2023-10-26 14:05:46 ET
Summary
- Medical Properties Trust, Inc. is slowly remedying problematic tenants.
- The REIT slashed the dividend, and selling of assets is preserving cash.
- The company's debt remains the primary risk.
- A guidance increase is propelling Medical Properties Trust stock from the grave in a nasty market tape.
Medical Properties Trust, Inc. ( MPW ) remains a controversial real estate investment trust ("REIT") that we finally got behind at $5 earlier this month. Naturally, the market kicked it further when it was already down, as we have had a pretty nasty selloff in bonds and stocks the last few weeks. The chart remains pretty bearish by all accounts, but the stock is getting a lift today. We invite you to review the in-depth piece here to get our thoughts on why we covered it. The purpose of today's column is to update the thesis based on the just-reported Q3 earnings .
Folks, we are looking for the stock to form a base here as it is truly back to Great Recession levels. However, while there is a lot of risk here, the balance sheet and property and tenant profile really are not as horrific as the stock action would suggest. Essentially, while it has issues with some tenants, it's the debt and high rates that have led to the destruction in shares. However, the company enjoys a tenant base of diversified healthcare names at over 400 properties in ten different countries.
Is the company finally on the mend after slashing the dividend to $0.15 per share? That is saving around $350 million annually. We think the just-reported quarter shows there is some life here after all, and we saw a nice move for 2023 guidance. At the end of Q3, total assets were approximately $19.0 billion, including $12.3 billion of general acute facilities, $2.5 billion of behavioral health facilities and $1.7 billion of post-acute facilities.
The company did sell off some Australian property two weeks ago for $305 million, and we expect some further sales in the future as the company seeks to survive. Two of the "problem children" for lack of a better term are Steward Health Care Systems and Prospect Medical Holdings. The company stated that it "believes that Steward will be able to satisfy its rental obligations over the full term of the leases." It sees this as likely, despite the strain on its cash generation due to Steward's local profitability at MPT's facilities, the cross-defaulted nature of the master leases, and the additional security a collateral package.
Prospect resumed payments of the approximately $3 million of contractual rent which is due monthly through February of 2024. Prospect will begin making full rent payments on its approximately $513 million California portfolio at a mid-8% cash rate in March of 2024. So that is good news.
Rents seemingly are stabilizing, although rent billed decreased from $232.4 million to $229.3 million. The pressure has been on the stock given rental issues and increasing expenses. However, straight-line rent swung from a negative $39.3 million in the sequential quarter back to a positive $21.5 million. As such, total revenue in Q3 was $306.6 million, down from the $352.3 million brought in during Q3 of last year.
On the expense side, we are seeing the higher rate impact as interest expense was up over 20% to $106.8 million, but depreciation dipped to $77.8 million after a surge in Q2. Total expenses were $229.1 million. Normalized funds from operations were down to $0.38 per share, falling from $0.45 a year ago. But with the much lower dividend of $0.15 quarterly, the company is meeting that obligation out of its funds from operations. If one makes adjustments for $0.11 per share in losses from leases, $0.02 of share-based comp, and debt amortization, adjusted funds from operations were $0.30, down from $0.36 a year ago.
Make no mistake, it has been ugly. But we expect the company is going to continue to pursue selective transactions to boost cash and improve asset value. But with lower rents coming in and more expenses going out, net income has also been hit, and while it may not mean as much as funds from operations, it is worth noting. Net income was $117 million or $0.19 per share compared to net income of $222 million or $0.37 in the year earlier period.
So, the debt for Medical Properties Trust is large, but has been being chipped away. Net debt to start Q3 was $9.91 billion, and it ticked up to $10.15 billion in the quarter. This is very important to keep an eye on, because the increases in interest expense are a massive risk. Now, we suspect further asset sales will allow more debt to be knocked down. The Australian property sales will help and we see income from a convertible loan. More sales are going to be needed, but getting the rent situation remedied is of the highest importance. This can help address debt further. Thankfully there are no significant maturities until 2025, so there is time for asset sales and income-generating deals to be made.
With the results, MPW now expects 2023 normalized FFO per share of $1.56-$1.58, compared with the $1.55 consensus and its prior range of $1.53-$1.57. That is giving shares a lift in an otherwise brutal market tape.
Take home
So, there is certainly risk with Medical Properties Trust, Inc., like other leveraged REITs, but we believe management is taking the steps to preserve capital and improve the fiscal state. We expect more asset sales. The savings on the dividend payment alone opens up hundreds of millions of dollars to tackle debt. Getting the rent situation back on track is key. But given all of the available information, after the massive hit to shares, we still believe Medical Properties Trust stock is a buy.
For further details see:
Medical Properties Trust Is Fighting For Its Life