20 August, 2022

Mafia World

Inimitable Business

Medical Properties Belief Q2 2022 Earnings (MPW): 50 Massive-Dividend REITs, Down Massive

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With rates of interest greater this yr, big-dividend REITs have been hit exhausting, notably these with greater ranges of debt. And one title that simply offered off even tougher (following its earnings announcement on Wednesday) is Medical Properties Belief (NYSE:MPW). MPW offers capital to hospitals, has a 7.2% dividend yield and has elevated its dividend yearly for the final 9 years in a row. On this report, we evaluate MPW to 50 different big-dividend REITs (by way of a wide range of monetary metrics) after which dig into its enterprise mannequin, present valuation, dividend security, the 4 large threat components it at present faces and eventually conclude with our robust opinion on investing.

50 Massive-Dividend REITs In contrast

Earlier than moving into the main points on Medical Properties Belief, let’s take a high-level have a look at MPW in comparison with 50 different large dividend REITs. The next desk is sorted by REIT industries (MPW is a healthcare REIT).

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knowledge as of 8/3/22 (blueharbinger.com)

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knowledge as of 8/3/22 (blueharbinger.com)

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knowledge as of 8/3/22 (blueharbinger.com)

A couple of belongings you would possibly discover on this desk (apart from a wide range of your favourite REIT names, equivalent to W. P. Carey (WPC), VICI Properties (VICI), Realty Revenue (O), AGNC (AGNC), Annaly Capital (NLY) and STAG Industrial (STAG)) is that MPW stands out for its large dividend yield (7.2%), its consecutive years of dividend will increase (9), its robust FFO-dividend protection ratio and its low price-to-FFO valuation a number of. You may also see it has offered off notably exhausting this yr (and it has offered off even tougher following its quarterly earnings announcement on Wednesday).

With that backdrop in thoughts, let’s take a more in-depth have a look at MPW to see if we will perceive why the worth is down a lot and if the shares are price contemplating for funding.

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Medical Properties Belief

Overview: Medical Properties Belief

Medical Properties Belief describes itself as “the worldwide supply for hospital capital.” Principally, MPW offers money to hospitals which might be struggling financially by shopping for the bodily hospital actual property (hopefully at a low value, for MPW buyers’ sake) in order that hospitals have the money they should enhance their operations.

In idea, the enterprise mannequin goes one thing like this. Particular person hospitals face dire price slicing pressures and plenty of of them have gotten into monetary bother whereby it prices them an arm and a leg to borrow capital to enhance their operations as a result of lenders don’t belief that they’ll even have the ability to pay again the loans. MPW may help alleviate this drawback by giving the hospitals the money they should enhance their operations in trade for possession of the bodily hospital actual property. And MPW can get the actual property for a low value as a result of the hospitals don’t have numerous different financing choices.

Moreover MPW just isn’t in nice monetary form itself (its senior unsecured debt has a Ba1 credit standing from Moody’s, which is under funding grade), however it’s nonetheless in significantly better monetary form than the hospitals themselves. And MPW can scale back its dangers by diversifying throughout many hospitals (it owns hospitals in 32 U.S. states, seven European international locations, Australia and South America) which they’ve carried out more and more nicely over time (its single largest property is lower than 3% of its whole portfolio). Moreover, as a result of MPW is organized as a REIT, it may possibly keep away from paying most company taxes by paying out most of its earnings as dividends to shareholders.

We’ll speak extra about how MPW is additional lowering the dangers of its enterprise mannequin within the part on “4 large threat components,” however for now it’s necessary to easily perceive that it has the monetary wherewithal to offer a lot wanted capital to hospitals whereas concurrently lowering dangers by means of portfolio diversification and its personal decrease price of capital as in comparison with the at-risk hospitals themselves.

Present Valuation

Value to funds from operations (“FFO”) is a primary and customary method to worth an actual property funding belief. And as you’ll be able to see in our earlier 50+ inventory desk, MPW trades at a low value to FFO a number of of 9.9 occasions. This will usually be an indication of a probably enticing low value, however it can be an indication of threat.

To offer just a little extra perspective, MPW experiences its normalized FFO in Q2 as $0.46 which means it at present trades at solely 8.7 occasions normalized FFO. And the corporate’s numerous FFO valuation multiples evaluate favorably to the sector (i.e. MPW shares are comparatively cheap).

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Looking for Alpha

Additionally noteworthy, the corporate’s FFO per share has just lately improved whereas its share value has declined, as you’ll be able to see within the following chart.

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Additionally enticing, MPW’s ebook worth per share has continued to develop whereas the share value is down this yr.

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From a valuation standpoint, the monetary metrics counsel MPW could be very cheap, however we’ll cowl the dangers in a later part of this report.

Dividend Security

Many income-focused buyers are interested in MPW as a result of its dividend yield is excessive (at present 7.2%), but in addition as a result of the yield has elevated for the final 9 years in a row (an indication of energy and attractiveness to some buyers). And from a dividend protection standpoint, as we noticed in our earlier chart, MPW’s dividend could be very nicely coated by FFO at 1.4 occasions. Additional, in Wednesday’s earnings announcement, MPW reported they anticipate 2022 normalized FFO (steerage) of $1.78-$1.82 per share, unchanged from the earlier quarter, and a sign that the FFO outlook stays greater than robust sufficient to proceed supporting the $1.16 annual dividend.

4 Massive Threat Components

So a preliminary have a look at MPW says the dividend is secure (and rising) and the valuation is enticing. So what offers? Why was MPW’s current brief curiosity over 10% (as you’ll be able to see in our earlier 50+ REIT desk)? There are threat components that have to be thought-about, and we’ve highlighted 4 large ones under.

1. Struggling Hospital Operators:

In the beginning, the hospital operators that MPW offers capital to are struggling financially (that’s why they want the capital) and so they run the danger of filling chapter. For perspective, MPW has changed solely 11 operators of 20 services (along with its Adeptus portfolio funding), over the course of almost 20 years whereby they cumulatively invested greater than $24 billion in almost 530 hospitals. Here’s a graphic from MPW’s newest investor replace presentation.

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MPW Investor Replace

Nonetheless, struggling hospital operators proceed to face challenges and pose dangers to MPW. For instance, these hospital operators run the danger of needing extra monetary help from MPW if they can not cowl their monetary obligations and MPW doesn’t essentially need to run by means of an costly chapter whereby they’re pressured to additionally discover a new hospital operator. Thankfully, as a result of MPW is nicely diversified throughout many hospitals, the implications are much less dire if a hospital can not survive.

For extra element on hospital operator dangers, right here is how MPW described it of their annual report:

Our revenues are dependent upon {our relationships} with and success of our tenants, notably our largest tenants, like Steward, Circle, Prospect, Swiss Medical Community, and HCA. Our tenants’ monetary efficiency and ensuing means to fulfill their lease and mortgage obligations to us are materials to our monetary outcomes and our means to service our debt and make distributions to our stockholders. We’re dependent upon the power of those tenants to make lease and mortgage funds to us, and any failure to fulfill these obligations might have a fabric adversarial impact on our monetary situation and outcomes of operations. As of December 31, 2021, our largest tenants – Steward, Circle, Prospect, Swiss Medical Community, and HCA – represented 18.5%, 11.1%, 7.3%, 5.8%, and 5.6%, respectively, of our whole professional forma gross property (which consists primarily of actual property leases and loans).

So regardless of any sugar-coating from MPW, operator dangers are important. Nonetheless, right here is a technique CEO Edward Aldag addressed it on the newest earnings name:

long-term assortment of our lease doesn’t depend upon the monetary outcomes of a selected operator. Within the few occasions that we have needed to transition from one operator to a different, we’ve been profitable in attracting excessive succesful and certified operators as a result of we had acquired hospital actual property that was important to the neighborhood and in the appropriate hand may very well be operated profitably.

Critically necessary to notice, lots of the hospital operators that had been struggling pre-COVID, have had these struggles exacerbated throughout COVID, and the newest Omicron surge has continued to create important challenges, to place it mildly. Thankfully, MPW is nicely diversified and owns hospitals with actual property that’s critically necessary to the communities, whatever the success or failure of any operator.

2. Important Debt Load

The following threat is just that MPW itself just isn’t probably the most financially robust enterprise on the planet. As talked about, it is credit standing is simply below-investment-grade, and the enterprise faces elevated challenges when monetary stress ticks up (prefer it has just lately, as you’ll be able to see within the following debt graphics).

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Thankfully, MPW has continued to search out options to its liquidity wants by promoting its personal properties (hopefully at good points) when wanted. One large instance of that is MPW’s comparatively current deal with a Macquarie non-public fairness fund, whereby its offered off partial possession of properties it owned in Massachusetts (to Macquarie) for $1.3 billion {dollars}. Not solely did this liberate capital for MPW, however it was an enormous deal contemplating the present whole fairness worth of the corporate is simply round $8.8 billion. Moreover, it opens the door for extra such offers when the necessity arises once more sooner or later. And the non-public fairness funds will at all times have extra capital obtainable contemplating their nice observe report of promoting new funds to giant institutional house owners (equivalent to pension funds) the place capital is actually limitless, as in comparison with the dimensions of MPW and “the Macquaries” of the world. For instance, here’s what CFO Steve Hamner needed to say on Tuesday’s earnings name:

…absolutely the certainty that governments and individuals are going to help their infrastructure like hospitals. And so all of that has led to a really excessive degree of curiosity within the non-public space, and that is with sovereigns and pension funds and asset managers and folks such as you simply talked about KKR.

The underside line right here is that regardless of the misery, MPW has worth. And for reference, it at present trades at round solely 1.08 occasions its ebook worth.

3. Rising Curiosity Charges

Rates of interest have ticked up considerably, and that poses elevated threat to MPW as a result of it will increase the price of debt financing (when debt matures and they’re pressured to refinance), however it additionally will increase the price of borrowing to fund new offers, which is a significant a part of its enterprise technique. As such, you’ll be able to see a robust correlation between MPW’s share value and the 10-year treasury yield. Particularly, as rates of interest rise, MPW’s valuation falls.

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Thankfully, rates of interest have ticked down considerably during the last month, and the share value has risen considerably (a minimum of up till Wednesday’s earnings announcement). Moreover, fed funds futures are actually predicting that rates of interest is not going to improve considerably greater than the 50-75 foundation level hike anticipated on the September fed assembly, which is essentially already priced into the shares of MPW and the market normally.

Nevertheless, if the fed continues its rate of interest hikes considerably past September, that poses an actual threat to the MPW enterprise mannequin—which is predicated closely on hospital actual property acquisitions.

4. Healthcare Regulation Dangers

Lastly, hospital regulation poses a big threat to MPW’s enterprise. Hospitals are closely regulated and depend on authorities funding by means of a wide range of sources, equivalent to Medicare and Medicaid. And because the authorities is consistently pressured to cut back the expansion fee in these prices, regulatory adjustments pose a big threat for MPW. Right here is how MPW describes this threat of their annual report:

The continued stress on fee-for-service reimbursement from third-party payors and the shift in direction of various fee fashions, might adversely have an effect on the profitability of our tenants and hinder their means to make funds to us. Sources of income for our tenants might embody the Medicare and Medicaid packages, non-public insurance coverage carriers, and well being upkeep organizations, amongst others. Along with ongoing efforts to cut back healthcare prices, the failure of any of our tenants to adjust to numerous legal guidelines and rules might jeopardize their means to proceed collaborating in Medicare, Medicaid, and different government-sponsored fee packages.

Value mentioning, a standard theme from MPW CEO Ed Aldag is that he merely doesn’t imagine the federal government will let hospitals all exit of enterprise (as a result of they’re too necessary to the communities) and for that reason he has elevated religion within the MPW enterprise mannequin. That is much like the sooner quote from CFO Steve Hamner in regards to the assets stepping in to help these hospital actual property property (which MPW owns).

Conclusion:

Medical Properties Belief is going through very important challenges stemming from its struggling hospital operators and rising rates of interest (which negatively affect closely debt-reliant companies like MPW). Nevertheless, it owns compelling hospital actual property property which have vital worth to the communities the place they exist, and its growing dividend is difficult to disregard, particularly as per its more and more enticing valuation.

An funding in Medical Properties Belief just isn’t proper for probably the most risk-averse buyers, however if you happen to can deal with the uncertainty and personal it inside the constructs of a prudently diversified portfolio, the shares are price contemplating on the present low value. For these causes, MPW is one in all our favourite property REITs in our new record of “70 yields over 7%” and we’ve taken a small place in MPW inside our Revenue Fairness Portfolio.