Medical Properties Stock: Attractive Valuation But With Dark Side

Business Description

Medical Properties Trust (NYSE:MPW) is a health care REIT founded in 2003 that, as of December 31, 2021, owns a large, and diversified across different countries, portfolio of investments in 437 facilities. The Company’s business strategy focus on three paths:

• Acquisition and Development of healthcare facilities with a subsequent lease, under the long-term net lease, of the facilities to healthcare operating companies.
• Mortgage loans to healthcare operators that are collateralized by their real estate assets. The aim is to allow such operators to fund facility improvements, technology upgrades, and other opportunities.
• Equity investments in certain Companies’ tenants with the aim of sharing profits (and losses) with them.

As of December 31, 20221, the Company’s key tenants include Steward Health Care System, Circle Health, Prospect Medical, Swiss Medical Network, and HCA Healthcare (HCA). Below you can see MPW’s portfolio of assets by asset type.

Valuation and Risks

MPW trades at a P/FFO of 12.37x below with respect to both the sector and the Company’s historical median respectively of 17.93x (-31.0%) and 14.32x (-13.7%) and it carries a forward dividend yield which currently sits at 5.74% (with an impressive 3.51% CAGR over the last 10 years).

For what concern the Company’s balance sheet, MPW’s Net Debt/EBITDA sits at 7.78x, well above both the 5.5x I like to see, and its’ historical average of 6.50x. Such a high ratio is a consequence of the Company’s aggressive acquisition strategy that it is unable to fund with internal capital, and thus, it relies on external one, which in turn drives leverage higher.

In particular, a Net Debt/EBITDA above 7.0x, perhaps combined with a deterioration of the fixed charge coverage ratio below 2.5x (2021′ FCC is equal to 2.9x) and further fueled by a deterioration in operating performance of its key tenants (Steward, Circle, and Prospect) may result in a Company’s credit downgrade (Moody’s current rating is Ba1). For the latter, an interesting WSJ article pointed out some of the issues the Company’s key tenant is experiencing. I would like to underline a point from it:

“Former MPT employees familiar with the company’s transactions said they saw deals with Steward as a way for MPT to provide it with cash as it notched losses, which in turn helped Steward make its rent payments and kept MPT growing.”

The above-described issue may represent a big headwind for the company and a big burden for the shareholders since to bring down the Company’s leverage it will need to raise $1.5-$2.0B of equity.

While for what concerns a possible headwind caused by high inflation, well, the Company should be doing fine since 99% of leases have inflation-based or fixed annual rent escalators.

Final Thoughts

MPW is a great company with an outstanding operating performance. Its current market valuation, as represented by P/FFO, signals that the Company is undervalued with respect to both the sector and historical median.

I believe that a likely reason why the stock keeps trading sideways is due to a big concern most investors have related to the high leverage the company carries. Personally, I believe that the stock is likely to keep trading sideways until the Company announces a plan to change its current capital structure. In particular, to reduce its leverage below a Net Debt/EBITDA of 7.0x, it will need to raise about $1.5-$2.0B of equity. Such an announcement, if made, is likely to negatively affect the stock performance in the short-term and to boost it in the long term (especially if the Company will be able to get an IG rating).

All of that said, I rate shares as HOLD due to the above-described issue. In particular, I would be a buyer in the area around $18.3/share or a P/FFO of 11.07x.

Below are some statistics for the stock over the last 5 years.