Medical Properties Trust’s third quarter earnings tell a bullish story (NYSE:MPW)
Medical Properties Trust (New York stock market :MPW) has been a capital destroyer in 2022, falling more than -50% since the start of the year, while ETF Vanguard Real Estate (VNQ) fell -29.46%, and the SPDR S&P 500 Trust (TO SPY) has down -20.27%. Short-term interest in MPW topped 12%, while the decline in the share price led to an inflated return above 10%. MPW has just released its third quarter results, and after reading the press release, I plan to average the dollar costs again. MPW is not a non-profit tech company or a meme stock, but stocks have been shrugged off as if there is something fundamentally wrong with the company. After the third quarter results, MPW looks much more like a broken stock than a broken company, and I believe these levels represent a long-term opportunity for capital appreciation and income generation.
MPW’s third-quarter earnings should have eased fears in the investing community as clarity around its operations was provided.
Prior to earnings, MPW had announced that it would sell 3 Connecticut hospitals to Prospect Medical Holdings and 11 of its facilities in Top notch healthcare. As part of the transaction with Prime Healthcare, MPW was repaid $30 million in funding. In early September, MPW sold 9 general acute care hospitals and 2 related medical office buildings to Prime for net proceeds of $360 million. On October 6, MPW announced that it would sell 3 Connecticut hospitals to Prospect Medical Holdings. The agreement establishes an aggregate sale price of $457 million. These sales were expected to reduce short-term debt in the third quarter and generated more than $1 billion in immediate cash.
In the new MPW press release Edward Aldaq, President and CEO of MPW, said performance at MPW’s facilities improved in the second and third quarters and is a testament to the resilience of well-funded hospitals. Since the start of the year, MPW has raised approximately $1.8 billion in cash from capital recycling transactions throughout its transaction, the partnership transaction with Macquaire Asset Management and proceeds from repayments of loans. The MPW is also expected to receive over $650 million in revenue in 2023 through other currently binding agreements.
Steward was a sore point when discussing MPW, and a thesis the Bears were unwilling to give up. During the third quarter, Steward completed its repayment of $450 million in Covid-related advances and collected $70 million from the Texas Medicaid program on overdue repayments. The bear thesis around Steward should fade as its positive revenue trends and annual cost structure savings from Steward should generate sustainable free cash flow (FCF) going forward. This should reduce the level of fear regarding Stewards Network hospitals and their ability to pay MPW in the future. As a previous pain point, a hurdle has been removed from the table and, in my view, the level of risk that some had speculated on has been mitigated with respect to MPW’s operating portfolio.
MPW figures do not reflect the possibility of a dividend cut as their operating funds have not decreased
Actual MPW Revenues were mixed, but more positive than negative. MPW generated $352.34 million in revenue in the third quarter, a shortfall of $36.68 million from the consensus estimate. Funds from operations (FFO), which are the main income investors investing in REITs, did not decline, coming in at $0.45 per share, in line with consensus estimates. MPW Q3 net income was $222 million or $0.37 per diluted share, representing a 27.59% year-over-year increase from $171 million or $0.29 per diluted share in Q3 2022. MPW provided guidance that should help the bullish thesis as MPW raised its earnings per share estimate in 2022 to $1.99-$2.01. MPW is also narrowing the spread on its NFFO forecast from $1.78-$1.82 to $1.80-$1.82, narrowing the range of its year-end results.
MPW pays a dividend of $1.16 per share, or $0.29 per quarter. In the last twelve months (TTM), MPW generated $0.43 in FFO in the fourth quarter of 2021, $0.47 in the first quarter of 2022, $0.46 in the second quarter of 2022 and $0.45 in the third quarter of 2022 , for a total of $1.81 in FFO per share. This represents $0.65 of FFO per share above its current annual dividend, creating an FFO payout ratio of 64.09%. The bearish sentiment around MPW’s dividend is unwarranted. I believe MPW’s dividend should be considered sustainable as MPW was able to generate more than enough FFO in a difficult year to meet its dividend obligations and retain a substantial amount of FFO after dividends were paid .
The other aspect that investors should pay attention to is MPW’s leverage. MPW reduced its total debt at the end of the third quarter to less than $10 billion. MPW has $1.3 billion allocated to its debt as part of its second and third quarter transactions, bringing its adjusted net debt to $8.17 billion after all proceeds are collected. This keeps MPW’s EBITDA to total debt ratio in line with its peers at 6.52x, and once adjustments are made to MPW’s net debt, this ratio falls below 6x.
MPW’s valuation is still very cheap due to what I believe is unwarranted selling throughout 2022.
To provide an accurate view, I will compare MPW to the following healthcare REITs:
- Healthpeak properties (PEAK)
- Health Care Real Estate Trust (HOUR)
- Physicians’ Real Estate Trust (DOC)
- Domestic Health Investors (INSA)
- Sabra Health Care (SBRA)
- Omega Health Investors (IHO)
When I compare REITs, I look at the price of the FFO I’m paying and how a REIT is trading against its respective peers. MPW is still trading at a discounted valuation, as its price to FFO is 6.34x compared to its peer group average of 11.02x. Since there was no impact on MPW’s FFO, it appears undervalued relative to other healthcare REITs.
The MPW has a total debt of $9.48 billion, and I am using this figure because the adjustments have not gone into effect. MPW is limited and does not pose leverage liability like SBRA does. MPW’s EBITDA to total debt ratio of 6.52x is more than adequate when looking at its peers and once the adjustments take effect, it will fall below 6x.
Shares of MPW are trading at a level where its return has exceeded 10% and is the largest in its peer group. MPW also has the 2nd highest FFO coverage ratio at 156.90%, indicating that its dividend is safe and stronger than many of its peers. From a dividend perspective, MPW offers a high yield and a fully covered dividend, which should reassure investors that it is not a yield trap on the verge of a dividend cut.
MPW’s third-quarter earnings provided further reassurance to news reports throughout the quarter. I believe Mr. Market is wrong and MPW is a broken stock, not a broken company. MPW has delivered its FFO and continues to repay its debt. The issues that Steward was facing appear to have been mitigated going forward with respect to MPW, as its operations will generate positive FCF. I believe MPW is trading at a steep discount to its peer group, and I plan to add more to my position to reduce my price per share and increase the amount of revenue generated from this position. I think we could see MPW shares climb above $15 through the end of 2022 and return to a more reasonable valuation in the first half of 2023.