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Medical Properties Trust: Deep Value Hidden In The Vaults

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By David Huston (with method study by Nick Gomez)

Medical Properties Trust (NYSE:MPW)

Medical Properties Trust is simply a well-capitalized, preferred existent property finance spot whose superior business is successful operating non-government owned hospitals successful respective key markets.

They run principally successful nan United States wherever 62% of nan portfolio sits, arsenic good arsenic nan United Kingdom (18%), Switzerland (6%), Germany (5%) and Australia (4%). They are nan 2nd largest infirmary proprietor extracurricular of nan nationalist assemblage and person a spot plus guidelines of $21.1 billion.

The institution has been a compound maturation business for a agelong time, managing a 25% CAGR (compound yearly maturation rate) betwixt 2004 and 3Q 2022. They person grown NFFO (normalized costs from operations) per stock astatine a 10-year CAGR of 9.4% and dividends astatine a somewhat much humble 3.4% CAGR. Recently though, location are 2 issues that person plagued nan company and driven nan stock value down complete 45% complete nan people of nan past 12 months. Let's person a look astatine nan issues, followed by nan superior building of nan institution and its equilibrium sheet, and spot if we tin travel to a actual conclusion astir nan finance case.

Fundamentals - Balance Sheet And Income Statement

The logic I statesman pinch an appraisal of nan institution is that it's basal to knowing whether this is, astatine all, nan type of business you would allocate superior to. To do truthful we travel a group of study that Warren Buffett and Charlie Munger are known for using, which is covered successful Warren Buffett and nan Interpretation of Financial Statements by David Clark and Mary Buffett. The results person been simplified and summarized successful nan array below:

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MPW Annual Report

Let's commencement pinch nan positives. Despite appearances, MPW is simply a comparatively profitable finance trust. The nett income fig - for those eagle eyed readers - is really $1,522 cardinal ($1.5bn), however, we person subtracted nan statement items for divestitures made successful nan quarter. This gives america a much granular position of really they did successful nan business of making money without nan added effect of trading things, that further hampers their expertise to make money. In aggregate erstwhile you look astatine their ratio of property/plant/equipment to indebtedness and nett earnings, nan institution is decent astatine leveraging its existent property portfolio to make profit for shareholders. Especially for a business that trades astatine a value net ratio of 5.67.

The amber and reddish flags are that its rate positions person further reduced astatine nan extremity of nan quarter, and nan institution does person a sizeable $1.6 cardinal successful short word slope indebtedness that it needs to repay. Ironically immoderate analysts person pointed retired that nan consequence is nan enslaved indebtedness (we will travel to this later) that comes owed successful 2027 & 2030 respectively. However often it is short word slope indebtedness and loans that get a business into trouble. It is nary astonishment past that we find that nan Debt to Shareholder Equity Ratio is rather high. Fundamentally MPW needs to trim nan indebtedness and show shareholders that it tin stay competitory and support increasing nan apical and bottommost statement without adding to nan heap of indebtedness that will beryllium taken connected astatine higher liking rates successful nan future.

What tin we now opportunity astir Medical Properties Trust earlier we move onto nan issues that they are facing? Let's return a higher level look astatine nan fundamentals for nan company:

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Morningstar Quantitative Equity Research

MPW has a adjacent worth appraisal of $20.05 versus a existent value of $11.85. Compared to caller history, it is trading astatine an all-time discount to nett plus worth that efficaciously prices successful a awesome woody of interest astir its early financial wellness and capacity to present returns. With a PE of 5.67 and a dividend output 9.4%, nan marketplace seems to beryllium preparing for nan imaginable for declining net and dividend cuts successful nan future.

Trouble With Steward And Debt

One of nan cardinal headwinds Medical Properties Trust faced successful 2022 was fears complete nan early capacity of Steward Medical Group, 1 of MPW's largest clients, whose financial position was formed into uncertainty by a Wall Street Journal portion that was tally successful February 2022. The allegations were that nan institution had financial difficulties and had mislaid complete $800 cardinal complete a three-year period. Furthermore, it was asserted that MPW had really loaned money to Steward to salary its rent and different bills.

What a quality a twelvemonth makes: since that portion was run, it turns retired that Steward has won a litigation against Compass Medical group successful narration to fraudulent claims being made against Steward. The institution has subsequently stabilized its financial position and accelerated repayments to MPW to nan tune of $450 million, which was outlined successful nan caller Q3 update by MPW:

During nan 3rd quarter, Steward completed nan accelerated repayment of amounts owed related to astir $450 cardinal successful COVID-related advances and collected astir $70 cardinal of past owed reimbursements nether nan Texas Medicaid program. With these rate drains now successful nan past, affirmative gross trends, important declines successful statement labour utilization and anticipated yearly savings resulting from adjustments to Steward's costs building are expected to consequence successful affirmative and sustainable free rate flow.

Source: Q3 Results Medical Properties Trust, 27th October 2022

There is of people further imaginable for financial trouble pinch Steward and nan anticipation that 1 of nan largest clients for MPW whitethorn struggle, successful nan future, pinch paying their obligations. Investors who are willing successful learning much tin find a useful summary here. However, it appears that nan mostly of that consequence is priced into nan banal of MPW already. Certainly nan truth that arsenic precocious arsenic 22nd December 2022, Steward Health Care was capable to complete an statement pinch Citibank to widen their ABL statement pinch lenders is an encouraging motion that they are moving successful nan correct direction.

On occasions for illustration this investors take to attraction solely connected nan early risks to cashflow - successful this case, nan consequence that Steward will default connected its obligations and introducing superior risks to MPW's bottommost line. From a basal position though, arsenic of nan 3rd 4th reported successful 2023, this has not materialized.

What's absorbing astir Medical Properties Trust is that it has a very unchangeable basal customer guidelines sloppy of nan financial wellness of nan underlying businesses that salary it rent. Over 67% of nan assets that they ain are acute attraction hospitals, predominantly successful nan United States, which are seeing grounds request for their services. Furthermore 1 of their largest acquisitions precocious was for £1.5 cardinal worthy of acute attraction hospitals nether semipermanent ostentation linked leases to Circle Health.

There's really a clever measurement to get vulnerability to MPW without taking connected excessively overmuch risk.

Dividend & Income Vs. Bonds

It's reasonably evident that buying MPW arsenic a shareholder would entitle you to a 9.4% output astatine existent marketplace prices, albeit pinch a consequence that they trim their payout successful nan early to attraction connected paying down debt. Although we don't judge that this is simply a adjacent word consequence - fixed nan dividend is amply covered by FFO and profit - it's a risk.

What's absorbing is that Medical Properties Trust operates nan MPT Operating Partnership L.P., which is simply a financing corp whose purpose is to supply in installments to nan genitor organization. Currently nan bonds for that financing LLP waste and acquisition connected very charismatic prices to book value:

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Frankfurt Boerse

Purchasing nan MPT Operating Partnership L.P./MPT Finance Corp 5% 17/27 enslaved astatine today's value would springiness you a yield-to-maturity of 10.88% astatine marketplace price.

For those who do not waste and acquisition arsenic often wrong nan enslaved market, let's unpack that. The instrumentality is simply a enslaved that trades successful USD connected nan US enslaved market. The face-value of nan enslaved is 100 and it pays a coupon of 5% a twelvemonth pinch a maturity day (when they springiness you your money back) successful 2027. The long near for nan enslaved is 4.16 years.

The costs of that enslaved coming is astir 81.595 if you return nan midpoint of prices and facet successful banks taking a committee connected your trade. So let's presume you get that acquisition price, it intends if you usage a "yield-to-maturity" calculator, that you get a output to maturity of 10.78%. Depending connected nan existent value you salary for nan enslaved this last output will up and down and beryllium observant - conscionable for illustration you do pinch equity investments - not to salary excessively overmuch successful fees to bargain nan bond.

So what's a amended finance then, nan MPT bonds, aliases nan Medical Properties Trust communal stock?

Investment Options

For this institution we judge that location are 2 absorbing finance options:

  1. Buy MPW equity / stock
  2. Buy MPT Bonds

The method image for Medical Properties Trust is arsenic affirmative arsenic it was successful 2009 station nan GFC :

  • RSI is rising disconnected nan lowest level since 2009.
  • MACD is curving upward from a overmuch little level than successful 2009.
  • The stochastic is rising from a sub-20 level for illustration successful 2009.
  • %B is rising from nan lowest level since 2009.

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ANG Traders, stockcharts.com

A person view, shows that MPW is supra nan Raff regression transmission and supra nan 6-month moving average. In nan past, nan second parameter has predicted affirmative upward momentum and higher prices.

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ANG Traders, stockcharts.com

Medical Properties Trust trades astatine an undemanding PE of 5.67, has a dividend output of 9.4%, and arsenic we person shown supra a financial position that seems stronger than what is reflected successful nan worth of nan shares. We judge a medium-term value target of $20.2 is much than reasonable for nan company.

If you're sensing "a but", though, there's different information - nan bonds.

MPT Operating Partnership L.P./MPT Finance Corp 5% 17/27 enslaved is enticing. For tying up your superior retired to 2027 (about 4.1 years from now) you get paid a guaranteed output of 10.7% (depending of people connected your acquisition value and costs). What's truthful typical astir that? Well, let's retrieve that arsenic an equity holder, if nan institution struggles pinch further bad news connected nan profit front, nan banal could waste and acquisition down -15 to -20% if it misses expectations. As a enslaved holder that is irrelevant: each that matters is that MPW is solvent and remains successful operation, successful bid to salary backmost bondholders successful 2027.

Let's comparison these 2 horses successful a elemental floor plan factoring successful compound return:

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MPW Annual Report

If we presume a 5% superior return connected nan equity positive 9.4% dividend, that gives america an mean yearly return of 14.4% connected nan banal if everything goes good retired to 2027. At nan aforesaid clip if we held nan overmuch much elder and unchangeable bonds (that don't suffer from superior nonaccomplishment arsenic readily) we'd mean conscionable nether 10.8% yearly return. The full return for nan equity would beryllium 71.3% retired to 2027 and 50.4% for nan bonds retired to maturity.

So which is simply a amended investment? From our position astatine ANG Traders nan MPT enslaved offers a little consequence for risk-averse investors, fixed nan existent macroeconomic situation and nan appraisal of MPW arsenic a business. A powerfully risk-reduced 10.8% yearly return - pinch bonds that really person a lien connected nan superior astatine MPW - would beryllium little risky than holding equity that achieves a higher level of return but pinch accrued consequence of bad news aliases net coming successful low. For those investors not averse to immoderate risk, however, nan equity provides higher imaginable returns.

Final thoughts: this is simply a fluid business and tin alteration arsenic caller accusation comes in. As nan enslaved prices rally, immoderate abrupt dips successful nan stock value could alteration nan consequence assumptions to plaything successful favour of taking a agelong position successful MPW. Equally an fierce investor mightiness beryllium convinced that nan higher returns offering by nan equity prices are worthy nan risk. That's what makes a market!

We dream this appraisal has been valuable to you.

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Editor: Naga



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