There are many victims of the high interest rate environment we currently live in, including consumers who want to purchase homes or cars. Commercial real estate companies may also be taking a hit if they need to refinance their outstanding debt. Some real estate investment trusts are starting to face this new reality. A REIT is a publicly traded entity that typically invests in real estate through owning actual properties or mortgages. Since REITs are publicly traded, they offer high levels of liquidity, which is not typical of most of types of real estate investing. REITs usually focus on specific property types such as apartments, commercial buildings, warehouses, hotels or hospitals.
One of the leading health care-focused REITs is Medical Properties Trust Inc. (MPW, Financial), which was formed in 2003 to acquire and develop net-leased hospital facilities. The company is one of the world’s largest owners of hospitals with 444 facilities and roughly 43,000 licensed beds in nine countries. Acute care hospitals represent approximately 75% of revenue and Texas has the largest state exposure, accounting for roughly 10% of revenue. The company’s financing model facilitates acquisitions and recapitalizations and allows operators and owners of hospitals to unlock the value of their real estate value to finance hospital improvements, technology upgrades and other investments in operations. The company also provides loans and mortgages to health care operators.
Financial review
The company recently reported 2022 results, which showed declining revenue for the fourth quarter and the full year. The majority of revenues are derived from rents, which decreased 11% in the quarter and were roughly flat for the full year. The reported net loss per share for the quarter was 24 cents and normalized funds from operations were 43 cents. For the full year, earnings per share was $1.50 and FFO was $1.82. The fourth-quarter loss included a real estate impairment of $171 million.
The balance sheet at year end showed real estate assets of $14.7 billion and cash equivalents of $235 million. Total debt stood at $10.3 billion and shareholders' equity was $8.6 billion.
The business model depends on sustaining a low cost of capital, but new unsecured long-term debt may be over 10% in this current environment. The company’s current debt rate is approximately 3.5%, so it may face much higher debt costs going forward.
Medical Properties should receive $655 million in asset sales in 2023, which can cover 2023 maturities of a senior note with a balance of $483 million and a GBP term loan of $126.7 million. In 2024, the company has a big Australian term loan facility come due in the second quarter, which totals $817 million. The company may have to monetize its Australian hospital assets in order to pay off that loan.
The company paid $1.16 per share in dividends in 2022 and had operating cash flow of $739 million. It is likely that level of dividend payments cannot be maintained in 2023 as free cash flow in 2022 was only $532 million. Free cash flow in 2023 is expected to be approximately $500 million according to analyst estimates.
Valuation
The average price target according to 10 Wall Street analysts that cover the company is $13.50, with a high target of $16 and a low target of $10. Using a forward adjusted funds from operations multiple of 8 times would create a value of $10. This is below the historical average of 13 times.
REITs are typically valued on the dividend yields they can create. The current run-rate dividend yield is 16%, which is almost certainly going to be reduced. A 50% dividend cut would still be an attractive yield and would still allow the company to generate excess free cash flow.
Guru trades
Gurus who have purchased the stock recently include Keeley-Teton Advisors, LLC (Trades, Portfolio), Jefferies Group (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)'s Bridgewater Associates. Investors who have sold or reduced their positions include Paul Tudor Jones (Trades, Portfolio).
Summary
The company still faces many risks, including the inability to make more acquisitions, potential financial stress from hospital tenants and changes in the health care environment in many countries that may make acute care hospitals less profitable.
CEO Edward K Aldag Jr. remains optimistic, however, as he recently said, “The vast majority of our portfolio is positioned to support a significant inflation-based increase in cash rents for 2023. On the other hand, our initial outlook for this year contemplates a conservative scenario due to the underperformance of Prospect’s Pennsylvania hospitals that we first communicated over a year ago, as well as the process by which we expect to recover our full investment in Prospect’s Pennsylvania and Connecticut hospitals.”
The company has executed well in a difficult environment and may be able to manage this high rate period with a strategic dividend cut. A 50% payout cut would put the dividend yield around 8%. Investors seeking yield may find Medical Properties Trust to be a decent investment at this time.
