Medical Properties Trust: +11% return with a $500 million share buyback program (NYSE: MPW)
The rising rate environment has not been bullish for equities, and one of the hardest hit sectors has been REITs as the cost of capital continues to rise. The SPDR S&P 500 Trust ETF (SPY) is down -24.35% since the start of the year, why ETF Vanguard Real Estate fell -33.15%. Medical Properties Trust (NYSE: MPW) has significantly underperformed the S&P 500 and VNQ as it fell -55.02% in 2022. MPW is not a not-for-profit tech company, but it has been under an abundance of downward pressure throughout throughout the year. In the second quarter of 2022, MPW exceeded consensus FFO estimates by $0.01 and missed its quarterly revenue of $680,000. MPW maintained its FFO guidance for 2022, and approximately -20% of MPW’s decline has occurred since its last earnings call. Management must agree with many contributors on Seeking Alpha that the stock is significantly undervalued, given that it just issued a Press release announcing a buyout of up to $500 million. This buyback is equivalent to 8.24% of MPW’s common stock based on the current market capitalization of $6.07 billion. I thought the stock was undervalued at $17, and bought all the way to the middle of the $11 range. I think MPW shares are one of the best stocks for long-term income investors.
How much can MPW really do when the board has approved up to $500 million for buyouts?
MPW shareholders, myself included, have been left with a big bag as the shares have yet to bottom. Many shareholders thought the rally from the June lows meant the bottom had been reached, but MPW shares took a turn for the worst earnings after the second quarter. Stocks broke through their June lows and fell to a puzzling level. It must have been just as perplexing to the MPW board that on 10/10/22 they posted an announcement of a new share buyback program.
The Board of Directors has authorized the repurchase of up to $500 million of MPW common stock over the next year. All repurchases made by MPW will be funded by cash on hand, operating cash flow, loan repayments, divestitures and/or joint venture transactions. MPW is not required to repurchase a single stock, but I believe this is a bullish signal as executives now have the flexibility to repurchase shares in the open market when opportunities arise. The board would not have authorized a buyback program if it did not believe it would be a positive use of company funds or beneficial to shareholders.
When I go back and look at the graph above, not knowing which company the MPW line represented, I would think it was a company in financial difficulty and possibly a future Chapter 11 candidate. half of the company’s value disappeared in less than a year. I would automatically assume that I would find red flags in their financials to at least justify the stock’s trajectory. Scrolling through the financials, I couldn’t find any red flags as MPW continues to grow in the right direction year over year.
Over the past 5 fiscal years, which would include the last twelve months (TTM) such as fiscal year 2022, MPW’s income statement is exactly what I would like to see. Its revenue increased by $931.5 million (130.32%), from $714.8 million to $1.65 billion. MPW’s operating profit increased by $611.8 million (123.45%) and its operating profit margin is 67.27%. Two critical items to look for are funds from operations (FFO) and EBITDA when it comes to REITs. FFO is the equivalent of EPS when it comes to REITs. MPW’s FFO increased by $664.9 million (162.77%) while its EBITDA increased by $832 million (132.57%) over the last 5 years. In every category, MPW has increased each of these metrics year over year, and after reviewing its income statement, I don’t see why shareholders panicked.
Looking at MPW’s track record, there are several things that stand out, and they’re not negatives. MPW has a market capitalization of $6.07 billion and its total capital is $8.87 billion. MPW has total assets of $19.74 billion, and in its liabilities there are $10.14 billion of long-term debt, of which $0 is due in 2022. At the end of the second quarter, MPW had a tangible book value of $14.80 per share. MPW is currently trading at a -31.57% discount to its total equity and a -29.8% discount to its tangible book value. MPW appears to be trading at a discount based on its balance sheet, and that comes with a strong income statement, which is likely part of why the board authorized a buyback program.
MPW has announced two sales agreements since early September
MPW has announced that it will sell 3 Connecticut hospitals to Prospect Medical Holdings and 11 of its facilities in Top notch healthcare. On September 7, MPW announced that it had successfully re-leased its Watsonville Community Hospital in Watsonville, California to Pajaro Valley Health Care District Corporation and sold 11 facilities to Prime Healthcare. As part of the transaction, MPW was repaid $30 million in financing. In early September, MPW sold 9 general acute care hospitals and 2 related medical office buildings to Prime for net proceeds of $360 million. Proceeds from the two transactions, in addition to loan repayments of approximately $200 million that are expected from LifePoint Health’s planned acquisition of the majority stake in Springstone, will generate approximately $600 million of near-term cash for MPW. . This will be used to reduce leverage and execute certain accretive acquisitions.
On October 6, MPW announced that it would sell 3 Connecticut hospitals to Prospect Medical Holdings. The agreement establishes an aggregate sale price of $457 million, the amount MPW purchased the hospitals for in August 2019. MPW plans to use the proceeds to reduce debt and fund future acquisitions and investment opportunities. . With the combination of September and October sales, MPW used the proceeds to reduce short-term debt in the third quarter and secured over $1 billion in immediate cash.
MPW has become the most attractive healthcare REIT from a valuation perspective
I will compare MPW to the following healthcare REITs:
- Healthpeak Properties (PEAK)
- Health Care (HR) Real Estate Trust
- Physicians Real Estate Trust (DOC)
- National Health Investors (NHI)
- Sabra Healthcare (SBRA)
- Omega Healthcare Investors (OHI)
MPW is now trading at a price against FFO of 5.71x, which is the lowest of its peer group. That’s almost half the peer group average, which is 10.18x. Today, you can buy shares of MPW at a fraction of the price compared to other healthcare REITs based on their FFO.
MPW is now the biggest dividend payer in the group. MPW has a dividend yield of 11.16%, while the peer group average is 7.38%. Falling share price continues to push MPW’s performance higher.
MPW’s dividend is fully supported by a coverage rate of 156.90% based on its FFO. MPW has a forward FFO of $1.82 and pays a dividend of $1.16. Although the dividend yield has been pushed higher, this is not a dividend trap, as the coverage ratio is significantly higher than the dividend.
MPW has an EBITDA to total debt ratio of 6.94x, below the peer group average of 8.18x. SBRA has a large EBITDA to total debt ratio of 17.99x, which is not optimal because it means it would take 17.99 years to pay off its total debt from EBITDA. When SBRA is mined, the peer group average drops to 6.54x and MPW drops just above. MPW has an attractive EBITDA/total debt ratio.
I was wrong on MPW, but I don’t panic selling. I buy more stocks on the downside. I think MPW is one of the most attractive REITs based on its current valuation, and its 11% yield won’t last forever. No one knows what will happen to REITs, and they could continue to fall when the Fed introduces future rate hikes. I think MPW’s fall further than most other REITs is unwarranted, and stocks seem to be in the market. MPW’s finances and dividend are strong, and the board obviously believes in the company as it has authorized a buyout program. Regardless of what happens, I’m happy to continue buying stocks and reinvesting dividends until the stock price recovers.