Medical Properties Trust (NYSE:MPW) reported solid results for the first fiscal quarter this week, especially when considering how stressful the situation has become with regard to one of the REIT's most important tenants, Steward. The healthcare facility operator this month declared bankruptcy and seeks to restructure its business via Chapter 11 proceedings. From an operational perspective, Medical Properties managed to support its current dividend of $0.15 per-share with normalized FFO. I do not expect to see a dividend cut in the near term, despite one of the REIT's largest tenants falling into bankruptcy, as hospitals are likely going to get transitioned to more solvent operators going forward. Shares also continue to sell at an attractive multiple based off funds from operations!
Previous rating
In my work 2 Victories In One Week, I said that Medical Properties had a high chance of sustaining its dividend payout in FY 2024. The company's first fiscal quarter earnings strongly support this conclusion, as Medical Properties easily covered its dividend with normalized funds from operations (which corrects for impairment expenses). The Steward bankruptcy was largely expected and did not have a major impact on Medical Properties' valuation. With MPT achieving a dividend coverage ratio of 1.6X in Q1'24, I believe the dividend will continue to get paid throughout FY 2024.
Steward update
Medical Properties gave an update about the Steward bankruptcy impact at the beginning of the month, in which it said that it had provided $75M in debtor-in-possession funding for the REIT. Steward's bankruptcy now clears the way for Medical Properties and Steward to transition MPT's hospitals to other operators that are financial better positioned. Mostly because of Steward's dire financial situation, Medical Properties was forced to recognize an impairment charge totaling $693.1M in the first-quarter.
Steward is the biggest tenant in MPT's portfolio, but the company now has the opportunity to change its tenant structure and de-risk the portfolio. The majority of tenants are paying on time and represent approximately 96% of the REIT's first-quarter revenues. Steward's bankruptcy therefore only had a very limited impact on Medical Properties. The portfolio/lease restructuring that follows as well as the opportunity for accelerated debt repayments are two specific catalysts that I see for MPT going forward.
Dividend coverage metrics reviewed
Medical Properties reported normalized FFO of $0.24 per-share in the first quarter, showing a decline of 35% year over year. The decline was mostly due to Steward not making rent payments. In the first-quarter, Steward accounted for about 19% of assets, but only 3.9% of Q1'24 revenues generated from its real estate portfolio.
The REIT's standard FFO, which includes impairment charges totaling $1.16 per share, was negative $1.07 per-share. Normalized FFO adjusts for the impact of impairment charges and in this regard, Medical Properties' financial profile looked much better. With $0.24 per-share in normalized FFO, the REIT achieved a dividend coverage ratio of 1.6X in Q1'24, meaning the company easily covered its dividend of $0.15 per-share. The high amount of excess coverage strongly suggests that the bankruptcy of Steward is not going to endanger the REIT's dividend in FY 2024, in my opinion.
What is the path going forward?
The Steward bankruptcy was more or less expected, which is why Medical Properties' share price is pretty much back to where it was before the bankruptcy statement. Steward's Chapter 11 bankruptcy will clear the way for the operator to transition hospital assets to other operators, which should then lead to higher FFO for Medical Properties. The $75M debtor-in-possession financing (a loan extended to Steward to help its restructuring effort) is a relatively low amount considering that the REIT hat $17.8B in total assets as of the end of the March quarter.
Balance sheet
MPT has guided for more than $2.0B in asset divestment in FY 2024, which should allow the REIT to retire a large portion of its outstanding debt. At the end of the March quarter, Medical Properties owed $10.1B in debt, including $1.6B in an expensive credit facility revolver. I believe we are going to see a quite significant reduction in the REIT's debt this year, which in itself could be a potential revaluation catalyst. Changing the debt structure (repaying high-cost debt) is the biggest opportunity for MPT to drive the REIT's share price higher, in my opinion.
MPW trades at a high safety margin
Medical Properties is hardly expensive, as investors have pressured the REIT's share price consistently over the last year to reflect MPT's troubles with its largest tenant. However, shares of Medical Properties continue to be very attractively valued.
Based off of Q1'24 annualized normalized FFO, the REIT is set to earn approximately $1.00 per-share in FY 2024 which implies a forward P/NFFO ratio of 4.7X. In my last work on the REIT, I stated that MPT could have a fair value P/NFFO ratio of 7X if the company successfully transitions its hospital portfolio to other, solvent operators. I continue to believe that a 7X post-restructuring P/NFFO ratio is appropriate for Medical Properties after Steward finally declared bankruptcy.
Assuming that Medical Properties can return to a post-restructuring, quarterly NFFO level of $0.34-0.36 per-share, shares could have a fair value in the neighborhood of $9.50-10.00 per-share which implies a potentially doubling in the REIT's market value.
There are other healthcare REITs that don't have MPT's operational focus, however, and certainly not Medical Properties' lease problems. A rival, to a certain extent, is National Health Investors (NHI), but even this REIT is more invested in the healthcare business for seniors by providing facilities for nursing home operators. NHI trades at 14.8X FY 2024 NFFO and therefore achieves a significantly higher multiplier compared to MPT. While MPT is quite unique as a publicly traded hospital REIT, the comparison nonetheless showcases just how depressed MPT's valuation is at this point and I consider the REIT's NFFO multiplier to embed a very high safety margin.
Risks with Medical Properties
The biggest risk for Medical Properties obviously is a deterioration in the dividend coverage ratio, which may result in a second dividend cut. This could be the case if MPT and Steward fail to transition Steward's hospitals to other operators, or if this process takes a longer period of time. The REIT cut its dividend in 2023 due to lower expected profitability levels as the company ran into problems with Steward. If MPT had to cut its dividend twice, I believe the strong buy thesis would likely be impaired.
Final thoughts
Medical Properties' first quarter earnings should have made clear that investors don't have to be concerned about the dividend in the short run. The REIT supported its dividend with normalized funds from operations in the first quarter and had a dividend coverage ratio of 1.6X. Additionally, Medical Properties' shares remain highly attractively valued with a P/NFFO ratio of less than 5X... this ratio indicates a very high safety margin for dividend investors. With Steward's bankruptcy clearing the way for a portfolio restructuring and asset transition to other operators, MPT also finally has a strong catalyst for an upside revaluation. The 13% yield that shares of Medical Properties pay looks safe to me for now.
The Asian Investor
I look for high-risk, high-reward situations. Five largest portfolio holdings: Bitcoin, SoFi, Alibaba, PayPal, Western Alliance. Early buyer of cryptocurrencies. I live in Thailand :)
Analyst’s Disclosure: I/we have a beneficial long position in the shares of MPW either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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