Shares of Medical Properties Trust (MPW 4.21%) have lost a third of their value this year. That has pushed the real estate investment trust (REIT) into deep value territory. The hospital owner trades around eight times its 2022 estimate for funds from operations (FFO), nearly 50% below the 15 times 2022 FFO of its healthcare REIT peers. Because shares are so cheap, it offers a high dividend yield that currently clocks in at 7.7%.
One factor weighing its value is that the market isn't giving it any credit for its hospital operating company investment portfolio. That's leading the healthcare REIT to shine a light on this hidden value so investors can see its untapped upside potential.
The anatomy of a hospital deal
Medical Properties Trust typically acquires hospital properties in sale-leaseback transactions with the facility's operator. These purchases will also sometimes occur as part of a larger transaction where another entity will purchase the operating company (OpCo) while Medical Properties Trust buys the real estate.
For example, in 2019, Brookfield Business Partners (BBU -1.04%) (BBUC -1.26%), the private equity arm of Brookfield Asset Management (BN -2.52%), agreed to buy Australia's largest hospital operator, Healthscope, for $4.1 billion. In conjunction with that transaction, Medical Properties Trust purchased 11 Australian hospitals affiliated with Healthscope for $859 million. That real estate sale enabled Brookfield to help finance its purchase of Healthscope, which operates 43 hospitals in Australia and 24 pathology labs in New Zealand.
Medical Properties Trust will also sometimes receive an equity interest in the operating company as part of a larger transaction. REITs can invest up to 25% of their total assets into non-real estate assets and earn 25% of their income from non-real estate-related sources. By investing directly in the operating company, Medical Properties Trust receives additional upside in the deal while further aligning its interest with other stakeholders.
The company's ability to complete transactions involving the whole company gives it a competitive advantage. It allows the REIT to acquire mission-critical infrastructure that other investors would find more challenging to purchase. It has made several OpCo investments in recent years, including:
- Steward: A $363 million loan investment in the operator with embedded upside participation features.
- Priory: Invested $156 million for a 9.9% passive equity interest in the operations and a variable rate syndicated loan investment.
- Aspris Children's Services: A $16 million passive equity ownership.
- Prospect Medical Holdings: A $113 million loan earnings 8% interest.
- Springstone: A $197 million investment consisting of a loan component earning 8% interest and a 49% equity ownership of the operator.
- International Joint Venture: A $231 million investment featuring a loan earning 7.5% interest and a 49% ownership of operator equity.
- Aevis Victoria: A $152 million passive investment in Swiss Medical Network and a $73 million passive ownership of Swiss Medical majority owner Aevis Victoria.
Instead of seeing these OpCo investments as assets, investors see them as a liability. That's leading Medical Properties Trust to take steps to showcase the value of its OpCo investments.
It recently announced a deal highlighting the value of one of its OpCo investments. LifePoint Health has agreed to purchase a minority interest in Springstone Health Opco from the current management group. The deal values the company at $250 million. Medical Properties Trust had invested $190 million, primarily in the form of a loan, and received a minority equity interest in Springstone in 2021 when it invested $760 million to buy its 18 behavioral hospitals. Medical Properties Trust will receive $200 million to fully satisfy the loan. It will also retain its minority interest, providing shareholders with the opportunity to participate in the future upside of Springstone. LifePoint also agreed to extend the maturity of its existing master lease on eight hospitals with Medical Properties Trust by five years to 2041. That will more completely align its operations with Medical Properties Trust.
That's the latest transaction highlighting the value created by one of its OpCo investments. The company also fully exited several OpCo investments over the years. Last year, the REIT sold its equity interest in ATOS Clinics International and MEDIAN in separate transactions, earning double-digit internal rates of returns on those sales. Meanwhile, in 2018 Medical Properties Trust sold its remaining interest in Ernest Health to One Equity Partners for $175 million. That represented a 13% unlevered rate of return on its original $96 million investment.
With several OpCo stakes remaining, the company has similar upside potential as it monetizes them in the future. Future deals could further unlock the value of its portfolio. They'd also give it more capital to recycle into new transactions to acquire additional income-producing hospital properties and an option value in the form of OpCo investments.
High income and upside potential
Investors aren't crediting Medical Properties Trust the full value of its assets because they're overlooking its OpCo investments. Instead of being a liability, they're proving to be a source of hidden value. The company is working to shine a light on that value by completing deals involving its OpCo investments. In the meantime, investors get paid well while they wait for the market to realize the full value of this REIT.