Medical Properties – Rated poorly for Healthcare REITs, I’ll approve (MPW)

Danil Sereda profile picture

Stanislau Kharytanovich

Introduction

Lately, I often see optimistic articles about Medical Properties Trust (New York Stock Exchange:MPW), which continues to deepen despite the optimism of the authors. It was the weak momentum, despite the fund’s fairly low valuation levels and a high dividend yield of now over 10%, causing MPW to drop to 7th out of 14 funds that make up the health care REIT industry (on Finding Alpha). So I’ve been wondering: Is Medical Properties Trust really an “average” REIT in quality, or are we just looking at unreasonable pricing that has every chance of reversing in the medium term and generating abnormal returns for investors? This article is dedicated to answering this question.

Misesteems and their cause

First, I loaded the time series of all 14 REITs, including MPW itself, to see if there is a clear discrepancy between the share price dynamics of Medical Properties and those of its closest peers. Based on historical price changes (excluding dividends), I derived 2 indices for comparison, with and without MPW within the structure. Here you can see how MPW performance compares to the drawn indexes:

Author's calculations, data from Investing.com

Author’s calculations, data from Investing.com

Excluding dividends, $10,000 invested in MPW on November 3, 2018, well before Covid, would have given a hypothetical investor a negative return of 28.23% (with dividends, that loss would have been 9.65%) . At the same time, if this same investor had equally invested in 14 REITs at once, or 13 REITs without MPW, they would have received a negative return of 17.83% and 17.58%, respectively (again, without dividend accounting).

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However, the attentive reader has probably noticed the huge premium that Medical Properties Trust commanded compared to the entire industry. In fact, over the last 4 years, this premium has averaged 20.34% (median = 22.2%). Now, however, due to a terrible sell-off, that premium has turned into a nearly 13% discount at yesterday’s close:

Author's calculations, data from Investing.com

Author’s calculations, data from Investing.com

MPW’s dividend yield rose to a multi-year high, while its payout ratio fell to near record lows:

Frame
Data by YGraphics

The second attribute above, payout ratio, suggests that the company as a whole is comfortable paying its quarterly dividends, which in theory should remove doubts about the risk of a payout cut in the near future. But it could be said that YCharts calculates the MPW payout ratio based on the classic ratio of dividends to net income, which is not correct in this particular case because Medical Properties pays dividends out of its working capital. But even if we look at the FFO dividend, we don’t see any reason to doubt MPW’s shipping performance.

Author's calculation, based on On the Pulse article (SA member)

Author’s calculation, based on On the Pulse article (SA member)

Continuing our comparison of MPW to its peer group, you should keep in mind that while momentum and dividend yield are very important, it’s far from the only criteria you need to pay attention to. The mere fact that the fund’s price has fallen 53% YTD and is now yielding more than 10% does not give us the right to shout “buy the dip!” whether there are clear fundamental reasons to expect a continuation of the storm in the medium term. The total return of -9.65% in the last 4 years speaks for itself, you know.

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Therefore, I decided to perform a cross-sectional analysis of valuation multiples, growth rates and profitability indices to see to what extent underlying expectations can explain the identified price manipulation.

Author's calculations, based on Seeking Alpha

Author’s calculations, based on Seeking Alpha

As you can see from the table above, which I compiled manually from the SA assessment tool, MPW is significantly cheaper than the rest of the sample on all key multiples, while at the same time, the REIT returns seem qualitatively better. . Forwarding growth rates are also better, with one exception: ROE is projected to decline by ~5% over the next year, while group average growth is ~12%. The overall picture is very reminiscent of what happened with MPW in 2018: peak profitability and strong multiple contraction, marking the beginning of the next bull cycle:

Argus Research, Author's Notes

Argus Research, Author’s Notes

In my opinion, the only major catalyst for Medical Properties Trust’s stock recovery is the decline in financial debt to equity, which is inversely correlated with MPW price and whose growth in recent months explains well the depressed price action. and the resulting discount for the peer group:

YCharts, author's notes

YCharts, author’s notes

As you can see from the chart above, we already saw a similar debt-to-equity surge in late 2015 and early 2016, and then (like now) stocks fell precipitously. Once that issue was resolved, MPW was back to its previous local highs very quickly.

This time, the situation is further complicated by the company’s business practices since the end of 2020. I can’t help but share a note from hedgehog accusing MPW of irregularities.

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Twitter, @HedgeyeREITs

Twitter, @HedgeyeREITs

Sea urchin even hired photographers for stagecoach The company-funded projects: Here’s what they think MPW’s $50 million investment in Wadley Texarkana looks like today: https://twitter.com/HedgeyeREITs/status/1587820407196946433

I can’t say exactly how true this is – there’s a possibility that Hedgeye is trying to promote their sell thesis via Twitter because they’re short (so the question begs: why exactly did they pick MPW?). There are many pitfalls in this story, and MPW’s continued decline against a background of very strong financials creates a field of discussion, which is why my article is on SA 26 from early October.

Bottom line

As a result of my little research, you have seen that the discount that MPW currently trades at is not normal (at least historically).

We have seen before how peak margins and profitability led to a strong multiple contraction, that was in 2018. At the same time, the company was under the influence of leverage that it was able to reduce, so stock prices rose rapidly within a few months. .

Now, the situation is reminiscent of 2018 again: multiples have dropped sharply against the background of MPW’s strong financial position that far exceeds that of its competitors. Exacerbating the situation now, however, are the potential risks of inconsistency between what we read in financial reports and hear from management and the actual situation in business operations.

I have not found enough arguments against the bear theses, so I cannot recommend buying MPW in any of our model portfolios. However, if you are willing to take that risk, the current drop looks good to go long.

Thank you for reading!

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