount since it became a publicly traded company. Tangible book value has dipped since the Fed embarked on its most aggressive monetary tightening campaign in decades, with interest rates now sitting at a 22-year high at 5.25% to 5.50%. This dip is reflected across the equity REIT universe but stands to be reversed once rates start to normalize. Goldman is forecasting the first-rate cut in the second quarter of 2024 with the market pricing in an 89% chance that the FOMC will keep rates unchanged at their next meeting on the 20th of September.
The Base Bull Case Is A Return To Tangible Book Value
MPW previously traded at a significant premium to book but is now swapping hands at a discount that the market has not even extended to some office REITs. Manhattan office REIT Vornado Realty ( VNO ) is currently only swapping hands for 91 cents on the dollar. The largest office REIT Boston Properties ( BXP ) is trading at a premium. Of course, direct comps are distorted by their respective dividend payouts, but it's surprising that a globally diversified owner of acute care facilities let out on triple net leases is trading at a lower price-to-tangible book than a sector described as the primary short trade of the post-pandemic zeitgeist.
Medical Properties Trust Fiscal 2023 Second Quarter Supplemental
If we assume MPW's tangible book value falls by 20% through 2024, the company would still be swapping hands at a near 40% discount to tangible book value. The question now is not why this discount exists, but whether it can remain perpetually. Like during the pandemic, negative news tends to be leaned on too heavily in the short-term without too much thought provided to what the situation in a year or two years will look like. MPW's problems with two of its largest tenants were compounded by inflation and the necessary aggressiveness from the Fed. But hospitals are not Class B malls or offices whose use has been impacted by mounting layoffs and the WFH trend. These facilities form mission-critical infrastructure, with MPW owning 444 properties with 44,000 beds spread across 31 US states and 10 countries as of the end of its second quarter.
This Is Not Class B Mall REIT
MPW reported second-quarter revenue of $337.4 million , a 15.7% decrease over its year-ago comp and a miss by $11.02 million on consensus estimates. Normalized FFO for the quarter came in at $0.48 per share to beat consensus by $0.11 and was actually up from $0.46 in the year-ago period. MPW has also moved to establish a REIT structure in the United Kingdom, its second-largest geographical market, accounting for 22% of total assets. This is set to save at least $2 million in quarterly income tax expenses.
The REIT has been incredibly shareholder-friendly, growing its dividend through the chaos of 2020. This could change if MPW's board decides to temporarily reduce the payout. But this is not a Class B mall REIT. Two of MPW's tenants are recovering from pandemic-induced financial distress, with Prospect set to resume 50% of rent in September and full rent from March next year. When faced with disruption, you either adapt or die, and MPW made the decisions it did to ensure the financial viability of its tenants who were disrupted by the pandemic. They simply needed time to recover.
Hence, it's a vote of confidence that MPW has been able to sell $105 million of its interest in Steward's asset-backed credit facility to a leading global asset manager with more than $100 billion in AUM. This highlights the investability of Steward from a credit perspective. MPW may keep its dividend unchanged or may cut it by 25%. What's relevant is the staying power of its portfolio. Fundamentally, the current discount to tangible book value has become unhinged with emotion, passion, and fear reigning in the short term. These emotions could prove to be overemphasized when we approach the Christmas of the next year or even the year after. I remain long.
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Medical Properties Trust: Beware The Prophets Of Doom