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Eyal Zimbelman
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I am a CFO responsible for a global bank presence in my country I started to spend time in analyzing investments that will increase my cash flow over time in order to build my portfolio for my retirement (hopefully many years from now...). I view the REIT world as a very attractive for... More
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  • Medical Properties Trust – Is It Still An Opportunity?

    Medical Properties Trust - Is it still an opportunity?

    Medical Properties Trust (NYSE:MPW) was recently downgraded by the Bank of America from hold to sell with a 1 year target price of 16$. The stock traded at 17$ prior to the downgrade and crushed to 15$ subsequently. The reason I wanted to explore the stock and provide my own target price for 1 year from now is that it is my second biggest holding, and I view this specific stock as a holding that I would like to keep forever. In this article I will explain the reasons I like the model of MPW and will share with you in details my analysis of the FFO and the expected share price.

    Why the Medical sector?

    Since 2008, where my investments took a big hit, I realized that as individual investors we cannot have a good forecast of most parts of the economic markets. We are limited in information we are exposed to, limited in information that we can digest, and we just cannot compete with the professionals. This crisis also taught me that even the professional players also can take significant hits as happened to the Financial sector in the US and Europe. As individual investors, however, we have one big advantage over the professionals, and it is our ability to be patient. We cannot identify the next rising stars, but we can identify growing sectors and hold our investment until it blooms. As I already said, we do not know when will the economy grow again but we know that some day it will.

    We also know that population is growing (mainly in emerging markets) and that population is growing old. Older people have specific needs such as senior housing, Skilled Nursing Facilities, and also, they need more medical treatment. As we all know there are more than 78M baby boomers that will need these services. Over 8,000 people per day in the states turn 65!

    That is the reason I believe that industries that can support this growing sector can be a good business.

    MPW strategy

    I find MPW's strategy very attractive as it focuses on hospitals. As far as I know MPW is the only public REIT that focuses on hospital financing. Yes, there are some competitors that also have some hospitals, but it is a very small piece of their portfolio. I think that the focus on hospitals makes MPW a Niche company acting in an attractive and growing markets. I am aware of the fact that this market is perceived as risky, however, only 1% of the hospitals close every year. On top of this, in this sector, the license goes with the facility and not the operator that reduces the risk of the facility owner. There are other barriers that reduce the risk as the buildings are unique, the long life of the premises, and the difficult relocation of a hospital. Take this together with the growing population, the Obama-care, and you have a very good market to be a leader in.

    MPW stock analysis

    Before starting to analyze the FFO I would like to share with you some selected data of MPW versus their main competitors (Main competitors as MPW presented in Feb. this year):

    Ticker

    Price

    Market Cap

    Div yield

    FWD P/E

    PEG

    Price/ Book

    Debt/ Equity

    Beta

    MPW

    16.4

    2.45

    5.1

    13.4

    2.16

    1.98

    73.69

    0.96

    VTR

    79.98

    23.66

    3.4

    18.69

    3.29

    2.66

    90.36

    0.54

    HCN

    74.9

    19.51

    4.2

    18.73

    3.69

    2.1

    80.83

    0.68

    HCP

    53.47

    24.24

    4.0

    17.03

    4.34

    2.28

    80.99

    0.59

    HR

    30.27

    2.69

    4.1

    20.05

    3.4

    2.36

    115.35

    0.84

    Source - Yahoo Finance as of 03.05.2013 close

    The comparison above is against the big caps or the 'Blue Chip' of the medical REIT world. You may argue if this is the right comparison, however, these are the competitors that the company defined, as there is no other public REIT that focuses on hospitals, that is the best that we can find. It is very clear here that MPW has a better valuation (low P/E), better growth pattern (PEG ratio) and higher stability (debt/equity). That may explain why it returned to the investors double its peers in the last year.

    2014 FFO estimate

    First step in order to analyze the stock is to set a target FFO for 2013 and a normalized FFO for 2013 year end:

    Q1 FFO was 0.25$ per diluted share ($35M in total). After this number was released the price fell by 2% as it disappointed investors. The reason it may have disappointed is because FFO/share was flat to Q4 2012. However, in Q1 2013, around 12M shares were issued, raising $173M of capital, i.e. ~8% dilution. Effectively the FFO/share grew by 8% without new purchases mainly due to ramp up of prior acquisitions.

    FFO per share is expected to grow due to the following reasons:

    1. Internal growth due to FFO increase - As disclosed in MPW Financials, contracts include annual appreciation at rates that varies from 1% to 4%. The appreciation will not impact earnings per share as per USGAAP rent should be smoothed over the lease period, but it does impact the FFO. An average appreciation of 2% per annum in the top line is expected to increase FFO by $4M or FFO/share by ~0.03$
    2. Internal growth due to FFO not distributed - FFO not distributed that will be used for new acquisitions is expected to generate incremental FFO/share of ~0.03$ (assuming dividends will remain 0.8$ per share)
    3. Ramp up of 2012 acquisitions - The management of MPW expects FFO per share in 2013 of 1.1$, mainly coming from ramp up of 2012 acquisitions.
    4. New acquisitions - In Q1 conference call both CEO and CFO mentioned that they face a very healthy pipeline, and that they intend to use all the $0.5Bn revolving credit facility for new acquisitions at CAP rates exceeding 10%. Assuming that only $400M will be acquired, and given the funding cost of 6%-6.5%, this will add to the FFO/share 0.10$ - 0.11$ (including the impact of expenses). As most acquisitions will probably be done in Q3&4, I believe that only 0.03$ will impact 2013 FFO per share and 0.08$ will be incremental in 2014.
    5. External growth - If incremental 10M stocks will be issued at a price of 16$ per share, and leveraged in the current funding cost of MPW, FFO/share is expected to increase by 0.05$

    To summarize, my estimate for the FFO per share without external growth for 2014 is 1.24$. This still leaves room for an upside if an accretive dilution will be done later this year.

    Stock valuation

    This really depends on what is the proper P/FFO ratio that investors expect. Given the current interest rate environment and the modest growth expectations, I assume that a P/FFO ratio of 15 does make sense, especially in an environment that supports growth. If this is the case a target price of 18$-19$ can make sense. Currently the stock trades at 16.4 after the stock reached a pick of 17$ and then took a dive to 15$.

    Expected yield for the coming 12 months

    Total return expected from MPW is estimated as follows:

    Dividend yield - 4.8%

    Stock appreciation - 10% - 16%

    Total return - 14.8% - 20.8%

    Conclusion - MPW is still attractive

    My conclusion would be to keep the stock for the next 12 month and not to seek for an exit opportunity at this stage.

    Disclosure: I am long MPW.

    May 05 9:16 PM | Link | Comment!
  • Why Equity REIT Dividend Are Not A Mirage

    After reading interesting articles stating that REIT dividend may be a mirage as on the one hand they distribute dividends and on the other hand raise capital that may be above the dividends distributed.

    In order to demonstrate it I will take a numeric example that is based on one of my (very) few successes in investments - Medical Properties Trust (NYSE:MPW), Omega Healthcate Investors Inc (NYSE:OHI) and Senior Housing Properties Trust (NYSE:SNH):

    Lets assume a CAP rate (Yield over assets) of ~ 10%; Assets generating revenue of 1,000 USD Million and a $100M income base, and assume no expenses. Lets also assume that debt to equity ratio is 1, so equity is $500 (50 shares of 10$) and debt of $500M at an average cost of 6%

    The result is as follows:

    Income 100

    Interest expense (30)

    Depreciation (20)

    Net Income 50 (all income is distributed as revenue

    Return on Equity 10% (or FFO/equity is 14%)

    Lets also assume that investors expect a 5% dividend yield. This means that the share price should be 20$ (Net income of 50$ to a capital base of 50 stocks makes 5% yield).

    In case the company raises additional capital of $500M in order to invest at properties that yield a 10% CAP rate and they manage to issue the shares around current market price the results will be as follows:

    Capital raised $500 (25 shares of 20$); Assets increased by 1,000, and debt increased by 500$.

    P&L report will be:

    Income 200

    Interest expense (60)

    Depreciation (40)

    Net Income 100

    Return on Equity 10% (FFO/Equity is 14%)

    What happens to the stock price?

    Dividend per share will be 100/75 = 1.33$

    Dividend yield will grow to 6.67%

    In case investors still expect a 5% yield, then the stock price should grow to 26.6$, or in other words will increase by 33%.

    Conclusion:

    In today's environment where funding costs are historically low, many opportunities that exist, make the companies that raise capital a potential buying opportunity

    Disclosure: I am long MPW, SNH, OHI.

    Tags: MPW, SNH, OHI, O
    Mar 07 3:59 PM | Link | Comment!
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