andresr
After a long time, REITs have become a very ¨interesting¨ investment as the speed and scale at which interest rates have moved have created concerns in some parts of the sector. One of these names which have sold off includes Medical Properties Trust (NYSE:MPW) as this REIT has sold off 60% from the highs around $25 earlier this year.
Hospital Real Estate
Medical Properties Trust is a REIT which claims to be the only vehicle in the market out there investing purely in hospital real estate in developed markets like the US, Europe, and to a lesser extent in Australia.
The company has grown in a very rapid fashion, with total assets up from about $6 billion in 2016 to some $20 billion in 2021. In February of this year, the company reported its results for the year 2021. The company is somewhat of an active landlord, as it provides financing leases as well, and at times collaborates and even invests in other financing vehicles.
This is exactly the point, which is a warning sign, as the REIT is mandated to provide flexible solutions, which makes it perhaps possible to hide problems longer than might be the case in normal REITs. Moreover, the company has higher risks as well, especially if additional financing is provided or equity investments into tenants are made as well.
The company ended 2021 with $20.5 billion in total assets, the vast majority relating to actual real estate investments, and to a lesser extent, receivables, financing lease investments, and equity investments. This is financed by roughly $8 billion in equity and the remainder in debt.
Total revenues came in around $1.5 billion, of which just over $1.1 billion in rent and the remainder as income from financial leases and interest income. Expenses ran at nearly $900 million, mostly driven by interest expenses and deprecation charges, as well as selling, general and administrative expenses to a minor extent. To be more specific, interest expenses of $368 million came in around 3% on a blended ratio in relation to total liabilities, or a bit more if we look at actual straight debt.
With 590 million shares outstanding and net earnings coming in at $656 million, earnings came in at $1.12 per share. With asset purchases and related dilution responsible for much of the growth, actual earnings per share rose just four cents compared to 2020.
The company guided for 2022 earnings between $1.16 and $1.20 per share and after adding back $0.65 per share in depreciation charges, normalized funds from operations are seen around $1.81-$1.85 per share.
2022 – Rough Times
After shares still traded at $25 in January, at just over 20 times earnings, shares fell to the $20 mark as the Ukraine war resulted in higher interest rates already. In mid-March, the company closed a deal with Macquarie in which it sold assets, freeing up $1.3 billion to reduce debt. That was significant, as it could cut debt by roughly 10%, needed as the company held more debt than equity, resulting in high leverage ratios.
This sale was in part offset by continued investments, yet by mid-2022, it was a total balance sheet which fell from $20.5 billion by year-end 2021 to $19.7 billion. Total liabilities fell to $10.9 billion with equity up to $8.9 billion. This was quite comforting, as interest expenses were actually coming in largely flat. That is just a matter of time, as its fixed rate debt will over time carry much higher rates as well.
While this looks pretty stable, investors have had to digest a painful decline in the share price to $15 earlier this summer and to just $10 now. Investors fear the opaqueness in the real estate, the fact that its largest tenant Steward is reportedly in financial difficulties, and that the business might not be entirely recession-proof, with the pandemic having hurt certain operators quite a bit. With its bonds effectively yielding around 10% and insider trading action not giving any confidence, or reason to be upbeat, it is easy to be scared here as shares have essentially fallen from $15 to $10 over the past couple of weeks.
To address some of these challenges, MPT sold 9 acute hospitals and related medical buildings for $360 million, providing more liquidity and deleveraging the business. On October 6, at the height of the concerns of investors in recent times, the company sold three Connecticut hospitals in a $457 million deal.
To scare off short sellers, the company announced a $500 million share authorization, which should not be confused with the expectation that these share buybacks will be executed upon shortly, or at least not necessarily. Moreover, the company has the potential to engage in buybacks, or redeem some expensive debt as well, in order to reduce leverage ratios.
What Now?
It is comforting to see the company delivering on $800 million in deals on the sell side in recent weeks to provide a lot of liquidity. While this is good, there are quite some caveats as well, notably the fact that some tenants are quite concentrated, as we have risks related to the opaqueness of the real state.
All of this is noteworthy, and I do not even want to go into the discussion whether there is more at play here. Many REITs have sold off in this environment and while the declines of MPT are outsized, there are some objective reasons for the concerns, as the potential is certainly there as well.
There is no need to be a hero as many names have sold off quite a bit in recent times, including high-quality REITs which are less leveraged, have stronger tenant diversification, and operate a pure landlord model, likely giving potential for a better risk-reward here.
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