2023-10-29 23:20:22 ET
Summary
- Medical Properties Trust has collapsed to new lows and is currently trading at a 65% discount to book value per share at the end of its fiscal 2023 third quarter.
- The healthcare REIT currently offers a 12.2% dividend yield with a lower distribution that is more than 200% covered by normalized funds from operations.
- A concrete Fed pivot and inflation falling back down to 2% are critical backstops required for the commons to recover.
Medical Properties Trust ( MPW ) has become a poster boy for the late 2023 REIT collapse catalyzed by the Fed's higher for longer mantra and tenant issues. The 20 September 2023 Federal Open Market Committee meeting saw this mantra reiterated to awaken new animal spirits that have led to a wholesale collapse of investor sentiment in across the REIT space. In doing so the Fed has turned what was a stable and somewhat sleepy asset class pre-pandemic into one highly defined by drama, controversy, and collapse. MPW last declared a quarterly cash dividend of $0.15 per share, a roughly 48% decline from its prior payout for what currently works out to be a 12.2% annualized forward dividend yield. I'll give it to the bears and 22% short interest, the collapse of the quarterly distribution forced by high leverage and troubled tenants has partially justified this pullback. What comes next?
Likely more pain. The market has capitulated and the prospect of rates remaining elevated for a prolonged period has forced a repricing of MPW common shares with no floor yet to be found. What we know is that the REIT is currently trading hands at a 65% discount to book value of $13.84 per share as of the end of its fiscal 2023 third quarter. To be clear, MPW is now trading for 35 cents on the dollar, a type of discount reserved for highly distressed companies facing the very real prospect of a near-term Chapter 11 filing. The REIT is also swapping hands for 3.14x the lower end of its range for funds from operations per share of $1.56 to $1.58 for its full year 2023. It's not an exaggeration to state that the current pricing of the commons leans into a specter of bankruptcy that simply is not reflected in MPW's current financials.
FFO, Dividends, And Operations
MPW's third quarter saw the REIT realize revenue of $306.58 million , down 13% over its year-ago comp and a miss by $35.27 million on consensus estimates. The decline was led by the continued nonpayment of rent from Prospect for the first two months of the quarter. Prospect resumed half payment of its rent in September and is on track to resume full payments in February of 2024. It's critical to state that the market looks to be pricing in a Prospect relapse for a nonrealization of what was $38.68 million of rent payments, and around 9.2% of total revenue, from the troubled hospital operator in 2022. MPW is not fully out of the Prospect headwinds yet in spite of an early 2023 $375 million recapitalization of the troubled hospital operator. The 2022 proposed sale of three of Prospect's Connecticut hospitals to Yale New Haven Health is still being held up with a summer cyberattack adding to Prospect's woes. The $435 million sales price might also be negotiated down.
Normalized FFO for the third quarter was $226 million, around $0.38 per share, and down around 7 cents from $0.45 per share in the year-ago period. FFO also includes roughly 2 cents per share from the receipt of an investment in PHP in lieu of cash for third quarter owed rent and interest revenue from Prospect. NFFO currently covers the reduced dividend by 253% with the reduction set to save roughly $335 million of cash per year . There are numerous risks ahead from a potential derailment of the Prospect Connecticut buyout to another cyberattack or another hike to the Fed funds rate. However, the market is currently pricing in a 99.9% chance that the Fed will keep rates unchanged at their current level of 5.25% to 5.50% when they next meet to set rates on 1 November 2023.
The Most Dangerous Period Faced By The World In Decades
JPMorgan's ( JPM ) Jamie Dimon described the current macro backdrop as the most dangerous the world has faced in decades during the bank's third-quarter earnings call. This is not an understatement, the last time REITs faced such a perfect cocktail of headwinds was during the 2008 financial crisis. It's not hard to see why investor sentiment has melted away. MPW is undoubtedly going through a transformation with property divestitures set to shrink the asset base it earns FFO. The REIT expects to raise roughly $2 billion in new liquidity over the next twelve months from a combination of property sales, joint ventures, and new secured debt.
Total debt at the end of the third quarter was $10.15 billion with MPW's debt-to-equity ratio at 123%. I like that its book value only dipped by 5 cents sequentially during the third quarter. This could invert to growth on the back of the full resumption of rent from Prospect and the $335 million in dividend savings. Hence, MPW is now an investment play on an eventual return to book value that could be set for growth next year. Sentiment would have to improve though and this will mean a conclusive Fed pivot and inflation moving back to the 2% target rate. I'll remain long.
For further details see:
Medical Properties Trust For 35 Cents On The Dollar, I'll Fight The Fed