Medical Properties Trust is at Bargain Basement Prices:
Initiated March 2023
Medical Properties Trust has recently seen a massive drop in share price which, based on our analysis, could represent a potential investment opportunity. Some of this decline has been caused by financial trouble major operators are facing which could impact their ability to pay rent. Additionally, Medical Property Trust also carries significant debt which will become increasing harder to refinance with our higher interest rate environment.
However, I believe that the current valuation more than compensates for the risks the company faces. Even accounting for potential rent loses, interest expense increases and dividend cuts, the company could still provide very high returns. In the event that the company meets management’s guidance, there could be even greater upsides. Based on this, I believe that Medical Properties Trust deserves a 5 out of 5 stars for valuation.
In terms of company quality, Medical Properties Trust does have a diversified portfolio of healthcare facilities across the globe. These facilities are utilized by 54 operators, with a handful of operators making up a significant portion of the company’s rent. However, Medical Properties Trust does have high debt, speculative credit rating and the healthcare system has been under strain following the pandemic. Thus, I rate Medical Properties Trust a 3 out of 5 stars for quality.
Based on this analysis, I believe that an investment in Medical Properties Trust could have a speculative role in my portfolio. I will personally consider this company a strong buy under $8.95 and a good buy under $9.69.
- Operates in a defensible industry with diversified healthcare facilities across the globe
- Current valuation may already price significant downside, thus potentially reducing investment risk
- Certain major operators are under pressure following the global healthcare crisis and are facing challenges meeting rent obligations
- Company’s high debt may be challenging to refinance with current macroeconomic conditions
Medical Properties Trust Business History and Overview:
Medical Properties Trust (NYSE: MPW) is an international real estate investment trust (REIT) that specializes in healthcare facilities. The company rents healthcare facilities including hospitals to operators via triple net leases. These leases typically require the tenant to pay ongoing operating expenses of the facility including insurance, utilities, taxes, capital expenditures and maintenance.
Medical Properties Trust was founded by Edward K. Aldag, Jr., and had their IPO in 2005. Some of the notable acquisitions include Northern California Rehabilitation Hospital, Ernest Health and their merger with Capella Healthcare. The company has also invested in properties managed by 54 major operators including Steward Healthcare System, Circle, Prospect Medical Holdings, Priory and Springstone Health Opco.
Medical Properties Trust Business Quality:
One of the strengths of Medical Properties Trust is their revenue growth since the IPO of their company:
Indeed, healthcare facilities can provide a reliable source of rental income due to their importance to the community. Medical Properties Trust has also been able to grow their portfolio by taking advantage of low interest rates over the last decade. The company specializes at acquiring hospitals below their replacement value and focusing on communities that will have consistent healthcare demand. In general, hospitals can be difficult to replace due to their specialized functions and extensive regulatory requirements. Below, we see that the company has increased their total healthcare facilities (measured in beds) significantly since being founded:
Currently, Medical Properties Trust currently has more than 400 properties worldwide with about 60% of their portfolio in the US. They also have about 60% of their revenue comes from general acute care hospitals. Many of these properties have very long leases, with a weighted-average remaining initial term of 17.6 years including annual rent escalations. In fact, over 92% of the current leases and loans are set to expire after 2032. This has helped Medical Properties Trust grow their normalized funds from operations (NFFO) almost tenfold over the last decade:
The company’s recent strategy has been to expand into behavior health. This has included a $1.1 billion investment in 35 behavioral health facilities in the United Kingdom. Medical Properties Trust expanded into US behavioral health with an acquisition for 18 hospitals. The company also acquired a $900 million portfolio of five hospitals in South Florida with an in-place master lease with Steward. Finally, the company has recently had an investment of $215 million of neighborhood hospitals in Los Angeles.
Medical Properties Trust also has a history of rewarding investors, with the company provided a sector leading 661% total shareholder returns from IPO to 2021. The company also has about $235 million in cash and cash equivalents as of the start of 2023. To my understanding, they are also expecting another $650 million by the middle of 2023. This additional money should help secure the company in the event of rent defaults or other broader economic challenges.
In terms of quality, I would rate the company as average (3 out of 5 stars). I believe that Medical Properties Trust is in a defensible industry where the buildings they own maintain value due to the service they provide and the difficulty in replacing them. Additionally, the company has diversified their assets across the world, via different types of facilities and lease to 54 operators which should help mitigate losses during economic downturns. Medical Properties Trust also has increased their total assets taking advantage of affordable interest rates to help fund these acquisitions. This has translated to many years of strong investment returns for shareholders since the IPO.
However, many REITs including Medical Properties Trust carry heavy debt to fund their acquisitions. Currently, the company has over $10 billion in total debt which has increased by over ten fold over the last decade. Although total assets have been keeping pace with debt, our economy has benefited from low interest rates which may not be sustainable going forward. Highly levered companies may need to refinance at much higher interest rates, which could substantially hurt their profitability. Medical Property Trust is rated as BB by S&P Global Rating (generally considered speculative grade), though the outlook is stable.
Another concern is the profitability of the operators of Medical Properties Trust. Certain major operators have had challenges making rent payments (more on this below). In general, many hospitals and operators have faced significant challenges from the global healthcare crisis. This could translate to rent defaults, which could hurt Medical Properties Trust during a time when raising additional capital can be very difficult.
Medical Properties Trust Valuation:
Traditional PE ratios are typically not reliable for estimating the value of REITs due to their lack of adjustment for depreciation and distributions. Alternatively, here we analyze Medical Properties Trust using the normalized funds from operations (NFFO). Below, we can see that Medical Properties Trust is currently trading at a major discount to NFFO:
A large part of this record low NFFO is due to challenges with some of their core tenants. At least two of Medical Properties Trust tenants, Steward and Prospect, have faced financial trouble from the demands of the global healthcare crisis. Some of the company’s tenants, especially Prospect, may not meet rental obligations which may decrease revenues for Medical Properties Trust. Fortunately, the situation with Steward seems to have improved. Medical Properties Trust has decreased the total amount of assets operated from Steward down to less than 25% and Steward has also extended their current credit agreement through the rest of the year.
Another challenge the company faces is with raising interest rates and credit tightening. As most REITs are heavily dependent on debt to finance their acquisitions, increases in interest can financially strain these companies. While Medical Properties Trust does have the majority of their debt is fixed rate, I estimate that about 20% of their bonds are due within the next 2-3 years.
For the purposes of this analysis, I am going to make a few assumptions about the future of Medical Properties Trust. I generally try to incorporate pessimistic or conservative assumptions to help build a margin of safety with my investments. Below are my assumptions:
1) I assume that the company will have trouble collecting rent from multiple operators leading to about a 15% decrease in rent collected in 2023. For reference, Prospect’s rent makes up about 11% of the company’s revenue.
2) The company will focus on managing their current properties and have no additional FFO growth through 2025. After 2025, the company may continue growing FFO by about 3% (less than half its median growth rate over the last decade).
3) Medical Properties Trust will refinance its bonds over the next few years at these higher inflation rates leading to about 20% increase in interest expense.
4) The dividend will be cut by almost 30% due to these challenges. For reference, the company’s dividend was cut by 20% cut in 2009.
Based on this analysis, which I believe is conservative, I think that Medical Properties Trust is extremely undervalued:
| Year | Predicted Dividend ($) | Predicted EPS ($) | Predicted Fair Price ($) |
| 2023 | $0.83 | $1.30 | $10.43 |
| 2024 | $0.83 | $1.30 | $11.08 |
| 2025 | $0.83 | $1.30 | $12.06 |
| 2026 | $0.86 | $1.34 | $13.43 |
| 2027 | $0.88 | $1.38 | $13.83 |
Interestingly, my NFFO assumptions are below the lower end of guidance provided by management. If management turns out to be correct, and the dividend is sustainable, these returns could potentially be much higher. Regardless, for our analysis, I believe that the current share price offers a huge margin of safety that could protect my investment in the event of financial trouble.
Thus, my opinion is that Medical Properties Trust should receive a 5 out 5 stars for valuation.
Investment Risks:
An investment in Medical Properties Trust does come with a number of potential risks. As mentioned earlier, many REITs are dependent on debt to fund their acquisitions and can be highly levered. While this might be sustainable when interest rates are low, current high interest rates significantly hurt these companies. As hospital operators have been strained due to the pandemic, higher interest costs could put Medical Properties Trust in a very bad position should major defaults in rents occur. Some operators, including Steward and Prospect, have already struggled with rent. I believe that the success of the company will be contingent on minimizing rent losses going forward.
I feel that this investment analysis would not be complete without mentioning that certain research groups have claimed that Medical Properties Trust is engaged in deceptive or potentially even fraudulent accounting. However, I should note that the company was audited by PricewaterhouseCoopers LLC, which is one of the big four accounting firms.
Disclaimer:
I currently own stocks mentioned in this article including Medical Properties Trust stock at the time of writing this post. Additionally, I am not a financial advisor and I am not providing financial advice. I am sharing my thoughts and processes of selecting stocks for my personal portfolio for fun and entertainment purposes only.
All information provided here is on a “best of my knowledge” basis and may be incorrect. All estimates and models are guesses and may not be accurate. Many opinions are presented in this post and may not be accurate. Stocks mentioned here may have additional risks not covered in the post.
Investing in the stock market comes with serious risk of losing money, please consult a professional financial advisor and do due diligence before investing.