While Medical Properties Trust (MPW) was founded in 2003, it has the youthfulness of a brand new company. Management intelligently halted growth in the shaky environment of 2008-2009, so it has just recently hit its growth spurt. To grasp the velocity of expansion we can simply compare the $850mm in acquisitions since the start of 2011 to a market capitalization of only $1.36B. Expansion of this magnitude usually comes with difficulties, but MPW has yet to see reason to slow down. In this article we will examine how MPW has been able to grow so accretively and take a look at how it may play as an investment. We will begin by showing what makes it such a strong company, and follow by addressing the concerns which have left it so underpriced.
Pipeline of accretive acquisitions:
Medical Properties is able to maintain such a large pipeline because it offers a unique blend of services to an untapped market. It has capacity to finance 100% of building costs (either leaseback or development) and even provide additional loans. Consequently, it can serve the entire capital sourcing needs of a healthcare company and going forward affords expansion into future capital needs. While other companies are competing for contracts with SNFs and nursing homes, MPW can make acquisitions of acute and extended stay health facilities which are mostly untouched by REITS. Through its unique strategy, MPW has repeatedly signed at cap-rates around 9%-11% and expects around the same on its planned acquisitions.
Locked-in to strong spreads with net lease concept:
A recent example of MPW's net lease practice was its acquisition with Ernest on 2/29/12 in which it acquired 12 facilities for leaseback at a going in cap-rate of 9% with CPI adjusted rate increases between 2%-5% annually. Since much of this was financed through a 6.375% fixed rate term loan, MPW secured a nice spread. This was not an isolated incident, and is representative of a majority of its portfolio which has long-term leases matched with long-term debt. With 54% of its leases expiring 2022 or later and over $650 million (out of around $900mm) of its debt coming due in 2018 or later, MPW has strong locked-in cashflows for quite some time.
An undrawn $400mm credit facility affords immediate acquisitions while giving time to find optimal financing. As announced on its 2Q conference call, MPW has many acquisitions planned for the remainder of 2012 which it will finance with its credit facility until more permanent options are utilized. While a plethora of options are available, from equity issuance (both preferred and common are being considered) to unsecured notes, the fairly cheap rates on its credit facility (LIBOR + 250 bps) afford taking the time to optimally finance.
So far in 2012, G&A has taken up 15.2% of revenue. This results from due diligence costs associated with all the acquisitions and relatively high compensation for its top executives. While I typically avoid investing with heavily paid executives, it's hard to argue that these guys aren't talented. Having founded the company, Edward Aldag, Emmet McLean, and Steven Hamner, who remain CEO, COO, and CFO respectively are responsible for each of the accretive acquisitions since the company's inception. Concerns about MPW's G&A are certainly legitimate, but it will go down as a percentage of revenues as the company gets larger and the acquisitions slow down. In fact, it has already decreased from 21.3% of revenue in 2011.
MPW recently issued a large chunk of common stock and given the massive acquisition pipeline, it seems likely that MPW will issue new equity in the near future. Per usual, this raises concerns about potential dilution. In my opinion, these concerns are unfounded as so far all of MPW's acquisitions have been immediately accretive to FFO even on a per-share basis. So even in the event of new issuance, the dilutive effect should only be temporary. It should also be noted that management is considering other sources of capital such as a preferred with a coupon around 6% to 7%.
FFO coverage of dividend:
For much of the past few quarters MPW has had a payout ratio over 100% which has been reduced to 90.9% in 2Q12. Aldag expects it to drop to a healthier 75% by early 2013 as acquisitions kick in.
A year ago Medical Properties Trust traded at $10.62 as compared to today's price of $10.18. Between accretive acquisitions, a per-share increase in AFFO from $0.16 in 2Q11 to $0.22 in 2Q12, and a complete absence of bad news related to the company, why has the price gone down? The short answer is that the market is wrong. Low price/FFO at only 77% of the sectors average combined with the company's stellar performance suggest MPW is a great value. This stock offers excellent growth potential and a 7.90% dividend while we wait.
Disclosure: 2nd Market Capital and its affiliated accounts are long MPW. This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the author.