Medical Properties Trust (MPW): Q1 2023 Update Analysis
Welcome back, investors. It’s that time of the year again when we dive into the Q1 2023 updates of Medical Properties Trust (MPW), a real estate investment trust that focuses on healthcare properties. In this blog post, we’ll review the key metrics, the current situation, and the future outlook for MPW. I continue to like REITs as an investment as they can provide long-term stability and growth in addition to income.
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Normalized Funds from Operations (NFFO) and Adjusted Funds from Operations (AFFO)
MPW’s NFFO came in at 37 cents per share for the quarter. Meanwhile, the AFFO, which is the preferred metric for evaluating dividend coverage, was at 30 cents per share. This figure is within the company’s narrowed guidance of $1.50 to $1.61 NFFO range. It’s worth noting that the lower end of this range assumes that there’s no rent collection from Prospect in 2023, which is a conservative assumption. As of Q1, MPW hasn’t collected any rent from Prospect yet. Management believes they will recover 100% of their investment and missed rent from Prospect, but the timeline is uncertain. The stock price declines may reflect investor uncertainty about this.
Dividend Coverage
MPW’s dividend coverage is currently tight. There has been chatter about cutting the dividend, but we don’t think it’s wise. Cutting the dividend and buying back shares is equivalent to paying out cash, and it’s not ideal from a cash flow perspective. The company’s long-term plan is to improve its debt-to-EBITDA ratio, and they’re doing a good job of it. They plan to pay off all their debt maturing in the next two years, resulting in $1.4 billion in proceeds, and reduce their revolver debt from $1 billion to $200 million. We don’t think MPW will cut the dividend, as it won’t make a meaningful difference, and it would leave shareholders unhappy, negatively impacting their overall valuation.
Debt Reduction
MPW is reducing its debt in a big way. They plan to pay off their near-term debt of variable rate debt maturing in the next two years in one move. This should leave them with a big chunk of cash, improve their debt-to-EBITDA ratio, and significantly reduce their interest payments. We think this is a power move, and it shows that MPW is serious about improving its financials.
As they note in the Q1 earnings call (emphasis added):
In fact, we continue to emphasize transactions that generate return of capital to us and liquidity for debt reduction. With liquidity at quarter end of approximately $1 billion, plus the more than $900 million from sales […] with additional cash expectations from the sale of Connecticut to Yale, repayment of Steward loans and other transactions, we will be well able to satisfy all of our roughly $1.4 billion in 2023 and 2024 debt maturities.
Future Outlook
MPW’s rent collection and dividend coverage may be poor in the short term, but they have a long-term plan. We think the world isn’t ending, and MPW will recover its contractual rent from Pipeline and Prospect. The company’s rent coverage is stable, and they plan to reduce their debt, improve their financials, and grow. We suggest monitoring their rent collection and whether they can recover their contractual rent. If they can’t, it may negatively impact their long-term growth prospects.
Let’s look closer at MPW’s financials for 2022 and the worst-case scenario guidance for 2023. For the full year of 2022, MPW reported a normalized funds from operations (NFFO) of $1.82 per share, net income of $1.50 per share, and an adjusted funds from operations (AFFO) of $1.42 per share. MPW paid a dividend of $1.16 per share, resulting in an 81% AFFO payout ratio for 2022. MPW paid out 81% of its AFFO to shareholders as dividends.
Looking ahead to 2023, MPW’s worst-case scenario guidance suggests an AFFO of $1.29 per share, which is lower than the previous year. The dividend will remain $1.16 per share, resulting in a 90% AFFO payout ratio for 2023. Despite the lower AFFO for 2023, MPW is committed to maintaining its dividend and paying out a significant portion of its AFFO to shareholders. While the worst-case scenario guidance is not ideal, MPW has a long-term plan to improve its financials, reduce its debt, and grow its portfolio of healthcare properties. Investors should monitor the company’s progress and consider the long-term potential of MPW’s investments.
Conclusion
MPW’s Q1 2023 update wasn’t eventful, but we believe they have a long-term plan to improve their financials and grow. The company expects to recover its rent from Pipeline and Prospect and plans to reduce its debt significantly. We suggest monitoring their rent collection and whether they can recover their contractual rent. Overall, we think this is a good time to buy shares at a good price.
Dr. Lincoln C. Wood teaches at the University of Otago in New Zealand. He is an avid investor and educator. He loves cash flow, income, and dividends when investing. He likes to buy undervalued companies with strong advantages and earnings growth.
