Investors had high hopes for Medical Properties Trust (NYSE:MPW) and similar net lease commercial REITs, viewing them as the gold standard for consistent payouts. However, recent events such as the pandemic and fast rate hikes have shattered those dreams, leaving MPW in a tough spot.
As a deep-value-oriented investor, I seek out fallen angels like MPW, hoping to find undervalued assets. However, in the case of MPW, the company’s current state may very well be indicative of a value trap.
MPW has already fallen approximately 77% from its highs, and I foresee further declines in its future.
In this analysis, I will delve into several key areas of concern:
1. Debt schedule and potential refinancing rates
2. True book value of the REIT for potential asset liquidation
3. Concentration of higher-risk tenants
4. Valuation and the misleading appearance of cheapness
MPW’s debt schedule is as follows:
The current weighted average rate of 3.608% brings the cost of capital to $372,544,003.92.
However, a potential refinancing into higher-rate notes could significantly increase interest expenses, with a 13.5% yield on the total debt translating to $1,393,942,365 annually. Given the current FFO and interest expense, this elevation in rates would push the company below breakeven FFO, creating a pressing need to address the debt burden swiftly.
Debt Reduction Strategy: Asset Sales
As a REIT, MPW is obligated to distribute 90% of its taxable income, limiting its ability to retain earnings for debt buybacks. With few options in a high-rate environment, the only plausible course for debt reduction seems to be through property divestment.
However, accurately assessing the true value of MPW’s properties is challenging, as the balance sheet values are based on acquisition cost minus depreciation. To gauge potential selling value, a buyer’s perspective is crucial, focusing on factors like adjusted EBITDA and cap rates.
Last quarter’s FFO of $216.4mm sets the stage for a challenging road ahead, one that MPW must navigate efficiently to safeguard its financial stability and investor trust.
The Financial Grind: Analyzing Medical Properties Trust’s Real Estate Assets and Debt Covenants
Medical Properties Trust’s real estate assets have been put under the microscope by financial analysts, who are delving deep into the company’s numbers to calculate the fair market value of its properties. One analyst has determined the value to be just under the company’s total assets listed on its balance sheet, raising questions about the true equity the company holds. The company’s total liabilities, on the other hand, closely align with the calculated value of its real estate assets.
The Real Estate Value
One analyst, after meticulously analyzing the company’s finances, has arrived at an estimated fair market value of $10.4348 billion for Medical Properties Trust’s real estate. The analyst warns that this figure does not account for frictional costs that could come into play when liquidating the assets quickly. In a forced liquidation scenario, the assets would likely fetch a significantly lower value than the fair market value.
Equity vs. Book Value
Taking into consideration the current market value of Medical Properties Trust’s bonds, an analyst suggests that the company could potentially engage in asset sales and debt buybacks. This approach, they believe, could reveal a significant discrepancy between the company’s “true” equity and the book value displayed on its financial statements.
Additionally, discussions have arisen regarding the debt covenants on Medical Properties Trust’s debt, an issue that was brought to light in a recent article by Julian Lin. The company’s 2027 bond prospectus contains specific terms that have caught the attention of financial analysts, sparking further debate about the implications for the company’s financial future.
Cutting Quality for Quantity: The Risky Business of Selling Assets
Many are celebrating, but with a lingering storm of financial worries swirling over MPW, it seems the ticker-tape parade might be dreadfully premature.
Risk factors are mounting and while MPW may seem to be as unyielding as an oak, the company’s covenants are weakening its financial stance.
One of the biggest concerns is the potential sale of assets lower than their actual worth, leading to a rapid decline in assets while liabilities remain stagnant. This dire situation could lead to a worrisome breach of covenants.
Cutting the Flowers and Watering the Weeds
Within the realm of asset sales, there is a gut-wrenching danger lurking in the shadows, coined as “cutting the flowers and watering the weeds” by investors. Should MPW go ahead with asset sales, they risk offloading high-quality properties while retaining lower-quality ones. The short-term appeal of such decision-making is overshadowed by the long-term peril it presents. The recent sale of properties in Australia exacerbates this issue, given that the properties sold were of superior quality, leaving MPW with a lopsided portfolio, heavily laden with precarious assets.
While some may extol the virtues of MPW, touting its share prices as a steal, it’s important to look beyond the fog of praise. Although P/FFO may appear tempting at 3.1, the allure of this apparently inexpensive valuation dissipates when evaluating the EV/EBITDA, which stands at a rather lofty 14.03.
The confounding contrast between EV/EBITDA versus P/FFO & P/CF is primarily attributed to MPW’s leverage. An exemplification of the impact of leverage lies in a comparison between a debt-free company trading at 10x EBITDA and a company laden with 8 turns of debt trading at 2x EBITDA. Despite the apparent variance, both companies equate to the same enterprise value, with the latter being burdened by a capital structure heavily reliant on debt.
The Bottom Line
As the pressure mounts, MPW is hurtling towards a cash flow negative future, necessitating asset liquidation. However, this path is fraught with pitfalls. Properties may fetch considerably less than their book value, and the haste to reduce debt might result in the disposal of high-quality assets, leaving the company shackled to high-risk properties. Contrary to popular belief, the supposed bargain in MPW’s valuation is unfounded, with an unattractive 14.03x EBITDA on the horizon.
The situation at present may be misleadingly rosy, but under the surface lies a thorny ordeal that could severely wound MPW’s financial health.