Shares of Medical Properties Trust (MPW 3.00%) have been under tremendous pressure this year. The hospital-focused real estate investment trust (REIT) has lost a staggering 55% of its market value, pushing its dividend yield into the double digits. The primary factor weighing on shares is surging interest rates. That's impacting the company's ability to raise capital at attractive rates, throwing a wrench in its growth strategy.
The REIT believes the market has overreacted and recently launched a $500 million share repurchase program to retire some of its wildly undervalued shares.
NYSE: MPW
Key Data Points
Growth on life support
Medical Properties Trust has been expanding rapidly in recent years. The healthcare REIT completed $3.9 billion of investments in 2021, growing its portfolio's gross asset value to $22.3 billion. Those deals helped drive double-digit growth for its adjusted and normalized funds from operations (FFO) per share.
The company had initially hoped to acquire another $1 billion to $3 billion of hospital real estate this year. However, given the rapid and dramatic changes in the capital markets and global economic environment, the REIT sees its acquisition volume coming in toward the low end of its target range. That's because it can't issue new shares to fund hospital deals without significantly diluting existing investors, given the steep slide in its stock price. Meanwhile, debt costs are surging due to higher interest rates.
That led the company to pivot its funding strategy to capital recycling, which uses the sale of mature assets to fund accretive new investments. The company most recently agreed to sell eight hospitals in Connecticut in a deal where a new operator acquired the real estate and hospital operations in a single transaction. That sale brought the company's total proceeds from capital recycling to $1 billion this year.
Meanwhile, the company has also reportedly retained an advisor to sell its Healthscope properties in Australia. It joined forces with Brookfield Business Partners (BBU +0.00%)(BBUC +0.00%) to help fund that company's privatization of Australia's second-largest hospital operator in 2019. It paid $859 million to acquire 11 top hospitals in a sale-leaseback transaction with Brookfield Business Partners. A sale of those properties would give it even more financial flexibility.
A potentially more accretive investment
Medical Properties Trust had planned to use its asset sale proceeds to reduce debt and fund select accretive investment opportunities. However, given the vast disconnect between its stock price and the underlying value of its hospital portfolio, it's launching a sizable share repurchase program. It could retire 8% of its outstanding shares, given its current $6.2 billion market cap.
To put its valuation into context, Medical Properties Trust expects its normalized FFOs to be between $1.78 and $1.82 per share this year. With its stock price recently around $10.50, it trades at less than six times its 2022 FFO estimate. That's a more than 50% discount to the 12 times-plus FFO multiple of the average healthcare REIT.
It could therefore make more sense to use its capital recycling flexibility to repurchase its significantly undervalued shares than to make acquisitions. Depending on the deal, repurchases might be an even more accretive investment opportunity since it could significantly boost its FFO per share. Share repurchases could also enhance the dividend's sustainability. Fewer outstanding shares would reduce the total cash outlay to cover its current per-share payment.
Taking advantage of the decline
The dramatic shift in market conditions has weighed heavily on Medical Properties Trust's stock price this year, impacting its ability to issue equity to fund new acquisitions. That's forcing the company to shift its funding strategy to capital recycling. Its recent successes have given it the financial flexibility to make accretive investments as opportunities arise, including buying back its wildly undervalued shares. That move could enhance shareholder value while putting its big-time dividend on a healthier foundation, making it a potentially very wise use of this capital.
