DNY59
Co-produced by Austin Rogers.
There has been a lot of great news about Medical Properties Trust, Inc. (NYSE:MPW) lately, and I think that it increases the probability of it becoming a multi-bagger in the coming years.
But before I get into all of that, I want to clarify two things:
Firstly, I have been wrong on MPW so far and could be again, so take all of this with a grain of salt. As I explain in a recent article, I was too quick to discredit the short sellers and I was wrong, they were right.
Secondly, while I believe that things are improving, the risks remain very significant. Therefore, if you are going to invest in MPW, make sure to size your position accordingly and do your own research, and this includes checking what the short sellers have to say about the company. I will also discuss some of the risks towards the end of this article.
Now, with that out of the way, here’s all the good news:
Good News #1: Steward is making some progress
Steward Health has made some progress on its goal to escape from its financial distress by agreeing to sell its physician network to UnitedHealth’s (UNH) Optum Care business.
Though the sale price has not been made public, management attests that this transaction should allow Steward Health to repay all outstanding debt obligations to MPW. As a reminder, Steward Health is MPW’s largest tenant at over 20% of rent. What’s more, MPW has a 9.9% equity stake in the hospital operator and is also one of its largest lenders with ~$630 million in debt outstanding owed by Steward, not including deferred rent.
So this is excellent news. The primary reason why MPW is so heavily discounted is the situation with Steward. This recent deal suggests that Steward and MPW should soon get a big cash inflow in the near term.
Good News #2: Significant Asset Sales
In early April, MPW made some progress on this front by completing the sale of five properties leased to Prime Health to the tenant. This transaction will raise $350 million, $250 million of which is in cash at closing and $100 million of which is in the form of an interest-bearing mortgage loan maturing in 9 months.
This transaction freed up cash equivalent to about half of MPW’s debt maturities this year, but it obviously still needed to do more asset sales.
Then, on April 12th, MPW announced some excellent news. The REIT has entered into a joint venture partnership with “a leading multi-strategy, multi-billion dollar institutional asset manager” to sell a 75% stake in its 5 Utah hospitals operated by leading nonprofit health system CommonSpirit.
As you may already know, CommonSpirit Health took over operations of these hospitals from Steward recently, which greatly increased their value and salability. This deal is evidence of that.
MPW sold these hospitals into a newly formed JV in which it retains a 25% ownership stake while selling the remaining 75% interest to the unnamed institutional asset manager, a very sophisticated buyer.
MPW sold the 75% stake in these hospitals for $886 million, just a touch below the REIT’s $1.2 billion total cost basis and “underwritten lease value.” The $14 million difference may simply be due to depreciation.
It appears that the 5-year and 10-year real estate purchase options in the CommonSpirit master lease, combined with the fact that it is CommonSpirit’s normal practice to own their own real estate, played a major role in affirming the value of these properties to a third-party investor.
Additionally, the newly formed JV simultaneously obtained a $760 million non-recourse secured loan for the properties (implied LTV of 64%) that resulted in another $190 million in cash proceeds to MPW.
In total, then, the cash proceeds to MPW from this deal amount to $1.076 billion.
Combined with the $350 million in proceeds from selling its Prime Health properties, MPW has raised $1.426 billion toward its goal of $2 billion, and the CEO says (emphasis added):
we are now confident that we will exceed our initial target of $2.0 billion in liquidity transactions in 2024 based on the valuations achieved on recent transactions and the terms we are actively negotiating for additional transactions.”
MPW owns over 430 properties around the world, and many of them are performing quite well and thus should be relatively easy to sell.
Medical Properties Trust
Notice above that though inpatient rehabs and long-term acute care hospitals have suffered falling rent coverage ratios recently, behavioral health facilities have been strengthening while general hospitals have remained flat.
Plus, keep in mind that MPW has established myriad relationships across the health operator space as well as the private equity space. The REIT should have plenty of numbers to call to drum up potential buyers, whether it can get the best deals right now due to the cost of capital environment.
The quality and essential nature of at least a large portion of MPW’s portfolio increase our confidence that MPW should be able to navigate this crisis without teetering into bankruptcy. Some uncertainty remains, but much of it has been removed by the recently announced asset sales.
MPW has bought itself at least a year of time, and it sounds as though it will be able to buy even more time with more near-future asset sales — probably of some of its higher quality properties, similar to the Utah CommonSpirit JV.
Good News #3: Dividend Announcement
For a while, we were beginning to suspect that rent collection or other issues were causing MPW’s management to consider suspending the dividend. After all, until April 15th, MPW had not paid or announced any dividends so far in 2024. The April 15th dividend announcement came almost two months after its normal Q1 dividend announcement timeframe in February.
Then, on April 15th, MPW announced the same 15 cent dividend that it has paid the past few quarters. At the current share price, this results in a near 14% dividend yield (depending on how you calculate it).
Risks to consider
The roller coaster ride of ups and downs for Medical Properties Trust is likely to continue in the near term because of the following risks:
Risk #1: Steward May Still Go Bankrupt:
MPW recently announced some good news, but the primary source of drama so far this year has come from Steward Health Care, which has experienced both bad news and good news.
The financial straits in which Steward finds itself are truly dire.
Steward is in the midst of a major liquidity crunch.
So far, MPW has allowed Steward to defer rent in Q4 2023 and January 2024. For February and March 2024, Steward has been allowed to pay only 25% of normal rent, which should bump up to 75% in April and May. All deferred rent is supposed to be repaid by the end of June 2024. (We don’t know how much rent Steward has actually paid.)
Some of Steward’s hospitals (such as Glenwood Regional Medical Center) are in deep financial distress and have experienced deplorable quality of care, leading to deaths. One reason cited for the drop in operational quality has been lack of financial resources extended from the parent company, Steward.
A recent Wall Street Journal exposé revealed that Steward’s hospitals continue to be plagued by poor operating conditions, lack of needed maintenance capex, growing lists of unpaid contractors, and a long backlog of surgeries.
Bankruptcy appears to be imminent or at least highly likely given the fact that MPW has retained a bankruptcy/restructuring law firm.
Moreover, while Steward recently announced a deal to sell its physician network to UnitedHealth’s Optum Care business, this proposed deal has encountered some pushback from government officials, however, because of the potential that it could further increase UNH’s already large market position. Even if Steward’s sale of its physician network goes through, though, it is unclear whether this will actually be enough to prevent bankruptcy.
Plus, even with a $60 million bridge loan and rent deferral agreements in place through this Spring, Steward may still be having difficulty paying rent.
Risks #2: Debt Refinancing
While we are glad to see the continuity of the dividend, we would not be deterred if management does decide to temporarily suspend it at some point to preserve cash for deleveraging.
After all, with over 50% debt to assets and a 6.9x net debt to EBITDA ratio, MPW’s primary concern right now is managing its debt maturities.
Here is a list of MPW’s debt maturities:
Medical Properties Trust
Notice the range of interest rates from 0.99% to its most recently issued ~7.2% 5-year term loan. The weighted average interest rate sits at 4.1% as of the end of 2023.
And though MPW’s credit rating of B+ would indicate that its cost of borrowing currently sits at around 8%, MPW’s bonds trade at yields to maturity over 12%. As such, the debt market does not look like a realistic option for MPW right now.
Here’s how MPW’s debt maturities look when laid out in chart form:
FactSet
As you can see, around half of MPW’s total debt matures by the end of 2026.
To address the ~$2 billion of debt maturities in 2024 and 2025, MPW is targeting asset sales of $2 billion over the course of this year.
MPW has bought itself at least a year of time with its recent asset sales, and it sounds as though it will be able to buy even more time with more near-future asset sales — probably of some of its higher quality properties, similar to the Utah CommonSpirit JV.
Even so, MPW’s turnaround will take years, and its portfolio will need to shrink by another ~$3.5 billion to address debt maturities through 2026.
Closing Note
Bankruptcy looks increasingly unlikely for MPW, and this is why they felt comfortable maintaining their dividend, now yielding 14%. However, Steward remains a wild card and MPW’s balance sheet is risky.
As we have said before, at an FFO multiple of about 3.5x, in our view, Medical Properties Trust, Inc. is either a 0 or a multi-bagger from here. Following the recent news, it appears increasingly likely that it will be multi-bagger, but we have been wrong before. Risks remain high, and we continue to think that only the most risk-tolerant of investors should be in it, and we expect to keep our position size small.
Very Good News For Medical Properties Trust
