2023-08-23 08:45:00 ET
Summary
- Market sentiment for Medical Properties Trust has been crushed since earnings, with shares losing around 1/3rd of their value and multiple downgrades.
- A California regulator has halted a deal that would provide financial support to one of MPW's struggling tenants, adding to negative sentiment.
- MPW has slashed its dividend and reported a net loss in Q2, leading to concerns about its balance sheet and debt obligations.
It's been an awful year for Medical Properties Trust ( MPW ) and its shareholders. Over the past year, shares have declined by -56.77%, and since earnings on 8/8/23, shares have lost roughly 1/3 rd of their value declining by around -$3.36 (-33.27%). I have written 7 articles on MPW over the past year, with sentiment ranging from bullish to very bullish, and MPW could be the worst-performing stock I am invested in. While I still see value here, I am disappointed in MPW's management. My largest gripe is transparency, as they were questioned about a dividend cut , and rather than coming out and discussing the plan, they left the door open, saying that everything was on the table. Personally, I think it's a bad look to have the conference call on 8/8/23 and then reduce the dividend on 8/21/23. As a shareholder, I would have preferred that this news was disclosed as part of the earnings release, then discussed at length on the conference call with commentary regarding the plan. While I think MPW will come out on top, and I plan on dollar cost averaging into my position, I am no longer bullish due to the market sentiment. MPW could very well still be a value play, but I'm afraid it's going to be a long road ahead for management to repair sentiment and get the share price back to more desirable levels.
Market sentiment for MPW has been crushed since earnings
In less than 2 weeks, shares of MPW have lost roughly 1/3 rd of their previous value and an onslaught of negative news and downgrades have impacted sentiment. Raymond James slashed its rating to underperform from strong buy and cited similar frustrations as I did. Next, Bank of America (BAC) downgraded MPW to underperform from neutral. RBC Capital was the next large firm to lower its price target on MPW from $12 to $10 and add a speculative risk qualifier to its outperform rating. Just the other day, on 8/21, JPMorgan ( JPM ) downgraded MPW to underweight from neutral as it's the latest firm to revise its outlook on the medical property REIT.
If the downgrades weren't enough, The Wall Street Journal published an article discussing how a California regulator has halted a deal to provide financial support to one of MPWs struggling tenants. In addition to the article, MPW slashed its quarterly dividend from $0.29 to $0.15. These factors have weighed heavy on the market sentiment toward MPW after a disappointing quarter where Medical Properties Trust tightened its guidance as they now see 2023 normalized FFO coming in between $12.53 - $.157 compared to $1.50 to $1.61.
MPW did respond to the article from The Wall Street Journal and indicated the following things:
- The California Department of Managed Health Care's hold is a standard, expected, and non-controversial part of the approval process for this transaction
- MPW expects to obtain approval for the transaction
- If the deal is not approved MPW will retain a convertible note in Prospect's managed care business, which would have identical economics to owning equity in that entity.
What happens with the California regulators remains to be seen. What is reflected in the current share price is a slashed dividend, many downgrades, and uncertainty with the Prospect approval. None of this is good, and while I want to be optimistic, the reality is that sentiment for MPW has been decimated.
MPW has slashed the dividend after giving investors some hope on the earnings call
In Q2 MPW's net loss was -$42 million or -$0.07 per diluted share compared to generating $190 million in net income in Q2 of 2022. MPW had previously disclosed that there would be$286 million in accelerated lease intangible amortization related to the early termination of Steward's leases of five Utah hospitals now leased to CommonSpirit and a related $95 million straight-line rent write-off, partially offset by a roughly $160 million tax benefit related to the Company's establishment of a U.K. MPW narrowed its 2023 net income per share to a range of $0.33 to $0.37 and its NAREIT Funds From Operations ((NFFO)) to $1.53 to $1.57 to account for the Q2 loss.
Jonathan Hughes from Raymond James asked if the board has considered a dividend cut to retain more capital to strengthen the balance sheet. Steve Hammer (MPW CFO) indicates that every option is on the table and is at a board level. My issue with this is while the statement clearly indicated that a dividend cut could occur, they didn't announce it on the conference call. Analysts from BOA, KeyBanc Capital, Barclays, Mizuho, JPM, Wells Fargo (WFC), and Raymond James were on the call. As a shareholder, I would have rather seen management make the announcement, outline the plan in detail, then engage with the analysts rather than wait. I find it hard to believe that the decision wasn't already made in time for the conference call. From an optics and damage control aspect, I feel it would have been beneficial to unveil a plan to drive value for shareholders by cutting the dividend when the analysts were there. Maybe the narrative would have been that management is making the tough decisions, but they're the right decisions for the future of the company since the analysts would have had the ability to ask questions.
Looking at MPW's balance sheet, debt profile, and the implications of the dividend reduction
After the first 6 months of operations, MPWs total debt and liabilities have slightly decreased. There was $10.24 billion in debt and $10.89 billion in total liabilities on the balance sheet. The severity of having $10.24 billion in debt on the balance sheet depends on profitability, the actual debt profile, the value of the company's assets, and the ability to payback/service the debt.
I went into the 10-Q and looked at the debt profile which is below. MPW has 57.61% of its debt maturing between 2025 – 2027, with $508.12 million coming due in 2023 and another $446.4 million in 2024. Most of MPWs senior unsecured notes have favorable interest rates, as the 2026 notes have the highest rate of 5.25%.
MPW has 598,344,000 shares on the balance sheet and just reduced its quarterly dividend payment from $173,519,760 to $89,751,600. This will free up $83,768,160 per quarter in capital or $335,072,640 on an annualized basis. Over the next 2 years, MPW will save $670,145,280 on dividend payments which should help eliminate a significant portion of its debt obligations. MPW has levers to pull in the form of asset sales as well, and if the Fed does stick to its plan of starting to cut rates next year, then by the time 2025 rolls around, MPW may be in a position to refinance the notes that have a 5% or higher rate from 2026 and 2027. Regardless, if you agree with the dividend cut, it certainly will help strengthen the balance sheet by eliminating debt, and with shares of MPW so low it's still yielding over 8%.
Is there still value to be unlocked and are shares of MPW undervalued?
While the downgrades and the dividend reduction haven't translated to positive catalysts for MPW, there is still value to be unlocked. Putting the negativity aside, MPW is trading at attractive valuations. I compared MPW to several of its peers, and the valuation is at the lowest levels I have seen. Here are the companies I compared MPW to:
- Healthcare Realty Trust ( HR )
- Sabra Health Care ( SBRA )
- Physicians Realty Trust ( DOC )
- National Health Investors ( NHI )
- Omega Healthcare Investors ( OHI )
When looking at these companies on a price-to-forward FFO methodology, MPW trades at just 4.45x its forward FFO while the peer group average is 9.9x. This is interesting, and while MPW has an uphill battle ahead of them, buying shares at 4.45x its FFO could be a steal.
MPW is also trading at a -50.61% discount to its net asset value ((NAV)). MPWs NAV per share is $13.89, while its shares are trading at $6.86. Shares would need to double to trade at a 1:1 valuation. Even if MPW does liquidate some assets to improve its balance sheet, MPWs NAV would still trade at a healthy premium to its share price. This makes MPW look inexpensive after the pullback.
Conclusion
I am an unhappy shareholder of MPW because of how management handled the situation. While shares look undervalued, and there is an opportunity for management to generate returns from the current level, how they handled the dividend reduction was not optimal. I think this would have been better received if they had taken the time to outline a plan on the conference call about how the funds from the dividend cut would be used and discuss what the market was getting wrong in the valuation. The crazy part is that MPW is still yielding over 8.5% after the dividend reduction. I will be holding MPW and dollar cost averaging into my position, but I can't be bullish any longer until management starts to prove the market wrong.
For further details see:
Medical Properties Trust: Downgraded After Dividend Reduction, I'm No Longer Bullish