2023-12-18 07:48:22 ET
Summary
- Medical Properties Trust has potential catalysts for recovery in 2024 with expected rate cuts.
- The dividend is covered and has an AFFO Payout ratio of 58%.
- The company is actively selling assets to enhance liquidity.
- Debt maturities for 2023 and 2024 have been covered with the recent sale of four Australian facilities.
Overview
Let me start off by saying that like a lot of you that are still actively following MPW, I was burned and still holding a bag. So be it, these things happen and it's no one's fault but my own. I don't lose sleep at night though since my portfolio is diversified enough. As investors, we move forward and look to the future. So as a result, I aim to share my unbiased forward-looking research here today.
Medical Properties Trust ( MPW ) has a few potential catalysts that can help fuel some recovery momentum going into 2024. At the same time though, there are clear issues that need to be addressed and management has already proven to be less capable at being transparent and providing value for shareholders.
If you aren't familiar with MPW here's a quick rundown. Established in 2003, Medical Properties Trust is a real estate investment trust focused on acquiring and developing net-leased hospital facilities. This REIT has expanded to become one of the world's largest owners of hospital real estate. They have 441 facilities under management and approximately 43,000 licensed beds spread across nine countries and three continents. MPW's financing model is designed to facilitate acquisitions and recapitalizations.
Portfolio
The portfolio encompasses $12.3 billion in general acute facilities, $2.5 billion in behavioral health facilities, and $1.7 billion in post-acute facilities. Currently, MPW's portfolio includes 441 properties with around 44,000 licensed beds. They cater to 54 hospital operating companies across the United States, as well as several countries in Europe.
MPW has exposure in Europe where they hold a total asset value of $6.1 billion. They have undergone recent developments such as the sale of Circle Health to PureHealth for approximately $1.2 billion and the purpose was to raise cash. While the sale of assets for the sole purpose of raising cash doesn't instill much confidence here, there has thankfully been some positive movements as well. MPW's European operators Priory and MEDIAN, are experiencing growth in reimbursement revenue. Priory has a EBITDARM rent coverage of 2.1x while MEDIAN has a rent coverage of 1.6x.
Prospect, another key component of MPW's portfolio, has resumed contractual rent payments, and it is anticipated to make full rent payments on its approximately $513 million California portfolio starting March 2024. Additionally, MPW extended a delayed draw term loan facility to Prospect, securing it with government and commercial insurance accounts receivable. This facility, currently at $65 million, has been instrumental in Prospect's recapitalization transactions and demonstrates MPW's strategic financial support across its diverse portfolio.
Vulnerability & Risks
MPW is actively selling assets to enhance liquidity, targeting $2 billion in transactions over 2024. While management views asset sales as a strategy for long-term value creation and a return to growth, this approach may not align with investors' expectations for sustained profitability which could further extend selloffs. Despite the acquisition of Circle by Pure Health, slated to close in Q1 2024, the overall trend of getting rid of more assets than acquiring, raises concerns about the sustainability. It all really depends on how well they can manage their debt load during this time and how the plan plays out.
While a potential reduction in rates is anticipated in 2024, a delay until late 2024 or even 2025 could pose additional challenges for MPW. A higher interest rate would contribute to making it harder to identify attractive investments with favorable spreads and AFFO growth.
Recognizing the looming challenge posed by the debt burden in 2025 through 2026, management is proactively addressing this issue. The current refinancing rates are deemed unaffordable, which has prompted the need to stay ahead of the curve. Management's objective seems to be to leverage asset sales until debt metrics are restored to acceptable levels. This would then enable the company to borrow at more favorable rates.
However, they have already covered the repayment of debts for the next two years with the sale of Australian hospitals for $305M. The sale was completed at a 5.7% cash cap and the proceeds from the sale will be utilized by MPW to reduce the balance of its revolving credit facility and bolster cash availability. Additionally, the company repurchased around $62M of its 2.550% unsecured notes set to mature in December 2023, achieving a repurchase yield averaging nearly 13%. MPW now boasts approximately $1B million in immediate liquidity, positioning them to handle outstanding 2023 and 2024 debt maturities. Therefore, they have no significant debt to repay until 2025, a year when rates are expected to decline.
Steward Exposure
Looking at Steward, their hospital operations are doing better with strong trailing 12-month EBITDARM coverage at 2.7x. Over the last 16 months, they've significantly reduced run-rate expenses by almost $600 million, including over $150 million in the last quarter alone, partly due to a 90% decrease in contract labor usage. MPW has tried to reassure us that Steward will be able to fill their rental obligations over the full term of their lease in the update they issued recently.
Steward is actively addressing its revenue cycle management using new technology and dedicated resources. They hope that this results in enhanced claims quality and quicker resolution of denials. Steward anticipates these improvements will bring in an extra $50 million in cash annually based on current volumes.
In Q3 , they successfully increased their new ABL by $30 million and are restarting a non-core asset sale program recommended by McKinsey before the global pandemic. This program is expected to provide significant liquidity to Steward's balance sheet.
Interest Rate Cuts
Approximately three interest rate cuts are anticipated for 2024 and I do believe this will change investor sentiment and serve as a catalyst for the next year. I believe that funds will begin shifting back into companies that strived in a lower rate environment and back into the REIT sector that was smashed during 2023. The first expected cut is around March of 2024.
Generally, lower interest rates mean reduced borrowing costs for REITs, allowing them to refinance debt at more favorable terms. This, in turn, enhances their flexibility, improves cash flow, and may positively impact profitability. Investors often flock back to REITs when interest rates are expected to decrease.
Moreover, the lower cost of borrowing resulting from interest rate cuts allows REITs like MPW to pursue growth strategies, such as acquisitions or development projects, which can further contribute to their long-term success.
Financials
MPW anticipates a normalized Funds From Operations (FFO) per share for 2023 in the range of $1.56 to $1.58. This outlook surpasses both the $1.55 consensus and the company's earlier guidance of $1.53 to $1.57. In the third quarter of 2023, MPW reported a normalized FFO per share of $0.38, exceeding the $0.36 consensus. The Q3 2023 number includes $0.02 per share of non-cash and non-recurring investment consideration in PHP Holdings, replacing Q3 cash rent and interest owed by tenant Prospect Medical Holdings.
Total revenue for the quarter stood at $306.6 million, missing the average analyst estimate of $341.9 million. However, MPW successfully collected cash rent payments in September and October from Prospect Medical Holdings, addressing previous challenges in rent payment. We have no update yet but I suspect the same is true for November as well.
From the latest earnings call , it seems like management is actively deploying capital strategy to increase liquidity so this is comes as no surprise:
"Looking forward, we have launched a capital allocation strategy to increase liquidity, effectively address our debt maturities, and solidify, through a right-sized cash dividend, our business for sustained long-term shareholder creation and growth when our cost of capital inevitably begins to normalize." - Edward K. Aldag, Chairman and CEO
In line with its strategy, MPW aims to raise approximately $2 billion in new liquidity over the next 12 months. Management is actively evaluating divestiture and joint venture opportunities as well as exploring limited secured debt financing options to further strengthen its financial position. All of this is great but it really depends how it plays out according to schedule. I think we're a bit too early into the process to tell but we play to revisit this after Q4 earnings are reported early next year.
Dividend & Valuation
As of the latest declared quarterly dividend of $0.15/share, the dividend yield sits above 12%. The yield is still extremely high following the recent dividend cut back in August and now following the price drop down to $5/share. After the cut, the AFFO payout ratio sits around 58% so I do think that the dividend can be held steady here going forward.
The price has fallen approximately 56% YTD now because of the tenant issues, dividend cut, higher interest rates, and other mentioned issues. MPW currently trades at a forward P/AFFO ratio of 3.74x, which is well below its 5-year average as well as the sector median of 14.55x. Despite the allure of a double-digit yield now over 12%, the continuous tenant troubles diminish the perceived value. For investors with a high risk tolerance and a belief in the long-term potential of MPW, the current price may present an opportune entry point.
However, with the short interest now above 23%, I feel that MPW's valuation plays little role here as the fundamentals sit on the back burner. MPW can now be categorized as a speculative play where we hope the recovery plays out as planned. As we move forward, I plan to continue holding my shares and reinvest the dividends for now. I will not be deploying new capital into my position however as I would like to give it a bit more time to see how these efforts play out. The position size I have is relatively small so it doesn't really benefit me to sell my shares here.
Takeaway
Despite ongoing challenges, MPW's diverse portfolio spanning multiple countries and healthcare sectors could serve as a foundation for recovery. Vulnerability and risks persist, notably in the form of active asset sales and the continuous impact of tenant troubles. The success of debt management and liquidity-raising efforts will shape MPW's trajectory in the coming months. The potential interest rate cuts anticipated for 2024 could inject positive sentiment, aligning with historical trends where REITs benefit from reduced borrowing costs.
The financials indicate both challenges and opportunities. While MPW anticipates normalized FFO per share exceeding consensus, missed revenue estimates and ongoing tenant-related issues underscore the need for cautious optimism. The company's proactive measures, such as the agreement to sell facilities and capital allocation strategy, indicate a commitment to addressing concerns but simultaneously sells off assets.
The dividend yield remains attractive, providing some compensation for the risks associated with MPW. The current valuation, trading at a significant discount to historical averages, may be attractive for those willing to take on a high level of risk. However, the heightened short interest and speculative nature of the company right now, underscores the importance of monitoring developments and allowing time for the recovery plan to unfold.
For further details see:
Medical Properties Trust: Holding Through Recovery Efforts