If there has been one thing that Medical Properties Trust (NYSE:MPW) has excelled at, it’s destroying shareholder value. In less than 2 years, shares of MPW have declined -82.16%, ended their consecutive dividend growth and reduced the dividend by -48.28%. Short interest remains above 20%, and nothing that MPW has implemented has reassured the market that the fears are overblown. I just checked my main dividend account, and I am down -60.84% on invested capital on my investment in MPW. I was bullish for quite some time, and my sentiment switched to neutral as shares were in freefall mode. Coming into the end of the year, I need to decide if MPW will be a candidate for tax loss harvesting or if I will try and buy my way out of what has become a bad situation. Despite management basically cutting the dividend in half, the yield is now exceeding 14%. Obviously, the market has little to no faith in MPW, and a large segment of the investment community is betting against a turnaround.
I try to keep emotions and my ego out of my investment decisions, and I am always willing to throw in the towel and admit defeat if I don’t see the light at the end of the tunnel. Right now, my price per share (PPS) is 12.04, and when the dividends I have collected and reinvested are taken into consideration, the PPS is $10.83. If I were to double down, I could lower my PPS to $7.53, and it wouldn’t be a difficult task to reduce my cost basis to under $7. I could be 100% incorrect on this move, but I am planning on adding to my position rather than sending MPW to the tax loss harvesting section, and this article will outline the reasons why I have made this decision.
Following up on my previous article about MPW
In my previous article about MPW, which was written on 8/23/23 (can be read here), I discussed how market sentiment was crushed, MPW slashing the dividend in half, the debt profile, and whether there was value to be unlocked in shares. I am following up on this article to discuss earnings, the current state of MPW, and why I am making the decision to add to my position rather than utilize MPW for tax loss harvesting.
If I am buying, how come I am neutral instead of bullish on shares?
I had been bullish on shares of MPW for a long time. While the numbers worked, the investment didn’t, and market sentiment triumphed over the numbers. Management was forced to reduce the dividend and is fighting an uphill battle. I don’t need to be bullish to add shares. No 2 situations are the same, and my situation is different from everyone who reads this article. I have assessed my PPS, the portfolio weight of MPW in my main dividend account, and what my ultimate exposure is. I have all of the time in the world, and I can choose to sit on my shares for decades or allocate more capital and sit on my shares for decades. There isn’t much difference if I sell them now for tax loss harvesting purposes or if they continue to decline and I decide to exit in the future. After going through MPW’s financials and the quarterly results, I came to the conclusion that I am willing to try and buy my way out of the red by increasing my position in MPW. The capital I am allocating won’t hurt me if it remains dormant or declines in value, as MPW is a relatively small position in my overall portfolio. There is a compelling case for me to back up my current investment with fresh capital, even if I have to sit on it for an extended period of time. Market sentiment is certainly in control, and no matter how compelling of a buy this is for me, I am not bullish because nothing MPW implemented has worked.
Q3 for MPW may not have been as bad as the investment community thought, and there could be light at the end of the tunnel
MPW closed Q3 with $19 billion in assets, which included $12.3 billion in general acute facilities, $2.5 billion in behavioral health facilities, and $1.7 billion in post-acute facilities. There were 441 properties and 55,000 licensed beds across MPW’s owned facilities. Since the close of Q3, MPW has sold 4 properties, which has reduced its licensed beds to 43,000 that are leased or mortgaged by 54 hospital operating companies. MPW has run into some hardships with its operating partners, including Steward and Prospect, since the pandemic. MPW recently released a presentation on the Steward investment (can be read here), and despite the revenue cycle management challenges have had on generating cash from operations, MPW believes that Steward will be able to satisfy its rental obligations over the full term of the leases. Prospect resumed payments of approximately $3 million of contractual rent which will be due monthly through February of 2024. In March of 2024, Prospect will begin making full rent payments on its California portfolio at a mid-8% cash rate to MPW.
On a YoY basis for both Q3 and the first 9 months of operations, MPW has declined on every measurable metric that I care about. On a YoY basis in Q3, MPW’s funds from operations (FFO) declined by -14.11% to $216.45 million, while its normalized FFO declined -17.18% to $225.52 million. On an adjusted level, MPW’s AFFO declined -15.47% to $182.09 million. On a per-share basis, MPW generated $0.36 of FFO, which was a -14.29% YoY decline. For the past 9 months, MPW has generated -$63.68 million less of FFO than in 2022, -$96.45 million less in normalized FFO, and -6.59% less in adjusted FFO. MPW’s per share FFO has declined -7.46% YoY in the first 9 months to $1.24 as they have produced $742.3 million in FFO.
MPW has slightly increased its guidance for the 2023 fiscal year as it expects the normalized FFO per share to come in at $1.56 – $1.58 compared to the prior range of $1.53 – $1.57. MPW has agreed to sell 7 facilities back to a tenant in the 1st half of 2024, which represents 1% of MPW’s assets but will make MPW whole from its investment in the facilities. MPW is expecting to raise $2 billion in new liquidity over the next 12 months as they consider which projects to divest and new joint venture opportunities. MPW is also looking at limited secured debt financing options, which could provide immediate liquidity based on asset value. By slashing the dividend to be more in line with the new amount of AFFO generated from a smaller portfolio, the near-term APPO payout ratio is roughly 60%, and MPW is in a position to preserve approximately $335 million on an annual basis. Management believes that the new dividend level is positioned to absorb the impacts of additional near-term asset sales, which reduced interest payments will also offset.
For me, there are 2 questions. Is the debt profile manageable, and are the numbers real? As I mentioned in my article from 4/3 (can be read here), I do believe the numbers are real. MPW has used PwC as its auditor since 2008. PwC is a Big Four accounting firm, and they have addressed the issue regarding the statements they have issued on MPW’s behalf due to accusations from Viceroy Research. I also don’t think that MPW could amass this size of a portfolio, especially hospitals that deal with countless regulations and pay billions in dividends if the numbers were fake. Obviously, anything is possible, but I don’t think it is probable that the numbers are fake, so I trust what is being reported. The next aspect is the debt profile. MPW has $340 million in cash on hand and is retaining roughly $83.75 million per quarter or $335 million on an annualized basis from the dividend reduction. This doesn’t include the ongoing profitability on a net income or FFO level that MPW will generate going forward. MPW has more than enough liquidity to manage the remaining liabilities for the year, and with management alluding to the fact they will be looking to raise $2 billion in new liquidity over the next 12 months and having the ability to sell assets if needed, I feel the debt profile is manageable.
After going through the financials and looking at the potential value, I am willing to try and buy my way back into profitability
MPW is currently valued at $2.54 billion, while its total equity on the balance sheet is $8.29 billion. MPW has $19 billion in total assets and $10.72 billion in total liabilities. Even if MPW’s gross property plants and equipment got rerated by -25% they would be valued at $9.78 billion instead of $13.04 billion. MPW’s total assets would still be valued at $15.74 billion, which would still place the total equity at $5.02 billion, which is almost double the current market cap. MPW’s tangible book value is $13.84, which is 326.42% more than the current share price. Earlier in the article, I had said that if I doubled down, I could get my PPS to $7.53. Hypothetically, if the tangible book value ends up changing for any reason in the future due to a rerating or any other reason, it could decline by -40% and still be $8.30, which would be $0.77 higher than my PPS if I doubled down. This makes me optimistic that I could get back to it even quicker if I add to my position, as the total equity and tangible book value are so much higher than the current valuation of MPW.
This also doesn’t take into consideration the future dividends if they remain at $0.15 per share. Hypothetically, if MPW’s share price didn’t move and the quarterly dividend remained at $0.15 per quarter, it would take me 10.98 years to break even. By doubling down, I could cut this time down to 5.49 years to break even under that scenario, and that doesn’t include the power of increasing my forward income by reinvesting the dividends. I have 5.49 years to wait this out, and if I were to allocate more capital, I could decrease how much time I would need to wait to break even under the scenario of the price not moving and the dividend remaining at this level.
MPW has been a bad situation for many investors, including myself. This is why I don’t buy on margin, and I don’t overextend in any position. I am well diversified, and the -60% loss in MPW doesn’t make me lose sleep at night. While I see value in shares of MPW, I am remaining neutral because sentiment is awful, and MPW isn’t necessarily trading based on the financials. If MPW’s financials and balance sheet were different, I would probably sell and send this off to tax harvesting land, but I think shares could rebound in 2024 or 2025. I have the time to wait this out, and I am willing to deploy more capital to reduce my PPS and increase the amount of income MPW is generating. With MPW generating over 14% from the dividend, I could theoretically double down on my position and wait 5.49 years to break even as long as the dividend stays the same and the price doesn’t move. For me, this is worth the risk, and I will be buying more before 2023 is over. Please do your own research and use MPW as an example of why it’s important to diversify and not overextend into a position. Even if the company looks drastically undervalued based on the financials, the ultimate decision maker is Mr. Market.