Medical Properties Trust: Sifting Through The Rubble

2 months ago

Medical Properties Trust (MPW) is simply a arguable existent property concern trust. First, fto america accidental that we person actively avoided advocating for astir REITs for a fig of quarters. We hypothesize that REITs mostly are getting person to being strong buys, but we archetypal request confirmation that rates volition settee down, and we volition go much bullish arsenic the likelihood of complaint cuts grow. This is our opinion. We person sought alternate sources of income and trades implicit the past 5 oregon truthful quarters arsenic REITs person been crushed. It has been beauteous ugly, determination is nary denying that. Now, with specified volatility successful the sector, it has surely drawn "buy the dip" calls, and for the astir part, this has been the full mode down. This successful crook leads to communal quips similar "you person not mislaid thing if you bash not sell." Maybe not, but adjacent connected paper, 1 of our cardinal rules is to (at slightest try) to "never suffer money".

Will the insubstantial losses connected REITs beryllium recovered? For the astir portion yes, but successful time. So successful that vein, buying present for the semipermanent volition apt wage off, particularly erstwhile you origin successful dividends, and for younger investors, the powerfulness of compounding. Our idiosyncratic investing doctrine is to bargain erstwhile situations originate that acceptable a assemblage oregon a banal up for a rebound, and to bounds losses, adjacent connected paper. We also, however, clasp generating other income from investments done options approaches, specified arsenic covered calls. With that said, adjacent though we deliberation we are adjacent to REITs basing out, and the Fed complaint hike run is coming to an end, the amended clip to bargain this assemblage is apt to beryllium successful 2024. That is our 'read of the beverage leaves', and we person discussed this successful extent among our investing radical membership. However, Medical Properties Trust successful our sentiment is simply a higher risk-reward situation. There are a fig of safer alternatives, but we judge this banal is going to look from the ashes.

Make nary mistake, MPW banal has been perfectly crushed. Some of our investing radical took a changeable connected this banal arsenic it fell to astir $8. For a fewer months, that played out. Despite unit connected the sector, things seemed to beryllium basing out, but with each passing quarter, antagonistic quality conscionable piled up. The banal has fallen different 33% from those levels, and touched down nether $5 precocious with marketplace woes. The medium-term illustration is disgusting.

This illustration beauteous bearish by each accounts. That is wherefore we request to hold for signs of basing successful the terms action. The semipermanent illustration shows the implicit circular travel for implicit a decennary successful a precise short-period, frankly:

The illustration is highly indicative of a institution that looks headed for the graveyard. But charting is not everything, contempt what adjacent immoderate of our ain analysts connected our squad whitethorn argue. We judge if the banal tin clasp this level implicit the adjacent fewer weeks, the bottommost whitethorn beryllium in. One simply has to ask, "how overmuch worse tin it get?" We surmise the reply is "it tin spell to zero," but this would mean it was facing down the tube of bankruptcy. Not quite. From a illustration position successful conjunction with the cardinal enactment being done to close the ship, if we spot signs of a basal being confirmed, the banal volition beryllium a bargain successful our opinion, up of a assemblage rally successful 2024 that we judge volition materialize.

There is inactive a batch of hazard here, we volition interaction connected that, but our reasons for starting to crook bullish are alternatively simple. First, the banal is oversold. That unsocial is not a crushed to buy. Second is that the income present is inactive charismatic to income investors, adjacent with payout changes. But that besides does not mean that this is not a value/income trap. The 3rd and astir important crushed is that absorption is taking a 'kitchen sink' attack to trying to close the ship. And yes, adjacent due to the fact that we similar what is happening, determination is inactive execution and imaginable liquidity hazard here. However, our opinion, and immoderate whitethorn impeach it of being alternatively speculative, is that amended days are up arsenic we sift done the rubble.

Our bullish instrumentality is simple

Here is the deal, readers. Our sentiment is that present that absorption has made large moves to commencement to close the ship, we judge that the banal whitethorn commencement to signifier a basal here. The banal is present backmost to Great Recession levels. Is the balance sheet and property and tenant profile truly his bad? We deliberation not, with diversified wellness attraction holdings astatine implicit 400 properties successful 10 countries.

Before delving into wherefore we are present highlighting the banal arsenic a high-risk, high-reward name, we person had our concerns. We grew cautious successful our squad roundtables with each passing net study and league telephone since 2022. We effort to enactment successful arsenic galore of these calls arsenic imaginable during net season, and since determination are many, we scour hundreds of transcripts a play arsenic well.

One happening that absorption telegraphed erstwhile Q2 was reported was that they were astir surely dropping a fig of hints that they were having liquidity and leverage concerns. As such, it was evident that immoderate drastic steps would beryllium taken to trim leverage and power their semipermanent outgo of indebtedness and moving capital. We took this to mean plus income and that the dividend would request further modification.

If you recall, the institution had been raising the dividend each year, but froze it successful 2023 astatine 2022 levels. That was really arguable astatine the time. But intelligibly it had not been enough. Well, definite enough, astir a period agone absorption dropped the hammer and declared a new level of dividend of $0.15 per share. Pretty overmuch chopped successful fractional from the anterior dividend of $0.29 per share. This determination would efficaciously prevention astir $350 million, since astir $700 cardinal was paid retired successful 2022 astatine $1.16 per stock annually. Of course, determination has been a batch of recapitalization efforts, truthful the savings are welcomed, if not higher than stated. The institution targeted an archetypal payout of projected near-term AFFO of little than 60%. That should beryllium comparatively safe, assuming the institution tin deliver.

In Q2, it became evident that AFFO would beryllium less than projected successful Q1 arsenic guidance was updated. The sees AFFO of $1.53-$1.57. This was a narrowing of a scope that saw up to $1.61 successful AFFO. Thus, astatine $0.15, the caller annualized dividend is of people $0.60. Thus, AFFO volition person to autumn overmuch further disconnected a cliff. We are assured that portion weakness whitethorn persist, we bash not spot AFFO dropping disconnected to $1.00 for a twelvemonth (which would beryllium 60%). The 60% people was simply for Q3, to beryllium clear. What is more, AFFO performed amended than expected. Q2 saw $0.48 per share, up from some $0.37 successful Q1 and from $0.46 a twelvemonth ago. Now, a chunk of that came from immoderate equity. This comes from Prospect Medical Holdings, a large tenant that has been a headache for deficiency of a amended term.

Rents seemingly are stabilizing. Rent billed accrued from $241.2 cardinal to $247.5 million. However, straight-line rent swung from $58.5 cardinal to a antagonistic $39.3 cardinal arsenic determination was a large write-down fixed aboriginal termination of leases, with Steward. Steward is the largest tenant, and a cursory reappraisal of the quality and investigation conception volition bespeak determination has been ongoing issues with this tenant arsenic well. As such, full gross successful Q2 was $337.4 million, down from the sequential $350.2 cardinal successful and down sizably from $400.2 cardinal successful Q2 of past year. There was besides an summation successful existent property depreciation and amortization lines, which ballooned expenses to $529 million, much than doubling from a twelvemonth ago.

It has been a spot ugly. What we besides person learned is that the institution is going to prosecute selective transactions to boost plus value. Thus, we tin expect further spot sales, imaginable deals and associated ventures, arsenic good arsenic targeted refinancing efforts. We would emotion to spot the institution enactment diligently to truly trim expenses. This is simply a tertiary extremity for the institution successful our estimation, but it's connected the table.

If absorption tin execute, we person a precise bullish acceptable up. However, the indebtedness is simply a monolithic risk. We cannot contradict this. This is wherefore the risk-reward illustration is truthful lucrative, but perchance dangerous. A higher complaint situation is horrific for debt-laden companies, particularly those that request to refinance, and perpetually marque deals. It is 1 crushed the assemblage has been 1 to avoid, if not actively short. However, arsenic we noted, the complaint hike run is coming to an end, and we expect the system to soften markedly successful coming months, starring to complaint cuts successful 2024. We fishy this volition beryllium bullish. So, the indebtedness for Medical Properties Trust is large, but has been being chipped away. Net indebtedness to commencement Q3 was $9.91 billion, which is down astir $10.14 cardinal to commencement Q2, a 2.3% decline. We fishy further plus income volition let much indebtedness to beryllium knocked down. The institution does person Australian spot income connected deck, and should gain income from a convertible loan. This tin assistance code indebtedness further. However, determination is overmuch to beryllium done connected this front, and it is simply a risk. No important maturities are owed until 2025, truthful determination is clip for plus income and income generating deals to beryllium made.

So, determination is surely hazard here, similar different leveraged REITs, but we judge absorption has taken proactive steps to sphere superior and amended their fiscal flexibility. The savings connected the dividend outgo unsocial unfastened up hundreds of millions of dollars to tackle debt, portion plus income volition supply further income to code debt. The eventual question is whether the tenants volition proceed to beryllium capable to marque their payments, and whether occupancy tin beryllium maximized. This is an execution hazard that needs to beryllium further acknowledged, but with the underlying plus worth successful conjunction with the battering the REIT assemblage has taken, on with the steps being taken to amended the fiscal authorities of the company, we judge MPW banal is simply a buy.

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