Post by bjspokanimal on Apr 24, 2024 13:51:20 GMT -5
I mentioned on the Transocean page another, similar, contrarian turn-around play that
I've been buying up shares in. That company is Medical Properties Trust. It is a REIT
that invests in medical properties, primarily hospitals, and leases them to the operators
of those properties. Here are some highlights on it:
Similar traits and investment thesis as Transocean.
MPW was a yawner of an investment up until the beginning of spring, 2022. It traded
pretty steadily in the $20 to $21 range like REITs do, and paid a nice dividend, like REITs
do. Then problems arose, and over the course of about 21 months, the stock crashed
down to the low $3 range. To me, the problems appeared correctable and the likelihood
of bankruptcy appeared low. Like Transocean, it looked like it could take 2 or 3 years to
correct the problems, so like most turn-around plays, it requires patience, but has the
potential to produce a multi-bagger return on investment. UNLIKE Transocean, MPW
sports a double-digit dividend.
The problems. What caused the fall?
There are 2, main problems that trashed this stock. Firstly, 2 of it's main lessees, Prospect
Medical and Steward Health, ran into problems and either stopped paying their rent, or
reduced it's payments significantly. The reasons were primarily some residual problems
coming out of Covid, but low Medicaid reimbursements were a main cause. Inflation of
expenses played a part and some mis-management, particularly with Steward, was also
a factor. The problems with Steward, which accounts for about 20% of MPW's revenues,
were significant enough that MPW has lent Steward bridge loans to help them as they
restructure and sell assets to recover. Prospect's problems were less severe, and mainly
in California.. a tough place to run a hospital, or anything else nowadays.
The other big problem, is the run-up in interest rates. MPW, like Transocean, has a lot of
debt. The debt they floated at lower, pre-2021 interest rates is now coming due and re-
financing the debt involves FAR higher interest rates. The longer it appears the Fed will
wait before easing interest rates, the bigger the impact on MPW.
I should also note that MPW cut their dividend almost in half last August, which also helped
the stock plummet, but given how far the stock has fallen, the dividend yield currently
still tops 13% (60 cents annually per share).
What's happening now and why do I like it?
The company is working on solutions which appear to be starting to raise optimism. Thus
the stock's minor recovery from the low $3s to the mid $4s.
First of all, the situation with Prospect is pretty much stabilized. Prospect sold it's Utah
hospital operations and MPW now has a much more solvent client running them. California,
which is where Prospect has most of it's operations, raised medicaid rates there to help
medical providers. Prospect is now current on it's rent with MPW.
Steward's issues are still un-resolved, but it's paying an increasing percentage of the rent
it owes MPW each month. The 9 hospitals in Mass. are the main issue. Steward has promised
to politicians there that they'll sell them to a new operator, possibly even a non-profit. Good
news recently announced is that Steward will sell it's managed care physicians network
operation to a subsidiary of United Health, which raises the probability that Steward will have
funds to repay MPW loans and get current on their rent more quickly. One hospital sale to Yale
is also pending.
Regarding MPW's upcoming debt maturities, rather than re-financing the debt, they are
predominantly selling hospitals and interest in hospitals to raise the funds they need to pay
down the debt. 2024 is already covered and they're selling $2 billion of assets in 2024 to
cover 2025 maturities. This makes sense, since the cap rates on the sales are solid and these
assets are valuable with relatively strong market values. The only issue, is that MPW loses the
revenue from these assets, which is partially offset by lower interest expense on the retired
debt.
Other considerations:
1. MPW's current dividend is about 70% of their cash flow from rents, a figure that assumes
no payments from Steward. That percentage should improve as payments from Steward
pick up or Steward sells hospitals to a more liquid operator.
2. There was recent concern whether or not the upcoming dividend would happen, since MPW
wanted to make sure they were on track with asset sales before fully committing to paying
it. The dividend was announced as forthcoming last week.
3. MPW has sold close to 80% of the assets, in just 4 months, of the $2 billion of assets it has
targeted for the full year. That helped to ensure the dividend was safe for now.
4. A hospital REIT is unlike retail or office REITs in that a lot of folks consider hospitals to be
somewhat "too important to fail". Indeed, the Mass. politicians have reassured Mass
residents that they won't LET Steward's hospitals fail there. For that reason, I like this
REIT whereas a retail or office REIT with the same problems wouldn't give me as much
confidence that it would recover without BK risk.
5. Conversely to #4 above, it's getting pretty common for hospitals in the U.S. to struggle
financially. Costs, insufficient medicaid/medicare reimbursements and labor shortages all
contribute to that. So a risk, is that we could see other problems with MPW's operating
clients so once I get a decent recovery with this investment, I'll likely sell it, hopefully in
the $10 to $16 range, and not re-visit this kind of company unless the likelihood of a
recovery appears to be as likely as this one does.
6. Unlike Transocean, I like that I can earn a very high dividend payout while I'm waiting
for a company, and stock price recovery. 13% is in and of itself a very good return (higher
for my big purchases in the low $3 range earlier this year). Of course, if things don't
go well, the dividend could be cut again as it might have been for the current period.
7. Obviously, like most contrarian, turn-around plays, this, like Transocean and so many
others, requires patience. It could easily take a year or 2 for enough of a recovery that
investors would move the stock toward $10. So far, it seems they're ahead of schedule
on their remedies, but the stock isn't up as much as I would have expected based on
what's been done so far.
8. Given the asset sales, the company will be downsized a bit within a couple of years.
I would not target a $20 stock price again anytime soon, but suspect I'd be happy
with $10 to $16 if the company is on a good trajectory by then and it's contrarian,
turn-around characteristics have gone by the wayside.
I've been buying up shares in. That company is Medical Properties Trust. It is a REIT
that invests in medical properties, primarily hospitals, and leases them to the operators
of those properties. Here are some highlights on it:
Similar traits and investment thesis as Transocean.
MPW was a yawner of an investment up until the beginning of spring, 2022. It traded
pretty steadily in the $20 to $21 range like REITs do, and paid a nice dividend, like REITs
do. Then problems arose, and over the course of about 21 months, the stock crashed
down to the low $3 range. To me, the problems appeared correctable and the likelihood
of bankruptcy appeared low. Like Transocean, it looked like it could take 2 or 3 years to
correct the problems, so like most turn-around plays, it requires patience, but has the
potential to produce a multi-bagger return on investment. UNLIKE Transocean, MPW
sports a double-digit dividend.
The problems. What caused the fall?
There are 2, main problems that trashed this stock. Firstly, 2 of it's main lessees, Prospect
Medical and Steward Health, ran into problems and either stopped paying their rent, or
reduced it's payments significantly. The reasons were primarily some residual problems
coming out of Covid, but low Medicaid reimbursements were a main cause. Inflation of
expenses played a part and some mis-management, particularly with Steward, was also
a factor. The problems with Steward, which accounts for about 20% of MPW's revenues,
were significant enough that MPW has lent Steward bridge loans to help them as they
restructure and sell assets to recover. Prospect's problems were less severe, and mainly
in California.. a tough place to run a hospital, or anything else nowadays.
The other big problem, is the run-up in interest rates. MPW, like Transocean, has a lot of
debt. The debt they floated at lower, pre-2021 interest rates is now coming due and re-
financing the debt involves FAR higher interest rates. The longer it appears the Fed will
wait before easing interest rates, the bigger the impact on MPW.
I should also note that MPW cut their dividend almost in half last August, which also helped
the stock plummet, but given how far the stock has fallen, the dividend yield currently
still tops 13% (60 cents annually per share).
What's happening now and why do I like it?
The company is working on solutions which appear to be starting to raise optimism. Thus
the stock's minor recovery from the low $3s to the mid $4s.
First of all, the situation with Prospect is pretty much stabilized. Prospect sold it's Utah
hospital operations and MPW now has a much more solvent client running them. California,
which is where Prospect has most of it's operations, raised medicaid rates there to help
medical providers. Prospect is now current on it's rent with MPW.
Steward's issues are still un-resolved, but it's paying an increasing percentage of the rent
it owes MPW each month. The 9 hospitals in Mass. are the main issue. Steward has promised
to politicians there that they'll sell them to a new operator, possibly even a non-profit. Good
news recently announced is that Steward will sell it's managed care physicians network
operation to a subsidiary of United Health, which raises the probability that Steward will have
funds to repay MPW loans and get current on their rent more quickly. One hospital sale to Yale
is also pending.
Regarding MPW's upcoming debt maturities, rather than re-financing the debt, they are
predominantly selling hospitals and interest in hospitals to raise the funds they need to pay
down the debt. 2024 is already covered and they're selling $2 billion of assets in 2024 to
cover 2025 maturities. This makes sense, since the cap rates on the sales are solid and these
assets are valuable with relatively strong market values. The only issue, is that MPW loses the
revenue from these assets, which is partially offset by lower interest expense on the retired
debt.
Other considerations:
1. MPW's current dividend is about 70% of their cash flow from rents, a figure that assumes
no payments from Steward. That percentage should improve as payments from Steward
pick up or Steward sells hospitals to a more liquid operator.
2. There was recent concern whether or not the upcoming dividend would happen, since MPW
wanted to make sure they were on track with asset sales before fully committing to paying
it. The dividend was announced as forthcoming last week.
3. MPW has sold close to 80% of the assets, in just 4 months, of the $2 billion of assets it has
targeted for the full year. That helped to ensure the dividend was safe for now.
4. A hospital REIT is unlike retail or office REITs in that a lot of folks consider hospitals to be
somewhat "too important to fail". Indeed, the Mass. politicians have reassured Mass
residents that they won't LET Steward's hospitals fail there. For that reason, I like this
REIT whereas a retail or office REIT with the same problems wouldn't give me as much
confidence that it would recover without BK risk.
5. Conversely to #4 above, it's getting pretty common for hospitals in the U.S. to struggle
financially. Costs, insufficient medicaid/medicare reimbursements and labor shortages all
contribute to that. So a risk, is that we could see other problems with MPW's operating
clients so once I get a decent recovery with this investment, I'll likely sell it, hopefully in
the $10 to $16 range, and not re-visit this kind of company unless the likelihood of a
recovery appears to be as likely as this one does.
6. Unlike Transocean, I like that I can earn a very high dividend payout while I'm waiting
for a company, and stock price recovery. 13% is in and of itself a very good return (higher
for my big purchases in the low $3 range earlier this year). Of course, if things don't
go well, the dividend could be cut again as it might have been for the current period.
7. Obviously, like most contrarian, turn-around plays, this, like Transocean and so many
others, requires patience. It could easily take a year or 2 for enough of a recovery that
investors would move the stock toward $10. So far, it seems they're ahead of schedule
on their remedies, but the stock isn't up as much as I would have expected based on
what's been done so far.
8. Given the asset sales, the company will be downsized a bit within a couple of years.
I would not target a $20 stock price again anytime soon, but suspect I'd be happy
with $10 to $16 if the company is on a good trajectory by then and it's contrarian,
turn-around characteristics have gone by the wayside.
