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Introduction
Medical Properties Trust (NYSE:MPW) expects a normalized FFO of $1.81 to $1.85 per diluted share for 2022. From 2015 to 2021 shares on average traded at 11.29x normalized FFO which would imply a price of $20.66 using the midpoint of the FFO guidance. This suggests that shares are currently close to fairly valued using the closing price on April 11. If we consider the 2019 to 2021 time period, shares have traded at about 12.8x normalized FFO which suggests shares are ~12% undervalued.
Source: Medical Properties Trust 10-K from 2015 to 2021, Yahoo! Finance
In this article, we look at valuation metrics to support or refute the argument that MPW’s stock is fairly valued. We look at the relevant metrics in the context of a seven-year and a three-year time period. There has been a marked shift in management strategy since 2019 and, where appropriate, we consider the three-year time period discreetly. In addition, we look at relevant operating metrics to support the thesis and evaluate the implications of investing in MPW in a rising interest rate environment. Finally, a fair value estimate and a conclusion are offered.
Price to FFO
Please take a look at Table 1. Applying the average Price to normalized FFO ratio over the last seven years to this year’s normalized FFO guidance, we see that the current price is slightly undervalued by this metric using the closing price on April 11th. The implication of this table is that an investment in MPW is a fair value transaction and you can expect an annual growth rate of somewhere between 5.64% and 8.66%.
| Table 1: Price to Normalized FFO 2015 to 2021 | |||
| Normalized FFO per share | Average share price | Price to NFFO* | |
| 2015 | $ 1.26 | $ 13.11 | 10.4 |
| 2016 | $ 1.28 | $ 12.77 | 10.0 |
| 2017 | $ 1.35 | $ 13.06 | 9.7 |
| 2018 | $ 1.37 | $ 14.67 | 10.7 |
| 2019 | $ 1.30 | $ 18.57 | 14.3 |
| 2020 | $ 1.57 | $ 18.32 | 11.7 |
| 2021 | $ 1.75 | $ 21.57 | 12.3 |
| CAGR | 5.64% | 8.66% | |
| Average P/NFFO | 11.29 | ||
| Implied Value | $ 20.66 | ||
| Current Price (April 11th) | $ 20.53 | ||
| Overvalued/Undervalued | -0.65% | ||
Source: Medical Properties Trust 10-K from 2015 to 2021, NFFO is Normalized Funds From Operations.
If we focus on the years 2019 to 2021 which are presented separately in Table 1A, MPW’s stock, on average, traded at 12.8x normalized FFO which suggests the current share price is 12.35% undervalued. The growth rate of normalized FFO per share is almost 3x the growth rate of the seven-year period. However, the growth rate in the share price has not kept up and is slightly below the seven-year period. This could be interpreted as the market not being fully convinced that the shift in strategy will be of incremental value to shareholders. The guidance of $1.81 to $1.85 normalized FFO per share reflects a year-over-year growth that is closer to the seven-year growth rate than the recent three-year growth rate of normalized FFO.
| Table 1A: Price to Normalized FFO 2019 to 2021 | |||
| Normalized FFO per share | Average share price | Price to NFFO | |
| 2019 | $ 1.30 | $ 18.57 | 14.3 |
| 2020 | $ 1.57 | $ 18.32 | 11.7 |
| 2021 | $ 1.75 | $ 21.57 | 12.3 |
| CAGR | 16.02% | 7.78% | |
| Average P/NFFO | 12.8 | ||
| Implied Value | $ 23.42 | ||
| Current Price | $ 20.53 | ||
| Overvalued/Undervalued | -12.35% | ||
In both these tables as well as others in the article, I present the current price, the implied value using the average statistic for the table and calculate the extent of relative overvaluation/undervaluation. At the end of the article, I calculate an equal-weighted geometric mean of the relative metrics to estimate a fair value. A negative number means undervaluation and a positive number means overvaluation.
Dividends
It is useful to dig a little deeper with the normalized FFO figure and connect it with dividends which is the primary filter for many REIT investors. Please take a look at Table 2.
| Table 2: FFO per Share and Dividends per Share | |||
| Normalized FFO per share | Dividends per Share | Payout Ratio | |
| 2015 | $ 1.26 | $ 0.88 | 69.9% |
| 2016 | $ 1.28 | $ 0.91 | 71.0% |
| 2017 | $ 1.35 | $ 0.96 | 71.1% |
| 2018 | $ 1.37 | $ 1.00 | 73.1% |
| 2019 | $ 1.30 | $ 1.02 | 78.4% |
| 2020 | $ 1.57 | $ 1.08 | 68.9% |
| 2021 | $ 1.75 | $ 1.12 | 64.0% |
| CAGR | 5.64% | 4.10% | |
Source: Medical Properties Trust 10-K from 2015 to 2021
I would like to offer two observations to the reader: the first is that the dividend growth rate has not kept up with the normalized FFO growth rate for the seven-year period and also for the three-year period from 2019-2021.
Secondly, the payout ratio has trended downwards of late. This move aligns with the stated growth-oriented strategy of management since 2019. There are other metrics that confirm this strategy which we will cover shortly.
Table 3 presents the dividend yield from 2015 to 2021 and Table 3A the dividend yield from 2019 to 2021. The reader will note the dividend yield compression from 2019 to 2021. MPW is expected to pay $1.16 per share in dividends in 2022.
| Table 3: Dividend Yield 2015 to 2021 | |||
| Dividends per share | Avg. Share Price | Dividend Yield | |
| 2015 | $ 0.88 | $ 13.11 | 6.71% |
| 2016 | $ 0.91 | $ 12.77 | 7.13% |
| 2017 | $ 0.96 | $ 13.06 | 7.35% |
| 2018 | $ 1.00 | $ 14.67 | 6.82% |
| 2019 | $ 1.02 | $ 18.57 | 5.49% |
| 2020 | $ 1.08 | $ 18.32 | 5.90% |
| 2021 | $ 1.12 | $ 21.57 | 5.19% |
| Average Dividend Yield | 6.37% | ||
| Current Dividend Yield | 5.65% | ||
| Implied Value | $ 18.21 | ||
| Current Price | $ 20.53 | ||
| Overvalued/Undervalued | 12.75% | ||
Source: Medical Properties Trust 10-K from 2015 to 2021
| Table 3A: Dividend Yield 2019 to 2021 | |||
| Dividends per share | Avg. Share Price | Dividend Yield | |
| 2019 | $ 1.02 | $ 18.57 | 5.49% |
| 2020 | $ 1.08 | $ 18.32 | 5.90% |
| 2021 | $ 1.12 | $ 21.57 | 5.19% |
| Average Dividend Yield | 5.53% | ||
| Current Dividend Yield | 5.65% | ||
| Implied Value | $ 20.99 | ||
| Current Price | $ 20.53 | ||
| Overvalued/Undervalued | -2.17% | ||
Source: Medical Properties Trust 10-K from 2015 to 2021
The growth rate of dividends combined with the current yield indicates a total return of ~10%. For comparison, the FTSE Nareit All Equity REITs index has a 40-year total return of 11.97% and a 20-year return of 10.47%.
Total Assets and Debt
In Table 4, the reader will note that total assets were 3.65x in 2021 what they were in 2015 and debt was 3.39x what they were in 2015.
| Table 4: Total Assets and Debt (2015 to 2021) | ||
| Total Assets (in thousands) | Debt (in thousands) | |
| 2015 | $ 5,609,351 | $ 3,322,541 |
| 2016 | $ 6,418,536 | $ 2,909,341 |
| 2017 | $ 9,020,288 | $ 4,898,667 |
| 2018 | $ 8,843,643 | $ 4,037,389 |
| 2019 | $ 14,467,331 | $ 7,023,679 |
| 2020 | $ 16,829,014 | $ 8,865,458 |
| 2021 | $ 20,519,801 | $ 11,282,770 |
| CAGR | 24.13% | 22.60% |
Source: Medical Properties Trust 10-K from 2015 to 2021
The growth in assets, compression of the dividend yield and recent decrease in the payout ratio all confirm the management shift in strategy towards growth. Indeed, their website calls this “entering a new era of transformational growth: 2019 to present”. Table 4A puts a finer point on the growth in total assets and debt in 2019 as compared to 2018.
| Table 4A: Total Assets and Debt (2018 to 2019) | ||
| Total Assets (in thousands) | Debt (in thousands) | |
| 2018 | $ 8,843,643 | $ 4,037,389 |
| 2019 | $ 14,467,331 | $ 7,023,679 |
| CAGR | 63.59% | 73.97% |
Source: Medical Properties Trust 10-K from 2015 to 2021
However, not all that growth necessarily accrues to the investor.
Revenue and FFO
The next table, Table 5, examines the growth in Revenue, normalized Funds from Operations and Shares Outstanding.
| Table 5: Revenue, Normalized FFO and Shares Outstanding | |||
| Revenue (in thousands) | Normalized FFO (in thousands) | Shares Outstanding (in thousands) | |
| 2015 | $ 441,878 | $ 274,805 | $ 218,304 |
| 2016 | $ 541,137 | $ 334,826 | $ 261,072 |
| 2017 | $ 704,745 | $ 474,879 | $ 350,441 |
| 2018 | $ 784,522 | $ 501,004 | $ 366,271 |
| 2019 | $ 854,197 | $ 557,413 | $ 428,299 |
| 2020 | $ 1,249,238 | $ 831,209 | $ 530,461 |
| 2021 | $ 1,544,669 | $ 1,035,920 | $ 590,139 |
| CAGR | 23.19% | 24.75% | 18.03% |
Source: Medical Properties Trust 10-K from 2015 to 2021
Because of the dilutive effect of the growth in shares outstanding, normalized FFO per share is expected to grow in the mid-single digits and the dividend payout ratio is probably closer to what it will be in the last two years. This supports the earlier assertion of ~10% total return provided the shares are purchased at fair value. If the shares are purchased at a discount to fair value, then the investor can expect an additional return as the stock returns to fair value. The opposite is true if the shares are purchased at a premium.
Net Debt/EBITDA
The previous tables have shown the growth in revenues and in debt. This next table examines how efficiently the increase in debt is being serviced by the increase in revenues.
| Table 6: Pro Forma Net Debt/Annualized Adjusted EBITDA | |
| 2016 | 5.12 |
| 2017 | 5.84 |
| 2018 | 4.38 |
| 2019 | 6.00 |
| 2020 | 6.33 |
| 2021 | 6.38 |
Source: Medical Properties Trust, Quarterly Supplemental Information, from 2015 to 2021
There is some deterioration in the pro forma net debt/annualized adjusted EBITDA figure from 2019 to 2021 as compared to the 2016 to 2018 time period. This is of some concern and investors should monitor this statistic. In a rising interest rate environment, the cost of servicing debt increases, ceteris paribus.
Spread to FTSE Nareit Equity Health Care
The average spread of MPW’s dividend yield to the FTSE Nareit Equity Health Care dividend yield for 2015 to 2021 is 109 basis points. The current spread is 157 basis points. A narrowing of the spread implies that the price of MPW stock goes up. By this statistic, MPW’s stock is undervalued by between 11.51% and 20.33% depending on the time period selected.
| Table 7: Spread to FTSE Nareit Equity Health Care | |||
| Year | Dividend Yield | FTSE Nareit Equity Health Care Dividend Yield | Spread |
| 2015 | 6.71% | 5.22% | 1.49% |
| 2016 | 7.13% | 5.44% | 1.69% |
| 2017 | 7.35% | 5.37% | 1.98% |
| 2018 | 6.82% | 6.10% | 0.72% |
| 2019 | 5.49% | 4.98% | 0.51% |
| 2020 | 5.90% | 5.62% | 0.28% |
| 2021 | 5.19% | 4.22% | 0.97% |
| Average Spread | 1.09% | ||
| Current Spread | 1.57% | ||
| Implied Value Using Avg. Spread. | $ 23.20 | ||
| Current Price | $ 20.53 | ||
| Overvalued/Undervalued | -11.51% | ||
Source: Monthly Property Index Values & Returns, Yahoo! Finance
| Table 7A: Spread to FTSE Nareit Equity Health Care | |||
| Year | Dividend Yield | FTSE Nareit Equity Health Care Dividend Yield | Spread |
| 2019 | 5.49% | 4.98% | 0.51% |
| 2020 | 5.90% | 5.62% | 0.28% |
| 2021 | 5.19% | 4.22% | 0.97% |
| Average Spread | 0.59% | ||
| Current Spread | 1.57% | ||
| Implied Value Using Avg. Spread | $ 25.77 | ||
| Current Price | $ 20.53 | ||
| Overvalued/Undervalued | -20.33% | ||
In order to calculate spreads for these two tables as well as the next two tables, I have used the MPW’s share price and dividend yield and the ICE of BofA BB US High Yield Index as of March 31, 2022 to match the most recently available statistic for the FTSE Nareit Equity Healthcare Index. All other tables use the closing price on April 11th.
Spread to ICE BofA BB US High Yield Index
MPW maintained a corporate credit rating from S&P of BB+ and a corporate family rating from Moody’s of Ba1. Table 8 looks at the historical spread between MPW’s dividend yield and the ICE BofA BB US High Yield Index. By this metric, MPW shares are overvalued in the range of 9.03% to 15.21%.
| Table 8: Spread to ICE BofA BB US High Yield Index | |||
| Year | Dividend Yield | BAMLH0A1HYBBEY | Spread |
| 2015 | 6.71% | 5.21% | 1.51% |
| 2016 | 7.13% | 5.20% | 1.93% |
| 2017 | 7.35% | 4.33% | 3.02% |
| 2018 | 6.82% | 5.15% | 1.67% |
| 2019 | 5.49% | 4.45% | 1.04% |
| 2020 | 5.90% | 4.53% | 1.37% |
| 2021 | 5.19% | 3.35% | 1.84% |
| Average Spread | 1.77% | ||
| Current Spread | 0.75% | ||
| Implied Value Using Avg Spread | $ 17.82 | ||
| Current Price | $ 20.53 | ||
| Overvalued/Undervalued | 15.21% | ||
Source: ICE BofA BB US High Yield Index Effective Yield, calculated annually with average figures.
| Table 8A: Spread to ICE BofA BB US High Yield Index | |||
| Year | Dividend Yield | BAMLH0A1HYBBEY | Spread |
| 2019 | 5.49% | 4.45% | 1.04% |
| 2020 | 5.90% | 4.53% | 1.37% |
| 2021 | 5.19% | 3.35% | 1.84% |
| Average Spread | 1.42% | ||
| Current Spread | 0.75% | ||
| Implied Value Using Avg Spread | $ 18.83 | ||
| Current Price | $ 20.53 | ||
| Overvalued/Undervalued | 9.03% | ||
Net Asset Per Share
Table 9 looks at net assets per share as compared to average share price for the year. Up until 2019, share prices seem to track rather nicely the net asset per share.
| Table 9: Net asset per share | ||
| Year | Average share price | Net Asset Per Share |
| 2015 | $ 13.11 | $ 10.48 |
| 2016 | $ 12.77 | $ 13.44 |
| 2017 | $ 13.06 | $ 11.76 |
| 2018 | $ 14.67 | $ 13.12 |
| 2019 | $ 18.57 | $ 17.38 |
| 2020 | $ 18.32 | $ 15.01 |
| 2021 | $ 21.57 | $ 15.65 |
| CAGR | 8.66% | 6.92% |
| Forward Estimate | $ 18.30 | |
| Current Price | $ 20.53 | |
| Overvalued/Undervalued | 12.19% | |
Source: Medical Properties Trust, Quarterly Supplemental Information, from 2015 to 2021
I would like to distinguish net asset per share with net asset value per share. The latter requires capitalizing income and then reducing it by the debt and then dividing it by shares outstanding. It requires adjustments which, in my opinion, will limit the measure’s reliability in this particular situation. I have simply subtracted debt from total assets and divided by shares outstanding for this table.
Fair Value Estimate
Table 10 and 10A look at the different metrics we have reviewed and suggest a value using an equal-weighted geometric mean of the different metrics. The reader may want to adjust the weights given to these statistics. For example, dividends are closely related to normalized FFO and using both dividend yield and normalized FFO and giving them an equal weight may overstate the importance of FFO relative to the other metrics. The reader may also have more confidence in one statistic over another or one time period over the other. For simplicity, I have assumed equal weights and have come up with a suggested fair value range of $19.54 and $21.28 which is not too far from where it is currently trading.
| Table 10: Fair Value Estimate (Using 2015 to 2019 Period) | |
| Metrics | Overvalued/Undervalued |
| Price to NFFO | -0.65% |
| Historical Dividend Yield | 12.75% |
| Spread to FTSE Nareit Equity Health Care | -11.51% |
| Spread to ICE BofA US High Yield | 15.21% |
| Net Asset Per Share | 12.19% |
| Geometric Average Overvalued/Undervalued | 5.08% |
| Fair Value Estimate | $ 19.54 |
| Table 10A: Fair Value Estimate (Using 2019 to 2021 Time Period) | |
| Metrics | Overvalued/Undervalued |
| Price to NFFO | -12.35% |
| Historical Dividend Yield | -2.17% |
| Spread to FTSE Nareit Equity Health Care | -20.33% |
| Spread to ICE BofA US High Yield | 9.03% |
| Net Asset Per Share | 12.19% |
| Geometric Average Overvalued/Undervalued | -3.53% |
| Fair Value Estimate | $ 21.28 |
Inflation and Interest Rates
Interest rates can be decomposed into the following components: real risk-free rate, inflation premium, default risk premium, liquidity premium and maturity premium. The current macroeconomic environment has the first two of these components accelerating significantly.
When interest rates rise, income investors may shift their dollars from MPW stock to other investments that generate a higher distribution. The selling pressure can depress MPW’s stock in the short-run.
When the real risk-free rate and the inflation premium go up then MPW’s cost of debt goes up. When the cost of debt goes up there is less profit to work with and less cash available for distributions. This is probably not an immediate concern for shareholders of MPW’s stock. $3.6 billion of the $11.4 billion of debt outstanding were variable interest debt of which half is hedged with interest rate swaps. Nevertheless, the unhedged portion of the long-term debt that is variable will increase interest expense in the short-run. Further down the line, if interest rates continue the current trajectory, it will be relatively costly to refinance debt as they come due. REITs do not have amortizing loans. 57% of MPW’s long-term debt will have to be refinanced or paid off before 2026 ends.
There is some cushion that MPW has against rising interest rates, though it will not be a 100% protection. 99% of leases have annual rent escalators that are tied to the CPI according to the June 2021 investor presentation. There is a ceiling that kicks in at 4.5% and the fixed lease escalators average 2.3% annually. Nevertheless, these lease escalators were a usual part of their contracts with their operators historically, so citing these lease escalators now as a mitigating factor to increased interest rates should be reviewed carefully.
There is also inflation that is due to the tight labor market and other costs. These are headwinds that are not unique to MPW and will exert some margin pressure. Time will tell to what extent it will affect MPW’s operations precisely and how management is able to mitigate these increased costs. For the investor, there is probably no escaping the effects of inflation and high interest rates. The prudent move would be not to overpay for a particular cash flow.
Conclusion
MPW is trading at about fair value. A 10% total return is a reasonable rate and is justified from these levels based on the selected metrics presented. Stated another way, the opportunity cost of holding on to MPW shares is 10%. Stated yet another way, there is no margin of safety at the current levels. A margin of safety is present when an investment can be made at a discount to intrinsic value. If the investor has an opportunity for a return that matches or exceeds 10% and exhibits a better risk profile, then the prudent investor should consider reallocating their investment dollars. At the end of the day, investing is an exchange of cash flows.
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