When a stock trades at low price-earnings multiples in conjunction with a high dividend yield, it should raise some concerns. That is especially true of most real estate investment trusts currently, specifically those tied to commercial real estate. The difference with Medical Properties Trust Inc. (MPW) is while telemedicine is rising, the majority of medical establishments are not going to be work from home.
Medical Properties is a self-advised REIT formed in 2003. It facilitates acquisitions and recapitalizations, which enables hospital operators to unlock the value of their real estate assets and fund facility improvements, technology upgrades and other investments in operations. The company has grown to become one of the world's largest owners of hospital real estate with 444 facilities with approximately 44,000 licensed beds in 10 countries across four continents.
This has helped the company grow significantly in the last decade while maintaining very high operating margins, which have consistently exceeded 60%. Revenue has increased from $246 million in 2013 to over $1.58 billion in 2022, with operating income up from $157 million in 2013 to over $1 billion last year. As a REIT, the company’s financing activities are vital to its success. The company has to take on plenty of debt to acquire properties. Historically, that has been met with relatively low interest rates. Today, the macro environment is much different.
Despite a 57% drop in its share price over the last 52 weeks, the company increased its dividend by 3.50% to 29 cents, marking the tenth consecutive year of dividend growth and extending its streak of consecutive dividend payments to 68 quarters. Although the company's current challenges may hinder further dividend increases this year, the substantial yield seems to compensate for this. More importantly, the dividend seems secure given a 78.3% normalized funds from operations payout ratio.
Currently, Medical Properties Trust pays north of $366 million a year in interest expense on $10.4 billion in total debt. The REIT doubled its debt load between 2018 and 2022, but the payments seem manageable while the biggest risk comes from its tenants having issues. However, with a wide and diverse portfolio approaching $20 billion vital for local communities in 10 countries, it is hard to imagine Medical Properties would be unable to navigate the near-time challenges.
A sigh of relief
A big concern alleviated came as the company made portfolio adjustments that should yield long-term benefits despite short-term challenges. First, it recently sold seven hospitals in Australia and diversified its portfolio by reducing its dependence on troubled operator Steward. Secondly, and much more of a big deal, tenant Prospect Medical Holdings successfully secured financing for $375 million to capitalize its managed care business, giving the company enough cash to repay a $250 million asset-backed credit facility, plus allowing it to simplifiy its capital structure, or shed debt and lease obligations outside of the ones from Medical Properties Trust.
Medical Properties Trust holds around $1.6 billion in total assets related to Prospect that are expected to be reconstituted as a $513 million investment in six leased California hospitals, a $457 million investment in Medical Properties Connecticut real estate and a $150 million first lien mortgage loan and equity interests in the managed care business valued at $100 million. Also included are loans totaling $264 million and accrued rent and interest of $56 million, along with a $50 million convertible loan to the managed care entities. The three-year term loans should provide enough time for Prospect to weather the storm and add value back into its managed-care business as well as refine its hospital operations.
While the above announcements give it some breathing room, the company’s cash is still under pressure. Around 90% of Medical Properties Trust's revenue comes from rent, thus a key factor to monitor is collection rate, but for its tenants to simply stop paying rent altogether would be such a severe issue for the entire industry as well as society overall.
To that note, Medical Properties Trust does not face significant refinancing until 2025, when it will need to refinance a combined amount exceeding $1.4 billion, consisting of a loan and a corporate bond. By 2026, the company's debt maturities will rise to over $2.6 billion, representing about 25% of its total debt. Meaning that excluding the 2024 loan repayment, more than 40% of the company's debt will mature in the next three years.
Admittedly, I have not gone through the REIT's list of properties and deduced a broad estimate of value on them. However, with 82% of these facilities across the U.S. and U.K. (with most of the others in Australia and Europe) it is not far-fetched to say the underlying asset is worth more than what was paid for many of them, and only getting more valuable thanks to global inflation.
An important function in health care
Health care facilities, like hospitals and rehabilitation centers, are capital-intensive businesses. They require substantial funding to acquire, build, maintain, upgrade and expand their physical assets. By providing this capital, Medical Properties Trust enables health care providers to improve and expand their services.
Lease agreements with a REIT like Medical Properties Trust can provide health care providers with predictable real estate costs over the long term, which can help them better plan and manage their financial resources. Even when Medical Properties Trust purchases a facility and leases it back to the provider, it allows the customer to reinvest the money that would otherwise be tied up in real estate into their core business, like patient care, advanced medical technologies, staff and other critical needs.
With the entire focus of its operations on real estate that supports the medical establishment, which will remain one of the strongest industries for some time to come, the company has room to work with lenders if needed, tenants if wanted and should be able to produce more value for shareholders long term.
Medical Properties Trust will likely continue to increase dividend payments over the next decade. If that happens at a similar rate as the last decade, investors today would be earning nearly 25% a year on their money by 2033.
And, if good news continues, the short sellers who occupy nearly 26% of the float will need to cover, which could double the value of Medical Properties Trust rather quickly.
Originally published on GuruFocus.com