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The Unfortunate Plunge of Medical Properties Trust

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Concept of living in a small house and wanting to move to something bigger

The recent boom in the REIT industry uplifted most of my holdings, enhancing the value of my REIT portfolio, to my delight. As the so-called REIT Rally kickstarted, it led to significant gains in my holdings, such as Digital Realty (DLR) with a surge of +40%, Simon Property Group (SPG) with a positive uptick of +33.4%, STAG Industrial (STAG) showing a robust growth of +30%, Prologis, Inc. (PLD) with a commendable +24.4%, Arbor Realty (ABR) displaying an increase of +22%, and American Tower (AMT) rising with a gain of +19%. Besides, I seized the opportunity to rebalance certain REIT holdings in Q4-23, allowing me to acquire more shares in Realty Income (O), Agree Realty (ADC), VICI Properties (VICI), and Safehold (SAFE). Furthermore, I lucratively sold off Innovative Industrial (IIPR) with a sizeable profit of +15% and Tanger (SKT) with an impressive gain of over 300%.

Most of my recommendations flourished in 2023, and even for those such as Safehold (SAFE) or Highwoods Properties (HIW) that didnโ€™t perform as expected, my optimism remained unwavering. However, in the realm of investments, thereโ€™s always an anomaly, a disappointment lurking in the shadows.

Medical Properties Trust (NYSE:MPW)

MPW, a hospital REIT, is the owner of 441 properties, equivalent to approximately 44,000 beds, across 10 countries. When I first started examining the company in 2012, MPW possessed a mere 68 properties and assets worth slightly over $2 billion. Itโ€™s noteworthy that at that time, MPW had a payout ratio of 91%. Regrettably, MPWโ€™s track record in maintaining consistent earnings has been inconsistent, with six out of 16 years displaying a decline.

Similar to many other REITs, MPW witnessed negative growth during the Great Recession. However, unlike some high-quality companies that rebounded to deliver steady earnings and operating profits, MPW had to slash its dividend in 2008 and only managed to resume its growth in 2013.

My apprehensions regarding the lack of dividend growth in 2014 stemmed from the absence of compelling catalysts, alongside a high payout ratio of 100% and the companyโ€™s debt rated as โ€˜BB.โ€™ Fast forward to May 2023, and with MPW yielding 15.7%, it was evident that a dividend cut was highly probable. Unsurprisingly, in August, MPW officially announced a 50% dividend reduction โ€œto bolster its balance sheet and decrease its cost of capital,โ€ recasting the annual dividend to $0.60 per share as opposed to the previous $1.16 per share. Although the management was aligned with the decision, the investor community received the news negatively, sending MPW shares plunging by an additional 29% post the dividend cut.

4 Reasons That Iโ€™m Not Buying

Prior to the dividend cut news, we maintained a speculative buy on MPW, acknowledging the elevated risk rating and the wide spectrum of potential outcomes. Investors with an above-average risk tolerance might discern value in MPW, but I chose to restrict exposure and adhere to stringent diversification standards.

The first reason that shackles my inclination to acquire more shares in MPW is the companyโ€™s substantial leverage levels. With a net debt/EBITDA ratio of nearly 7x as of Q3-23 and $3.9 billion of debt maturing at a weighted average interest rate of 2.8% through 2026, the situation is far from reassuring. Furthermore, MPWโ€™s existing 2028 bonds are trading at an exorbitant yield of nearly 12%, and the companyโ€™s credit rating remains in the precarious โ€˜B+ negative / Ba2 negativeโ€™ territory.

The second deterrent is linked to its operator issues, predominantly revolving around Prospect, which accounts for approximately 5% of MPWโ€™s revenue. The financial robustness of this operator has raised concerns. For example, MPWโ€™s sale-leaseback agreement with Prospect in Connecticut remains in a state of limbo, with the monetization of the sale contingent upon the completion of a deal with Yale New Haven, which has become an enduring challenge to navigate.

This is further exacerbating my worries as the $75 million loan facility extended by MPW to Prospect had $45 million drawn at the end of Q3-23, and $65 million is the outstanding balance at the close of the period.

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