2023-10-27 14:49:50 ET
Summary
- Prospect Medical Holding has paid landlord Medical Properties Trust, Inc. as agreed upon in the recapitalization, contradicting rumors that they had not.
- The market had low expectations for Medical Properties Trust, causing the stock price to react positively to the routine news.
- The current Medical Properties Trust dividend is well covered. Prospect is expected to resume normal payments in March, leading to an increase in corporate cash flow (and better dividend coverage).
- The Steward Health Care System business relationship appears to be on solid ground.
- Medical Properties Trust management is slowly overcoming the challenges brought on by the pandemic.
A lot of comments have been made about tenant Prospect Medical Holding not paying Medical Properties Trust, Inc. ( MPW ) as agreed upon recapitalization. Some were brave enough to state in various places that it had already happened. But management noted in its Q3 earnings release that the cash was received as planned, which sent the stock skyward upon release of the news.
Real estate generally appreciates over time if the property chosen is well located and the services provided by the business at that real estate location are "mission critical." Management of Medical Properties Trust has long gone out of their way to find that real estate. But Mr. Market had such low expectations about the company that just regular news was going to bring about a good result.
Stock Price Reaction
Clearly, the market went overboard on the pessimistic side.
Medical Properties Trust Common Stock Price History And Key Valuation Measures (Seeking Alpha Website October 26, 2023)
The market expectations were clearly so low that when management announced that guidance was achieved, the result is what is shown above. This also likely means that the stock is not going to be going any lower unless there is a material event in the future not currently foreseen.
The current dividend was well covered in the latest report (coverage will improve still more when Prospect begins full payments), and Prospect is expected to go back to normal payments early in fiscal year 2024. That means there is an expected increase to the corporate cash flow as the Prospect recapitalization agreement proceeds (so far) as planned.
Steward
Steward Health Care System's payment coverage continues to improve from a very challenging 2020 fiscal year. During the Q3 conference call , management did note some successful cost savings as well. The issue with Steward should continue to fade as the pandemic challenges move further into the past.
Medical Properties Trust Investment Summary In Steward (Medical Properties Trust Steward Update Third Quarter 2023, Earnings Conference Call Slides)
Clearly, the coverage ratio shown above has improved and it is likely to continue to improve.
The other "bone of contention" has to be the investments in Steward. What is important is that the total dealings with Steward have been profitable in the past and are likely to remain profitable in the future unless there is an unanticipated material change. That profitability has been covered in past articles.
The investments in Steward shown above are really not all that material for a company with roughly $20 billion in assets. It would take a major event for an investment of that size to have a material deleterious effect and really there is nothing of the sort on the horizon.
Some of this , including the later detailed working capital loans, came about not only because of industry conditions, but also because they outsourced the processing of claims. As Medical Properties Trust noted, much of the industry has not had a good experience with outsourcing of claims processing.
Catching up the receivables due to an above average amount of initial denials will likely result in "extra" cash flow that will actually make things a little more comfortable for Steward as it continues to recover from the pandemic related financial stress. Given the market reaction to the news today, it is likely that the market is not expecting such a development.
Other Sales
Management gave an update on sales in progress and, as usual, some are taking their sweet time. Whenever there is a group of any type of business, some go smoothly and then there is that smaller group of others. That should have been expected as that is probably normal. But, in this market, it can be hard to tell exactly what the future expectations are.
In any event, management is announcing the intention to raise liquidity more either through some sales or possibly with a short-term loan until interest rates come back down.
There is a very good chance that interest rates will come back down because inflation is stubbornly heading downward from rates that were not seen in quite some time. Continued low rates would probably depend upon a lower deficit or a Federal Reserve policy that continues to offset continuing deficits. But if that latter happens, then rates may not be quite as low as they were before. Right now, the political climate appears to be heading towards cutting spending. Allowing Medicare to negotiate drug prices and actually tackling the Social Security deficit appear to be the most significant issues. But there are other issues that could replace those two over time.
Should this change materially and a lack of political will power presents itself, then there is a good chance that this company will have to deal with higher interest rates. That could materially affect the desirability of the investment. But it will take some time for a long-term solution and its effects to become apparent. Right now, interest rates are heading down and there is no reason to believe that will not continue in the immediate future.
Unconsolidated Holdings
There has long been an issue with some investments that are more commonly seen in a business development company ("BDC") type situation than in a REIT.
Medical Properties Trust Detail Of Unconsolidated Investments (Medical Properties Trust third Quarter 2023, Earnings Conference Call Slides)
Clearly, from the comments on previous articles, a lot of investors do not want this to happen at all. However, management has a successful record over time here as well. Combine that with the fact that fiscal year 2020 financially stressed out a lot of hospital operators. Management has found a creative and generally successful wait to navigate away from the 2020 challenges.
But this may not be acceptable to all investors. If that is the case, then you need to find something you are comfortable with and pass on this investing idea.
Key Ideas
Cash flow improved just from the payments received from Prospect. So far, the Prospect recapitalization plan appears to be on track. It is far too soon to determine the success or failure of the plan.
Similarly, there is a plan t o convert a convertible into ownership in California. But if it does not happen, management is content to sit with the convertible instrument as they state that the terms are basically the same. As of right now, this deal appears to be in a routine phase even if it takes time.
To me, the surprise on that one is that the current instrument has a higher claim on company assets as a debt instrument or even a preferred. So, am not sure why there is a lot of concern over it not possibly becoming an ownership interest once it is approved by regulators.
The bottom line is that management has largely performed as advertised or guided. Now higher interest rates, if maintained, could be an issue for this company. Then again, many of these companies adopt to industry conditions as required over time. Right now, though, inflation is headed down and therefore interest rates are likely to follow for at least the immediate future.
Therefore, the recovery potential of this business is likely huge. Should low interest rates return, then growth would likely resume. In the meantime, management appears to have any liquidity issues appropriately dealt with.
The current dividend is well-covered and debt is heading down. As long as Medical Properties Trust, Inc. management continues to execute, this issue remains a strong buy because management sooner or later will get a reputation for the good execution seen so far.
For further details see:
Medical Properties Trust: Prospect Paid As The Recovery Begins