2023-08-18 07:00:00 ET
Summary
- Medical Properties Trust, Inc. has been a highly shorted REIT, with negative sentiment surrounding the company and a short interest of 21.07%.
- The stock has experienced a significant decline, down -34.0% year-to-date and over -50% in the past year.
- Concerns about Medical Properties Trust include outstanding debt, the financial health of tenants, and the potential for a dividend cut.
There’s a lot going these days…in politics…in sports…in finance…and in real estate investment trusts ("REITs").
And one of the ways that I drown out the constant flow of noise in the world is by going to the gym every morning at 5:00 am.
I’ve been doing this for quite some time, and I’ve found that my writing has improved because of my “time away.”
I get a lot of new ideas when I’m not staring over a computer screen and not scrolling through messages on my phone.
And don’t even get me started with social media…
Anyway, back to the gym…
So, this week I was walking on the treadmill and one of my iTunes songs began to spit out these lyrics,
Have you heard about the lonesome loser?
Beaten by the queen of hearts every time
Have you heard about the lonesome loser?
He's a loser but he still keeps on tryin'.
Now, in case you don’t know, this is a tune by The Little River Band that tells the story of a gambler who bet and lost to the “Queen of Hearts.”
Now, I know you’re really confused by now…
What does this song have to do with the beaten down healthcare REIT known as Medical Properties Trust, Inc. (MPW)?
And am I the lonesome loser?
After all, I’m still long shares in Medical Properties Trust, and specifically, I’m down -29% in one account and -28% in another.
As I informed members last week, I’m now maxed out of the “speculative” buy position, which means I have only two remaining options – either hold ‘em or fold ‘em.
As I explained in my last post on this ticker (in mid-May):
“MPW is now yielding 15.7%. This means the probability of a dividend cut is somewhere between “even chance” (coin toss) and certain (100% probability).”
Shares were trading at $7.59 when I penned that article and today, they’re trading at $7.39 per share. I may be one of the few writers who’s humble enough to show you my YTD track record:
So, as you can see, there’s no pride parade here…
Perhaps a pity party…
But as John Ortberg wrote in his book (also the title to his book),
“The Game is not over until it all goes back into the box.”
As I’ve explained in previous Seeking Alpha articles, I’m a big Monopoly fan, and in real life, I’ve come from near bankruptcy to a net worth of millions.
So, the real truth is … I have not lost anything yet (since I haven’t sold my shares) and I’m sure I’m not the only player in the game…
Which means I’m not lonely.
I’m sure there are many others reading this article just like me.
Who are sitting on MPW chips and debating…
Should I hold ‘em or fold ‘em?
Or perhaps after reading this article, some of you may even double down…
Without further ado, let me tell you about this lonesome loser…
Medical Properties Trust
Medical Properties Trust has been a battleground stock since the beginning of 2022 and has been one of the most shorted REITs since that time. There continues to be negative sentiment surrounding the company and at the time of this writing the stock has a short interest of 21.07%.
Year-to-date the stock is down -34.0% and has fallen by more than -50% over the past year.
The stock rallied from the middle of May towards the end of July with the price per share going from $7.26 on May 16 to $10.62 on July 26 for a gain of approximately 32%, but shares fell sharply after earnings were released on August 8 and have continued the downward slide into this week, losing practically all of the gains made during its two-month rally.
Primary concerns surrounding the company include MPW’s outstanding debt, the financial health of their tenants, and the potential for a dividend cut.
MPW’s management team touched on these issues during their second quarter conference call, so we wanted to take a closer look at their most recent operating results along with some of the topics discussed during the call.
Medical Properties Trust Overview
MPW is an internally managed real estate investment trust that was formed in 2003 and specializes in the acquisition and development of hospital facilities which are leased to operators on a net-lease basis.
They invest in a variety of medical properties including general acute care hospitals, behavioral health clinics, impatient rehab facilities, long-term care hospitals, and urgent care facilities. But the primary driver of their earnings is general acute care hospitals, which make up 63.7% of their total assets and 69.6% of their second quarter revenues.
MPW’s portfolio consists of 444 healthcare properties that contain approximately 44,000 licensed beds, which are leased to or mortgaged by 55 operators with properties located in 10 countries across 4 continents.
Second Quarter Operating Results
MPW reported 2023 second quarter total revenue at $337.4 million compared to $400.2 million for the same period in 2022. Total expenses for 2Q 23 were reported at $529.2 million versus $232.1 million in 2Q 22 and GAAP net loss was reported at $42.4 million, or ($0.07) per share versus GAAP net income of $189.6 million, or $0.32 per share in Q2 22.
Included in the 2Q 23 net loss were several non-cash charges including approximately $286 million in accelerated lease intangible amortization and a $95 million straight-line rent write-off, both of which are related to the early termination of Steward’s leases for the hospital properties in Utah, which are now leased by CommonSpirit.
Normalized funds from operations (“NFFO”) in 2Q 23 were reported at $285 million, or $0.48 per share, compared to $275 million, or $0.46 per share in 2Q 22.
While the 2Q 23 reported NFFO shows a year-over-year increase, it is important to point out that $68 million, or $0.11 per share, that was included in the 2Q 23 NFFO was rent and interest revenue that was recognized due to the receipt of an equity interest in Prospect’s managed care business (PHP Holdings, LLC) in lieu of cash for the 2023 contractual rent owned by Prospect Medical Holdings.
The $68 million included in NFFO reflects the excess value of their equity interest in PHP Holdings over the book value of the real estate and other assets exchanged for the equity interest in the managed care business.
When backing out the non-cash item of $0.11 per share, NFFO for 2Q 23 comes to $0.37 per share, which represents a 19.5% decrease in NFFO when compared to the same period in 2022. When asked if the equity stake in PHP Holdings would generate any recurring cash flow, MPW’s management replied:
“No, not at this time. We expect to realize that value upon the ultimate monetization of the PHP business. But, no, we’re not expecting any cash income related to that instrument.”
Given that this is a non-cash item, we will back out $0.11 from NFFO and adjusted funds from operations (“AFFO”) when evaluating MPW’s dividend coverage.
Steward Health Care
While it was not brought up during the conference call , it is well known that MPW has high tenant concentration, especially in their top tenant Steward Health Care, which contributes more than 20% to their annualized revenue.
Given their high exposure to Steward, many investors and analysts have had concerns over Steward’s financial health and how it might impact Medical Properties Trust.
MPW disclosed that Steward refinanced its asset-backed credit facility that was set to mature at the end of 2023 and entered into a new asset-backed credit facility that has a four-year term and provides Steward with significant incremental liquidity.
MPW is 1 of 7 members of the lending group that is financing the new asset-backed credit facility and agreed to invest up to $140 million, which is secured by first-lien interests in Steward’s government and commercial receivables.
I see both positive and negative aspects in this recent development.
Many investors would like to see MPW get out of the business of lending money to its tenants, as the additional investment increases their exposure to Steward.
At the same time, the new asset-backed credit facility extends Steward’s debt term, increases their liquidity, and removes concerns over Steward’s ability to refinance its debt.
Edward K. Aldag, Jr., the CEO of MPW, pointed out that the new investment is not an operating loan to Steward but rather a loan that is collateralized by account receivables from government payers and commercial insurers .
While unrelated to the new investment, MPW highlighted that Steward’s trailing-twelve-month EBITDARM rent coverage came in at 2.9x which is a significant improvement over their EBITDARM rent coverage of 1.8x that was reported in the second quarter of 2022.
MPW Debt
As of the end of the second quarter, MPW had $19.2 billion in total assets and $10.2 billion in debt for a debt-to-asset ratio of 53.3%.
Their adjusted net debt to adjusted EBITDAre ratio was reported at 6.8x and their adjusted interest coverage ratio was 3.4x at the end of the period. 86% of their debt is fixed rate and their total debt carries a weighted average interest rate of 3.93%.
MPW has been in the process of deleveraging their balance sheet recently and made significant progress with the sale of their Australia hospitals .
During the second quarter, MPW completed the sale of 7 hospitals in Australia for AUD 730.0 million and used the proceeds to reduce their Australia term loan which matures in 2024.
They expect to sell the remainder of their Australia portfolio for AUD 470.0 million during the third or fourth quarter this year and expect to use the proceeds to fully repay the 2024 Australia term loan.
On the earnings call, MPW stressed that the use of capital for debt reduction continues to be their primary focus.
In addition to the proceeds from their Australia portfolio, MPW plans to use $100 million in proceeds from the sale of 3 hospitals to Prime, and the expected $355 million in proceeds from the planned sale of their Connecticut hospitals to Yale to further deleverage their balance sheet.
MPW’s management team pointed out that due to their asset sales the company does not have to refinance any debt at this time.
They have a single maturity due later this year for £400 million but have the liquidity to cover it and the 2024 term loan should be fully repaid once the remaining hospitals in their Australia portfolio have been sold.
This removes the need to refinance at today’s rates and buys MPW some time to address the significant debt maturities that come due in 2025 and 2026 .
When asked how MPW plans to refinance the 2025 / 2026 maturities, MPW’s management team commented that they have several levers to pull, with the primary one being asset sales, but also mentioned that they could enter into joint ventures to help reduce and refinance their debt.
MPW’s Dividend
One lever MPW could pull to raise capital for debt reduction is a dividend cut.
In 2022, MPW paid out approximately $698.5 million in dividends, which represents approximately 45% of their total revenues that year.
During the call, Jonathan Hughes, an analyst with Raymond James asked if MPW’s board is considering a dividend cut to retain more cash in order to pay down debt and improve the balance sheet more quickly. MPW’s management team stated that the decision is at the board level but that “ everything is on the table. ”
During the second quarter, MPW paid a dividend of $0.29 per share. Using their reported NFFO of $0.48 per share gives us a NFFO payout ratio of 60.42%, but when removing the non-cash item of $0.11 that jumps to 78.38%.
After accounting for share-based compensation, debt costs amortization, and straight-line rent, MPW’s AFFO per share for the second quarter was reported at $0.41. After backing out the non-cash item of $0.11 that leaves $0.30 of true cash flow for the quarter, which translates to an AFFO payout ratio of 96.67%.
The uncomfortably high payout ratio does not necessarily mean that MPW will cut its dividend, but given their emphasis on debt reduction, I would not be surprised at all to see a dividend cut in the near future .
Currently MPW pays a 15.28% dividend yield and trades at a P/AFFO of 5.89x. The high yield and low AFFO multiple suggest that the market is expecting a dividend cut, which is very possible. I look at MPW as an extreme example of a high risk / high reward trade.
The company has a BB credit rating (junk rated), so it does not get investment-grade pricing, and in today’s interest rate environment any new debt incurred would likely be prohibitively expensive to make accretive acquisitions.
Similarly, with an AFFO yield of almost 17%, the same could be said about their cost of equity.
MPW’s overall cost of capital will make it very challenging for them to achieve external growth, and if current conditions persist, it will be very costly for them to refinance their 2025 / 2026 debt maturities.
At the same time, hospitals are essential for a functioning society, so in the long run MPW should continue to generate positive cash flow as they have over the last 20 years.
For an investor with a strong stomach that is willing to ride out the storm this could be an excellent entry point as the stock is trading at a significant discount to their normal AFFO multiple and is trading approximately 40% under the net asset value.
We rate Medical Properties Trust stock a Spec Buy.
The Perfect Short?
In a recent Seeking Alpha article someone commented,
“There will be books written about MPW, titled "The Perfect Short."
Maybe?
That’s yet to be decided.
“Us” shareholders are funding a lawsuit right now. On the Q2-23 earnings call, management pointed out that the “costs related to (our) Short Seller Litigation were about $2.5 million."
I’m sure that number will increase as litigation continues.
Keep in mind, here’s what happened to Farmland Partners (FPI) after they announced a dividend cut to help fund their litigation against a short seller (on Seeking Alpha).
There’s another interesting comparison I’ll make with regard to FPI and MPW…
The Chairman and founder of FPI is Paul Pittman. He owns 2,473,000 shares, amounting to around $27 million today (as per FactSet).
Edward Aldag, CEO of MPW, owns 4,294,000 shares, amounting to around $32 million today (as per Fact Set).
Whether you love or hate ‘em, they both have significant skin in the game, and in the case of Aldag, his retirement is riding on the success of MPW.
For now, I’m hanging on for the ride…
How about you?
For further details see:
Medical Properties Trust: Let Me Tell You About The Lonesome Loser