Since my first article on Medical Properties Trust (MPW) was published last October (here), the stock has enjoyed a steady rise of over 40%. While such a large move was great for those with holdings, it did not allow many opportunities to add to or initiate any long positions. Since May, however, it has retreated from those highs warranting an update for SA readers on future prospects and risks moving forward. For a summary of the company, its market and competitors, please refer to my first article or Eyal Zimbelman's article published May 9th.
Let's start by looking at the numbers from MPW's first quarter 2013.
First quarter net income came in at $58.4 million compared to $41.3 million in the year prior. Normalized Funds From Operations [FFO] increased 55% to $34.8 million compared to $22.5 million in 1Q 2012, though FFO per diluted share only increased 39% to $0.25 due to the secondary offering of an additional 12.65 million shares of common stock. That issuance of stock, issued at a $14.25 share value, raised an additional $173 million, giving them a total of almost $500 million in immediate resources with which to make acquisitions. During the last earnings call on April 26, 2013, Edward Aldag had this to say about acquisition plans:
During this past quarter we made tremendous progress on these acquisitions. Our active acquisitions pipeline is larger today than it has ever been. I want to be clear I'm referring to our active acquisition pipeline not a shadow pipeline. These are properties that we are actively working towards the close. We certainly recognize that we will most likely not close on each of these. However, the number and dollar amount of properties we are actively working are larger than they have ever been...
On May 23rd, MPW announced a quarterly dividend of $0.20 per share, equating to a yield of 5.6% at the July 2nd market close. Management has continued to reiterate that it would like to see the payout ratio decrease. During my article last October, I noted the payout ratio was 91%. It has subsequently fallen to 80% which may represent an opportunity for them to raise the dividend in the future. During the question-and-answer section of the conference call Mr. Aldag alluded to this by saying.
..the Board's policy is that they would like to see a sustained payout ratio of 80% or better. We've obviously -- as you've just pointed out, we've been there. Our next Board Meeting is coming up at the end of May. I'm sure that will be a topic of discussion, but it is not anything that's planned to this particular point.
Using the projected 2013 FFO per share number of $1.13, an 80% payout ratio would equate to roughly a $0.10 per share annual dividend increase, or a yield of 6.25% at today's stock price. Looking further into the future, using the 2014 FFO per share estimate of $1.22 would equate to a 6.78% yield at today's prices.
'Bumps In The Road'
During the 1Q conference call, Mr. Aldag referred to two current 'bumps in the road' which are placing a burden on MPW's portfolio at this time. The Monroe Hospital in Bloomington, Indiana, whose operations were taken over by St. Vincent Health last September, continues to be a drag on the portfolio. MPW is currently not receiving rent on this property, and does not expect to for perhaps the next 12-24 months. The Monroe facility is expected to place a $0.03 FFO per share loss on the 2013 estimates.
An additional burden is the Florence Hospital in Florence, Arizona. In March of 2013, after only 1 year operation, the hospital announced that it intended to reorganize under Chapter 11. At that point, and up until the last 10Q, Florence had not missed any lease payments to MPW. Mr. Aldag appeared to remain positive about future opportunities at that location, either with the current operator or other interested parties. We do know that Florence represents about $0.02 per share on an annualized basis, or approximately 1.2% of MPW's total portfolio. A prudent investor should watch how management responds to these current issues moving forward.
I initiated my first position in MPW last October below $12/sh, after which the price climbed steadily, providing few opportunities to add to my shares. In May, the stock hit a high of $17.50 before retreating to current levels, partially due to a downgrade by Bank of America, which set a price target of $16. I further added to my position recently at $14.22, when the stock appeared to be oversold. Even neglecting capital appreciation, the yield at these levels has become much more attractive.
Looking forward, I believe MPW currently represents a good value at today's prices. They have exhibited strong, conservative growth without rushing to raise the dividend. MPW continues to acquire and develop new properties, decreasing the drag that any single facility would have on their portfolio should issues occur. Conservative investors may choose to wait until the 2Q earnings to learn more about the effects of the Florence Hospital closure, however, I believe those interested in taking a position should consider scaling in at these levels.