Shares of Medical Properties Trust (MPW -2.15%) have crumbled over the past year. The stock price has been cut in half, pushing its dividend yield into the double digits. Several factors have weighed it down, including higher interest rates and financially challenged tenants.
While the healthcare real estate investment trust (REIT) is struggling these days, the management team believes it laid a solid foundation to support the company over the long term. Here are the three factors that drive this view.
The balance sheet is designed to mute the impact of spiking interest rates
Medical Properties Trust has three co-founders, CEO Edward Aldag, CFO Steve Hamner, and COO Emmett McLean, who will retire later this year. Hamner discussed the company's financial foundation on its recent first-quarter call. He stated, "After a virtually unchanged business model since we started the company almost 20 years ago, I thought I would make a few comments relevant to analyzing that model's sustainability."
The CFO noted that at its core, Medical Properties Trust sells a product to its lessees: capital. It predominantly acquires hospitals from operators via sale-leaseback transactions that provide them with capital to operate and grow their businesses. This capital has a cost to the company in the form of debt costs. Since it can't control the cost of debt, it focuses on what it can manage. Hamner stated, "That is why all of our long-term debt is at fixed rates. It is also why we carefully plan on staggered maturities, both of those cornerstone strategies are consciously designed to help avoid a situation that might otherwise arise if interest rates spike upward and significant amounts of debt mature simultaneously."
The financial cornerstones of using fixed-rate debt with staggered maturities prevent the company from facing significant debt maturities amid surging interest rates like we're seeing today.
Leases are structured in a way that protects against higher rates
Hamner then noted, "But critically, our model has always anticipated the likelihood of rising interest rates and the need for our contractual rental rates to increase with the inflationary pressures that result in higher interest rates." He went on to note that most hospital leases don't feature rental rate escalations tied to market rates. That's where Medical Properties differs because virtually all its leases "provide for annual contractual rental increases that are tied to inflation."
This strategy helps insulate its income from inflation and higher interest rates. Hamner said, "Based on these annual contractual increases in our cash rent, and under almost any reasonable and historically normalized assumptions, rents from our existing portfolio only are expected to increase at rates at least comparable to interest rate increases in our maturing debt issues." As a result, it has insulated the business from higher rates in the future.
The portfolio can withstand challenges
Hamner also noted that Medical Properties Trust's recent transactions to sell several of its hospital properties "support[s] the values of our leased assets." He further stated that it "demonstrates that sophisticated investors and operators recognize and are willing to invest billions of dollars based on the long-term sustainability of our model, particularly our receipt of annually increasing rental payments that are generated from local hospital operations."
The company undertakes a rigorous due diligence process before it invests in a hospital. Because of that, subsequent sales continually validate its approach since the hospitals have held their values despite significant changes in market conditions.
Medical Properties Trust's rigorous underwriting process also helps safeguard it from potential issues. That has been evident in the case of Prospect Medical. While that company currently isn't paying rent on the Pennsylvania properties it leases from Medical Properties Trust, the REIT will eventually recoup that money and the value of those properties. It has many provisions in the leases protecting its rental payments and the value of its assets, including a financial interest in Prospect's very valuable managed care business. While recovering that money will take some time, it will eventually receive all the unpaid rent and interest.
Built on a very solid long-term foundation
Medical Properties Trust is currently facing some stiff near-term headwinds. However, the company's co-founders built the REIT on a rock-solid foundation. As a result, management remains confident the company can withstand these headwinds and grow shareholder value over the long term.
