2023-08-23 13:40:13 ET
Summary
- Medical Properties Trust has addressed and eliminated many concerns from the original short case, making it likely that the remaining concerns also will be resolved.
- The company has implemented a new dividend strategy that allows for cash retention and growth without frequent equity raises.
- The Prospect settlement will begin making payments in September, indicating a positive cash flow that will increase dividend coverage in the future.
- Despite some lingering concerns, the overall coverage of payments for Medical Properties Trust is in good shape, and the company is successfully navigating the continuing challenges of 2020.
Medical Properties Trust ( MPW ) has now eliminated big chunks of the original short case. This includes suppositions about paying too much for properties and other irregularities. However, as management has surmounted one challenge after another, there's less suppositions of the original short case remaining. The way things are going, the remaining concerns are likely to fall as well. Mr. Market is likely to begin ignoring the short case as time goes on.
New Dividend Strategy
Management announced a plan to retain some cash. 60% of available cash appears to be the key concept for determining the new payout level (as defined in the release).
This likely sets up a pathway that is similar to the transition I covered in midstream companies and to some extent oil and gas royalty companies that allow management to grow the portfolio without frequent trips to the capital market for equity raises.
It would be a new way of doing business for this entity. But it's well established in other areas where Mr. Market "got tired" for frequent requests for more capital.
Write-Offs And A Gain
Now this quarter t here were some valuation issues that led to a write-off and there was a one-time gain that at least some argue should not be there having to do with the British properties. The reasoning is that one-time events are not recurring business cash generating events. That's a fair enough statement. But to simply extend current results also would turn a temporary situation into a permanent one that goes against the Prospect settlement.
As management mentioned, the Prospect settlement is currently being reviewed by the proper authorities. This is pretty standard in many industries, not just this one. When it comes to government, there's always a reason to review transactions. As management mentioned, this one is typical and no problems are anticipated. That happens to be the case for most reviews.
Prospect Begins Payments
With the latest conference call, management has now stated the Prospect settlement several times. Prospect will begin 50% payments in September. That happens to be next month. Then 100% payments will begin in March. That means that to exclude the one-time gain and then the Prospect settlements (and the resulting payments) is far too conservative. Consistency should dictate that if the one-time gain is temporary, then so is the prospect recovery to full payments. Therefore, full payments by Prospect is likely to be the measure for which cash flow is calculated for dividend coverage in the future.
There are all kinds of scary arguments about Prospect failing again. There's always a heightened risk that a reorganized entity will fail a second time. But even that heightened risk is relatively small. It's probably reasonable to assume that Medical Properties Trust management knows the industry and is a decent evaluator of the people (and business plans) that have to be dealt with on an ongoing basis. The past results have indicated relative success in this kind of situation. There's little to no reason to assume a different outcome this time.
Dividend Payment Abilities
Along with this, there is also some concern about how recurring cash flows are calculated. But there are sales that also generate cash. The net result is that if management wants to pay the dividend until things settle down, there's plenty of cash that can be used to repay the dividend. Under market pressure, management has made a different decision. It's probably better to consider the current period as a transition back to normalcy.
The debt is rated BB. That's a fine rating for a company of this size even if that rating is not investment grade. There's a world of difference between cutting the dividend when financial stress indicates that worse is on the way and cutting the dividend to accommodate current business conditions. The latter would indicate that a dividend restoration is far easier as business conditions continue to recover.
Key Customer Ratio
Many of the issues that Medical Properties Trust is dealing with go back to fiscal year 2020 and the coronavirus challenges. That situation is unlikely to recur. But you would not know that listening to the short case.
Management ha s noted that overall, the coverage of payments due to Medical Properties Trust is by and large in good shape. Prospect coverage will be on the "iffy" side until there is history from the current settlement forward to show improvement.
Management also stated that Steward refinanced as needed as of the time of the conference call. Management has therefore removed the largest uncertainties surrounding the company's future from the "worry list." Steward now has a line of credit that lasts four years with extensions.
This has reduced the short argument to disappointment with the management of Medical Properties Trust accepting an equity investment as part of the settlement. However, such an arrangement is hardly unusual for distressed tenants. So far, those equity investments are a very small part of the balance sheet. One could argue that the total failure of every single equity investment is really not that significant. Even the relative historical success of these types of investments is not that significant either. Therefore, this is essentially a misdirection of investors to something that really does not matter one way or the other.
Where I would disagree with management was the issue of putting Steward's results as an addendum to the 2022 financial statements. It's really at this point almost too late for those results to be relevant. However, management did note that they are doing this at the request of the SEC. But that should not establish a continuing practice. Personally, I would like to see a continuing practice of historical results for any major positions the company has. That's especially for companies with which this company does a lot of business and has an equity interest as well.
On the other hand, financial results of the payer of the leases are a distraction from the lease agreements. Medical Properties Trust is concerned with getting paid. Now as long as they do their homework before the lease is signed, then management has a very reasonable assumption of getting paid.
No one could predict the challenges of 2020 ahead of time. Nor could anyone predict all the side effects that came with those challenges. This company appears to be dealing very well with the few situations it has of companies running into trouble because fiscal year 2020 caused unexpected financial strain.
Summary
This quarter appears to be the recurring cash flow low point. Typically, the market frets at a low point that things will never get better. Also very clearly, the shorts aimed to take advantage of those fears by spreading the idea that the one-time gain should be excluded from continuing results while also excluding the Prospect Settlement (even though 50% payments begin next month). This is typical market overreaction because some issues came up as the stock price declined. Therefore, surely more issues are in the future. It's like management never solves the problem despite management presenting the solution with due care taken as well.
This argument is designed to detract from the fact that both Prospect and Steward have resolved the financing issues (that the short case stated would not happen). Since the short case on the refinancing is totally lost at this point, the remaining issue is to pick apart the accomplishments and therefore undermine the case that things are better. It will take some time, but the market is very likely to see this latest argument as an attempt to prop up a failing point of view.
After the market had concerns about management taking part in the loan agreement, management sold most of its exposure to that agreement . That alone should demonstrate that this management knows what it's doing.
Management has done very well with the "hand it has been dealt." Companies that fail are companies that "sit there and take it." Clearly that does not apply to this management.
Any time the financial structure of a company signing the lease "goes downhill," then the risk of nonpayment increases. However, this company has a good record of changing operators if that needs to happen. Should a major operator fail, that failure would cause temporary cash flow issues for which this company has a large enough bank line to deal with an issue like that. But there's no evidence of such an event on the horizon.
What does need to happen is for the industry to continue to recover and head back to normal. That very much appears to be a likely scenario. If that's the case, then all the worries about tenants will fade. That should result in a far higher price.
For further details see:
Medical Properties Trust Busts Short Case