Business Description
Medical Properties Trust is a REIT that invests in healthcare facilities with triple-net leases. The properties are mostly hospitals.
Hospitals have stable "customers" and good long-term growth due to population growth. However, sometimes the cost of the management can be out of control, so MPW has some difficulty with their tenants (in 2021-2023). Also, MPW's management did not do well in managing their debts, which brought the company to peril in 2023.
The assets of MPW are still fine in general, but the track record of the management is bad. I would classify this as one of the stocks that I would only invest at a very low valuation (see Low ROIC Low Valuation Stocks).
Updates
2024/08/22 Update after 2024 Q2 earnings result, decided not to buy any more MPW
I decided not to buy any more MPW after the 2024 Q2 earnings result..
The earnings showed that $MPW's Steward properties were in pretty weak conditions.
Adjusted Net Debt to Transaction Adjusted Annualized EBITDAre Ratio at over 8x, 53.6% debt over gross assets, too highly leveraged.
The $400 million wipe off of its JV that owns 8 Steward hospitals in Massachusetts shows the management is quite incompetent.
This is only the latest losing record for various writeoff related to its top operators over the last two years: Steward (19.2% of property assets by the end of 2023 Q4), Priory Group (7.6%), Prospect (6%), MEDIAN (3.6%), Lifepoint Health (2.7%). The write offs were understated a bit because Steward was pretty much forced to take on some "investments" from the troubled tenants, which were probably just deferred write offs.
In addition, with elevated interest costs coming a year or two later due to refinancing debt that cost less than 3% today, I can only see the company earning at most $0.8 a year with non-trivial downside risk.
It's still cheap compared with the price of $4.6, but it's already much lower than what I originally estimated, which means I was wrong. I decided to just cut my losses and move on.
MPW renegotiated with its lender to relax some covenants:
"net worth covenant has been permanently adjusted to $5 billion and that can be compared to the $6.2 billion of GAAP net worth we reported as of the end of the second quarter."
"Other changes that are effective through September 30, 2025, are to increase the allowed total leverage to 65%, increase allowed unsecured leverage to 70% and reduce the required unsecured interest coverage to 1.45x."
In return, MPW limited its dividend to $0.08 a month.
The downward revision on dividends is not an issue given it just means more cash for debt repayment. However, the fact that it has to ask for mercy from the lender is a big red flag. Going to zero is a non-trivial risk for $MPW at this point.
Second Quarter 2024 Supplemental Information
2024 Q2 earnings call transcript
First Quarter 2024 Supplemental Information (Updated)
Fourth Quarter 2023 Supplemental Information
2024/08/17 Very Bad News For Medical Properties Trust by Jussi Askola, CFA
2024/08/21 Medical Properties Trust: Cash Flow Concerns Persist by Jeremy LaKosh
2024/02/23 Update with 2023 Q4 earnings
Medical Properties Trust, Inc. Reports Fourth Quarter and Full-Year Results
2024/02/23 Medical Properties Trust: Thoughts On Its Q4 2023 Results by High Yield Landlord
As High Yield Landlord said, this is the game plan of the company:
Sell assets to unlock value and raise cash
Use the proceeds to pay off debt maturities
Help its two challenged tenants get back on their feet
Reduce their exposure by releasing some properties to other tenants
Reemerge as a stronger REIT with lower debt and stronger tenants
So we have to look for clues to see whether the company can execute the plan. I believe the management gave pretty much the best answers for all questions during the earnings conference call:
Most of the targeted $2 billion asset sale properties have Letter of Intents, with backup parties, i.e. more than one interested party.
Dividend not contingent on Steward's rents.
Steward is on track to pay full rent later in June
New loans being funded to Steward have other partners
Further loans to steward contingent to Steward retenanting and selling of non-core assets.
Asset sales all booked gains so far.
2/3 of the assets are good, 1/3 are steward and prospect which needs work.
All facilities rented to Steward have been interested by more than one parties for retenancy consideration.
Some retenancy can be done overnight.
Covenants are not concerns at all.
Equity stake in Steward already been written down or any of the loans that have been provided to Steward have already been written down as well.
We will have to see whether MPW can keep the momentum going on its plan to sell $2 billion of assets, and whether Steward can execute its plan for MPW to recover all the loans and unpaid rents. The dividend is definitely still at risk but the overall picture is not bad.
2024/01/10 Update with a new update article from High Yield Landlord
High Yield Landlord's author Jussi Askola published an aptly named article: Medical Properties Trust: Risks Becoming Realities. The main points related to MPW are:
MPW's fundamentals look significantly worse today than during the GFC.
Consider that during through the GFC, both revenue and total assets remained roughly flat for MPW. Compare that to today's situation, in which MPW's quarterly revenue has dropped 25% over the last two years as a result of asset sales and non-collection of rent. The asset/property sales will have to continue in over the next few years in order to repay maturing debts
Inmost recent news concerning the nonpayment of rent of MPW's largest tenant, Steward Health (~25% of total contractual rent and ~20% of collected rent), and a bridge loan to assist with Steward's liquidity issues. MPW also owns a 9.9% equity stake in Steward and has extended about $215 million of various loans and credit facilities to Steward. In this case, the landlord and the lessee are financially tied at the hip.
The poor financial state in which Cerberus handed Steward off to Steward's physicians group left little cash for badly needed investment in many of its underperforming properties as well as significant financial obligations, including ~$270 million of annualized rent payments to MPW in 2020. MPW has become more and more financially tied up with Steward over the years.
In 2016, MPW took its first equity stake of $50 million in Steward, which was ostensibly to be used to invest in upgrades for Steward's Massachusetts hospitals. Fast forward to December 2023 and Steward has announced plans to close one of these Massachusetts hospitals because of persistent financial challenges. After pledging to invest $27 million into upgrades into this hospital a decade ago, Steward now says it has lost $22 million on the facility over that timespan and cannot afford to keep it open.
Also, in May 2023, Steward closed a larger hospital in San Antonio, Texas, citing similar financial difficulties. After the closure, post-graduate residents were owed $4.5 million in unpaid salaries. And in Florida, a security services firm recently sued Steward for $11 million in unpaid bills. And in Texas, Steward has recently been sued by a number of other vendors for unpaid bills totaling over $13 million.
In their Q3 2023 conference call, MPW executives expressed an optimistic tone about Steward. Although the operator still had "near-term cash flow headwinds," Steward's "hospital operations continue to perform well as evidenced by their strong trailing 12-month EBITDARM coverage of 2.7x." MPW's management team asserted that Steward was cutting costs, improving revenue, had upsized their asset-backed loan facility by $30 million, and should become free cash flow positive in 2024. At the same time, however, MPW's Q3 2023 10-Q filing revealed that Steward had "delayed" payment of a portion of September and October's rent due to MPW.
in early January, MPW released an update explaining that Steward has continued to pay only partial rent on its master lease. In the last four months of 2023, Steward owed MPW $90 million in contractual rent, but MPW reported that total unpaid rent from Steward approximates $50 million. This means that in the last four months of 2023, Steward paid only $40 million of the $90 million in rent owed to MPW (~44% of the total obligation).
MPW has agreed to defer Steward's rent for the lesser of 6 months or until Steward is able to sell some of its assets (i.e. hospital operations). Under the new agreement, zero rent is due in January, then $9 million is due in February and March, then $44 million is due in the second quarter. The rent due in Q2 2024 is equal to ~60% of contractual rent in the existing master lease.
In addition, MPW has granted Steward an additional $60 million bridge loan (on top of the $215 million in debt already owed by Steward) to assist the hospital operator with near-term liquidity issues.
What collateral backs this new bridge loan? Answer: "[E]xisting collateral plus new second liens on Steward’s managed care business, subordinate only to Steward’s ABL lenders." In other words, if Steward defaults and goes bankrupt, MPW and Steward's few other lenders take over its managed care business entirely.
And, in addition to all of the preceding, MPW also wrote off $225 million in straight-line rent receivables, which basically means that it may not receive Steward's future contractual rent escalations. Indeed, it calls into question whether the preexisting master lease with Steward (with 22 years remaining on it) will continue to exist in its present form or need to be renegotiated wholesale.
Also, MPW wrote off $25 million in rent receivables associated with the Massachusetts hospital Steward recently decided to close. And MPW also wrote off $100 million in receivables related to other rent owed before September 2023.
In our estimation, Steward would literally be bankrupt today if not for the many lifelines MPW has tossed it over the last few years.
It is true that MPW has historically been able to re-tenant properties at substantially similar rent rates. However, the situation with Steward is different than those past re-tenanting scenarios. Rather than one or a few properties to re-tenant, the bankruptcy of Steward would require MPW to re-tenant 1/4th of its portfolio.
That is why MPW is pushing Steward to sell its hospital operations at various facilities. If Steward sells its hospital operations at MPW-owned properties to larger and stronger operators, MPW benefits in four ways:
The new tenants at these properties may have to assume the existing lease. No re-tenanting rent negotiations required.
The new tenants will almost certainly be financially stronger than Steward. That was the case when Steward sold its Utah operations to CommonSpirit Health, one of the largest nonprofit hospital operators in the country.
Steward will have the cash to pay its obligations to MPW.
Steward's own finances and balance sheet will improve.
But, tellingly, MPW is preparing for the worst. The REIT has hired outside legal counsel to assist in the recovery of rent and repayment of loans from Steward. One plausible outcome (indeed, the one that Steward appears to be pursuing) is that Steward will enter into a joint venture with a "capital provider" and use the proceeds of an equity sale in its managed care business to fulfill its financial obligations. While this may sound positive on the surface, that "capital provider" would almost certainly be a bottom-feeding private equity firm. At this point, it seems unlikely that a reputable investor would invest in Steward as a turnaround play.
MPW reported that if all contributions to AFFO from Steward had been removed in Q3 2023, its AFFO per share would have been reduced by $0.11 to a total of $0.19. That would have still been enough to cover the $0.15 quarterly dividend with a payout ratio of 79%. We might expect Q1 2024's AFFO per share to come in around $0.19 or slightly above it. If Steward is able to pay its rent obligations under the new deferral agreement, then Q1 2024 should be the lowest point for MPW's AFFO per share. We don't expect another dividend cut at this time, but if further tenant issues arise, it remains possible that MPW will choose to cut the dividend in order to preserve cash.
Insiders actually own pretty significant positions with the CEO alone owning over 3 million shares (taifamilyfund: should be 4,207,251), which were once worth over $50 million. Their value has crashed down to ~$11 million, he has kept the vast majority of his shares, suffering along with other shareholders.
As of Q3 2023, MPW was in compliance with all debt covenants. But the risk is elevated right now that the REIT could call out of compliance with at least one covenant in Q4 2023 or Q1 2024.
While this is a major risk, we don't believe it would necessarily result in bankruptcy or a liquidation scenario even if it does occur. The reason for this is that MPW's lenders don't want to take possession of its assets. Banks do not want to own real estate and only do so when they have to. More likely, in a debt covenant default situation, MPW would enter negotiations with its lenders, likely being forced to cut its dividend and/or more sell properties in order to deleverage until covenantal compliance is reached again.
Reasons for optimism:
Lower Fed Funds rate ahead to reduce MPW's interest expenses
As attested by MPW's management, most of Steward's individual hospitals are performing reasonably well and are profitable... if you exclude all corporate expenses and other non-MPW operations that are losing money.
There is some precedent for major tenants making a comeback after some help from MPW. Last year, MPW agreed to defer rent for Prospect Medical until September 2023, when the operator began making partial rent payments again. Full rent payments are expected to resume in March 2024.
Benefit of doubt to MPW in extending $60 million in debt financing to Steward after negative press in previous loans
No reason to believe that Steward will be unable to divest of certain hospital operations this year, just as it did recently when it sold its Utah hospital operations to CommonSpirit.
Even in the worst case scenario of a Steward bankruptcy, we do not believe this would likely lead to an MPW bankruptcy. MPW would at least partially recover over time as it re-tenanted properties while continuing to sell other assets for debt repayment. Remember that the property-level rent coverage of these assets is strongly positive.
MPW is extremely cheap. It currently trades at 3.0x Q3 2023's annualized AFFO and 4.8x MPW's AFFO even with all contributions from Steward backed out.
The dividend yield of 16.5% remains well-covered.
I agree with most of the points. It's definitely a high risk high reward bet. The risk of permanent capital loss by investing in MPW is still low at this point (~$3.5 a share), my guess is less than 30% chance.
2024/01/05 Update on negative impact from Steward Health Care's liquidity issue
News: Medical Properties Trust Provides Update on Steward Health Care
The gist:
Steward Health Care needed the help due to the liquidity being negatively impacted by significant changes to vendors’ payment terms.
Two financial impact on MPW:
Additional $50 million rents deferred
$60 million bridge loan to Steward secured by all MPT’s existing collateral plus new second liens on Steward’s managed care business
Steward Health Care is a physician-owned and operated health care system, so the alignment of interest and expertise should be there to keep the hospitals running. MPW has a 9.9% stake in the hospital and an addition over $300 million in unsecured investment, so keeping the tenant's operation stable while getting a bigger piece of the tenant's equity piece is the right way to go, similar to what other landlords would do in a similar situation for different kinds of properties. The alternative is forcing Steward into bankruptcy, which only makes sense if Steward's business is deteriorating, but not the case here. Steward is still cash flow positive excluding the rent, so I think MPW is doing the right thing.
MPW earns about $700 million cash flow each year, so the news is 15% of this 2024's cash flow. It sucks, but it's part of the risk of investing in MPW. I decided to lower my estimation of MPW's cash flow in 2024 by about 15%, and cut the valuation on 2023/08/24 by 10% in addition to the 10% cut mentioned on 2023/11/10:
Overall, I am still cautiously optimistic that MPW will turn around with the management's determination of reducing its debt level to reduce its cost of capital. My buy below price calculated on 2023/08/24 based on 2024 cash FFO is now changed from $0.35 to $0.3 quarterly, so the valuation would be: $0.3 * 4 * 6 = $7.2. I then add a 20% cut to account for future asset sales and tenants's trouble, so $7.2 * 0.8 = $5.76. It is significantly lower than my 11/10's estimate of $7.5, not a good sign. On the other hand, it is significantly higher than the current price of $3.5.
2023/11/10 Update with 2023 Q3 earnings and downgrade by Stifel
2023 Q3 earnings release: news, supplemental, transcript
Stifel downgrade: link and link
Let's go through the earnings release to identify items related to the two biggest concerns around MPW: tenant issues and debt. The rest are just details about how much upside the stock has.
Update on tenant issues:
Trailing 12-month total portfolio EBITDARM coverage of 2.4x
For rents from Prospect: "collected cash rent payments in each of September and October from Prospect. As expected, Prospect resumed payments of the approximately $3 million of contractual rent which will be due monthly through February of 2024. Under the lease agreement, Prospect will begin making full rent payments on its approximately $513 million California portfolio at a mid-8% cash rate in March of 2024."
For loans given to Prospect: "In May 2023, MPT disclosed that it agreed to provide Prospect a $75 million delayed draw term loan facility in connection with its recapitalization transactions. Funding under this facility increased to $45 million during the third quarter and to $65 million following quarter-end. The delayed draw term loan facility earns cash interest, which was fully paid to MPT in early October, and is secured by government and commercial insurance accounts receivable."
For a tenant that does not have the ability to pay rent, only for 1% of total assets: "Agreed in principle to sell seven facilities back to a tenant comprising approximately 1% of MPT’s total assets in the first half of 2024, substantively ending the relationship and making MPT whole for its investment and deferred amounts"
For Steward's ability to continue to pay rent: "Steward reported facility level GAAP EBITDARM coverage of 2.7x for the twelve months ended June 30, 2023. Although demands on cash from operations have been impacted by challenges related to revenue cycle management and an accounts payable backlog, MPT believes that Steward will be able to satisfy its rental obligations over the full term of the leases given the local profitability Steward generates at MPT’s facilities, the cross-defaulted nature of the master leases, and the additional security of its overall Steward collateral package"
Update on debt:
$439 million matures in 2023. $430 million matures in 2024. $1.38 billion matures in 2025. $3 billion matures in 2026. $4.95 billion for the rest until the year 2031.
$305 million of Australian facilities sold to go towards repaying debt.
General comment on how to adjust debt maturing in 2025 and beyond: "We continue to evaluate the potential sale of certain assets including through joint venture structures, limited secured financing of assets and possible amendment and extension of certain bank loans. While we will not presently specify any particular assets that we are considering monetizing or the specific timing of possible transaction, I can say that we are targeting approximately $2 billion of liquidity transactions over the next 3 to 4 quarters."
Color on the company's current asset value vs value in book: "And even in such an environment, when the estimated current values of some of our hospitals are compared to our initial investment values, we are encouraged by the market ability for sale of those assets. Just a couple of examples. Rosa mentioned a few minutes ago, the announcement during the quarter of the acquisition of Circle by PureHealth, which is expected to close during the first quarter of 2024. Many of you will remember that we completed the acquisition of about 30 Circle hospitals for GBP 1.5 billion in 2020. The PureHealth acquisition places a value on Circle operations of about 3x higher than when we underwrote the 2020 transaction."
Color on the company's current asset value vs value in book: "Hospital assets are long-term, well-covered absolute net leased with inflation protection and is drawing a significant amount of attention. So even in this rate environment, we're not seeing the kind of discount demands or lack of a market even that other types of real estate are having." "I think the biggest thing that the Street doesn't give us credit for that's there, which is that we will -- we have tremendous interest for these assets at greater than our net book value."
Adjusting of debt maturing in 2023: "in December, we expect to repay from on-hand liquidity, the remaining GBP 350 million of maturing unsecured notes."
Adjusting of debt maturing in 2024: "Maturities in 2024 have an aggregate balance at current exchange rate of about $430 million. We expect to have access to ample resources to satisfy those 2024 maturities before even considering any expected proceeds from the sale of our Connecticut hospitals to Yale New Haven Health which we remain optimistic about."
$50 million liquidity from selling PHP in 2024: "Prospect expects to begin marketing the company soon, and we continue to expect a transaction in 2024." (The investment is about $50 million)
Management incentive alignment on debt reduction: "when we file the proxy in the coming months, you'll see that even in 2023, there were meaningful changes in what the Board is incentivizing management to do. There's no longer aggressive accretive growth that we successfully executed in earlier years." "you'll see a continued evolution towards fixing, assuring a good strong balance sheet and a return to access to affordable capital because the market we're in remains"
The reason of tapping secured debt: "because of the credit environment that we're in now and that translates into for a lot of buyers, not all of them, but for a lot of buyers that rely on debt, it drives the purchase price down. Now to the extent you believe that maybe this environment we're in now is not long-lasting or not permanent, it's better for us, all else equal to borrow against those assets rather than permanently give up value by virtue of selling them.", "I wouldn't expect that we would do all $2 billion under secured debt. It would be limited temporary and frankly, not that dilutive given where we're paying interest right now in any case."
With that, the following is my answers to Stifel's reasoning of the downgrade:
The article Medical Properties Trust Is Making Good Progress by Jussi Askola on 2023/11/03 also added a few points:
Its tenant, Steward, has now refinanced its credit facility for 4 years.
Its LTV is at around 50% and its maturities are reasonably well staggered.
2-3 years later when MPW faces $1.38 billion of debt in 2025 and $3 billion of debt, the assets will have higher sales prices due to rent escalation for the 2-3 years
That's in addition to his 2023/10/16 article, Medical Properties Trust: Assessing The Risk Of Bankruptcy, that calculates the book value of MPW would be $8.5 per share even assuming its assets are only 80% of the current values in its book.
Overall, I am still cautiously optimistic that MPW will turn around with the management's determination of reducing its debt level to reduce its cost of capital. My buy below price calculated on 2023/08/24 based on 2024 cash FFO $0.35 still holds: $0.35 * 4 * 6 = $8.4. Maybe a 10% cut is warranted given future asset sales will be dilutive to FFO, so $8.4 * 0.9 = $7.5, still way above the current share price of ~$4.2.
2023/10/14 Recent price movement
MPW share price could not catch a break due to its high debt in a high interest rate environment and uncertainty in its tenants. There was a recent strong sell article on Seeking Alpha: Medical Properties Trust: Why I Am Selling At The Lows And Downgrading To 'Strong Sell'.
On the other hand, the company announced some progress on asset sales on 10/11, with the proceeds being used to repurchase debt at 13% effective yield (news). The CEO also gave a message to shareholders in a video on 10/02: https://www.medicalpropertiestrust.com/. I think the company still has a fair chance of turning around by reducing debt through asset sales and managing its tenants default risk.
2023/08/24 Valuation
MPW is a good investment at P/FFO < 6. Its sustainable cash FFO is about $0.28 a quarter this year, so $1.12 a year. It will have a one-off step up next year due to the terms with Prospect holdings (one of MPW's tenants). My estimate is that is sustainable cash FFO is at least $0.35 a quarter next year going forward. The buy below price of MPW is thus $0.35 * 4 * 6 = $8.4.
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