Medical Properties Trust Inc. (New York stock market :MPW) saw its share price tumble on Thursday after the real estate investment trust announced fourth quarter results which revealed that MPW had not fully covered its dividend with funds from operations due to issues with the operator.
That said, Medical Properties Trust’s AFFO-based dividend payout ratio in the fourth quarter was 85%, and I think investors are overreacting to the trust’s near-term lack of FFO.
I said before that the trust’s dividend is moderately safe. Based on adjusted funds from operations, the stock is relatively cheap, and the trust recently announced its regular dividend payment of $0.29 per share per quarter. I will buy the drop.
Composition of the portfolio and international exposure
At the end of the fourth quarter, Medical Properties Trust’s portfolio comprised 444 healthcare facilities, the majority of which were general acute care hospitals and inpatient rehabilitation centers. Facilities. General acute care hospitals are Medical Properties Trust’s most profitable asset, accounting for 75.2% of the trust’s rent in 4Q-22.
Behavioral health facilities, long-term acute care hospitals, and freestanding emergency rooms are examples of real estate assets. All real estate assets combined, Medical Properties Trust had assets worth $19.7 billion at the end of 2022, generating total revenue of $380.5 million in the fourth quarter.
Medical Properties Trust is a healthcare REIT rooted in the United States, but with assets and earnings that have significant exposure to European markets, reducing the trust’s reliance on the US healthcare market .
In the fourth quarter, the US market contributed 71% of the REIT’s revenue, while other markets in Western Europe and Australia, including the UK (20%), contributed 29% of income.
Healthcare spending, which is increasing both per capita and overall, is the primary long-term driver of Medical Properties Trust’s FFO growth. National healthcare spending has been on an upward trend for several decades, and healthcare real estate investment trusts like MPW are poised to benefit from these long-term trends.
Despite the company’s struggles with operators failing to make scheduled payments, Medical Properties Trust produced $1.42 per share in AFFO in 2022, a 4% year-over-year increase.
In the fourth quarter, for example, Medical Properties Trust recorded a $171 million write-down related to a portfolio of properties leased to Prospect Medical Holdings and wrote off $112 million in unpaid rent. These losses were the main reason for the decline in funds from operations at Medical Properties Trust in 4Q-22.
AFFO-based dividend coverage remained robust
In 4Q-22, Medical Properties Trust earned $0.21 per share in funds from operations, 28% below the current quarterly dividend of $0.29 per share.
That said, the real estate investment trust declared its final dividend payout of $0.29 per share last week, implying that the trust has no plans to change its dividend payout in the near future.
Importantly, Medical Properties Trust’s AFFO payout ratio was 85% in the fourth quarter and 82% in the prior twelve months, indicating that the healthcare REIT will continue to cover its dividend commitments. towards the shareholders even if it solves the problems of the tenants.
The medical properties trust is good business again
Following the 8% drop in MPW’s share price yesterday, I increased my position as I believe the dividend is and will continue to be covered by adjusted operating funds.
In 2023, Medical Properties Trust could earn $1.40 to $1.50 per share in adjusted funds from operations, implying that the trust’s AFFO could either stagnate or decline slightly (I made this assumption to err on the side of conservatism).
This assumption translates to an AFFO 2023E multiple of 7.7x at a stock price of $11.14. I think the valuation reflects a very high margin of safety, and I gladly accepted the lower market offer yesterday.
In my view, MPW’s valuation multiple could eventually reset to 10x AFFO (assuming no tenant issues and strong dividend coverage), giving the trust a price target of fair value of $14-15, implying a 26-35% upside.
Why MPW might see a lower valuation
Medical Properties Trust’s primary concern is dividend coverage. If more tenants experience financial difficulty and fail to pay rents to the real estate investment trust, Medical Properties Trust could be forced to reduce its dividend payout.
But a lot of things would have to go wrong for MPW to get to this point, especially since the 82% dividend payout rate provides protection against rental shortfalls.
I buy panic because I believe dividend-paying investors are overreacting to the prospect of a dividend cut.
Medical Properties Trust declared its regular quarterly dividend of $0.29 per share a week ago, but did not use the earnings release to announce a change in its dividend policy. This strongly suggests that management is not looking to change its dividend policy in the short term.
Finally, I believe the AFFO multiple of 7.7x accurately reflects the trust’s tenant issue with Prospect Medical. While I don’t expect a full recovery in the near term, I think MPW is worth 10x AFFO, or $14-15 per share.