Shares of Medical Properties Trust (MPW 0.40%) have cratered nearly 70% from their all-time high a few years ago. That's why the healthcare REIT still offers a more than 8% dividend yield even after recently slashing its payout by almost 50%.
While painful, that dividend cut was necessary medicine. It will allow the healthcare REIT to retain additional cash for debt reduction. However, the hospital owner still faces a long road ahead as it works to fix the issues with its balance sheet and portfolio. Because of that, investors will need to be patient as the company works to rebuild shareholder value.
NYSE: MPW
Key Data Points
The value proposition
Despite the significant slide in its stock price, Medical Properties Trust owns a valuable portfolio of hospital real estate. It's one of the world's largest owners of this kind of real estate, with 444 facilities across 10 countries. At the end of the first quarter, it had $19.2 billion in total assets leased or mortgaged to 55 hospital operating companies.
The company has repeatedly demonstrated the value of these properties through monetization transactions for values at or above its initial purchase price. Despite that, the REIT currently trades at an enterprise value of $14.3 billion. That implies that the company has $5 billion of value recovery potential, assuming the underlying value of its assets holds firm.
There's a similar disconnect between the company's current earnings multiple and its historical average. Medical Properties Trust sells for about 6 times its adjusted funds from operations (FFO). That's 50% below its 10-year average of around 12 times adjusted FFO.
This value disconnect suggests that the REIT's share price has significant upside potential as it addresses the issues weighing on its valuation.
The roadmap to recovery
Recovering that value won't come overnight because Medical Properties Trust still has a lot of issues holding it down. The dividend cut was a step in the right direction because it will free up cash that the company can use to repay debt.
The REIT also disclosed that it plans to continue pursuing transactions that "reinforce underwritten asset values." It plans to explore opportunities to sell real estate to third parties or joint venture partners at prices that confirm the value of its portfolio. It has also identified nonleased and non-real estate assets it can sell. Those transactions will give it additional cash to use toward deleveraging.
However, shoring up its balance sheet isn't the only thing left on the docket. Mizuho analyst Vikram Malhotra recently highlighted four other catalysts that could help unlock value for shareholders:
- Recover lost rental payments by monetizing Prospect's managed care business. While the recapitalization deal with Prospect is currently on hold, the REIT needs to close it and eventually sell its interest in that business. That future sale will allow it to recover lost rental income and real estate value from that key tenant.
- Seeing its leading tenant, Steward Health Care, file audited financial statements. The deteriorating financial health of Steward and Prospect has been a big weight on Medical Properties Trust.
- Continue diversifying away from those two tenants by selling assets leased to them and redeploying the proceeds into properties leased to higher-quality tenants.
- Improve investor communication. The REIT failed to disclose the hold on the Prospect deal and wasn't direct about the future of the dividend. The company needs to be more up front and honest with investors.
Many of these catalysts will take time to come to fruition. The company hopes for a monetization event for the managed care business sometime next year. That would provide it with cash proceeds it can redeploy into acquiring income-generating hospital assets from other operators, helping reduce its exposure to Steward and Prospect. Meanwhile, future asset sales and an improving balance sheet would give it additional financial flexibility to continue diversifying.
Patience could eventually pay off
Medical Properties continues taking steps toward returning to a firmer financial foundation. That should help eventually lift the weight currently holding down its valuation. While it has a long way to go, shares of the hospital REIT have significant upside potential as the company slowly recovers. That makes it a potentially enticing opportunity for value-hunting investors with a lot of patience.
