My job is done. I can finally take off the bear suit. Didi_Lavchieva/iStock Editorial via Getty Images
Last night, an extended version of this MPW article was sent to subscribers of The REIT Forum.
Medical Properties Trust (NYSE:MPW) is a junk REIT with an unsustainable dividend. For much of the last year, I was Seeking Alpha's only bear on Medical Properties Trust:
Seeking Alpha
It was good to be the only bear on MPW as shares plunged:
Seeking Alpha
Of course, there was an abundance of strong buy articles. Since I published that article, MPW received 30 "Strong Buy" articles. Why does it get so many? Probably because MPW gets a ton of page views which means the articles get paid more money.
It doesn't hurt that investors absolutely love being told their garbage yield is safe. Still, that was a ton of "Strong Buy" ratings published by other analysts.
MPW's 2023 guidance called for NFFO (Normalized Funds From Operations) in the range of $1.50 to $1.65:
Medical Properties Trust
The midpoint of that range is $1.575.
Seems like good coverage for an annual dividend rate of $1.16. Right?
Wrong. Because "Normalized funds from operations" is not a good approximation for cash flows.
For that, we need AFFO. However, we don't agree with MPW's adjustments in reaching AFFO:
Medical Properties Trust
Adjustments for straight-line rent and rent deferral look good. However, we don't accept the elimination of share-based compensation and debt cost amortization. Structuring compensation to be paid through equity doesn't prevent it from being an expense. Since a company cannot record revenue from issuing shares, it doesn't make sense to wipe out expenses that were paid by issuing shares. Further, I find debt cost amortization is a recurring expense that is fundamentally similar to interest. It simply doesn't get paid on the same schedule as the interest.
The payout ratio is going over 100% on "Higher Quality AFFO."
The REIT Forum
Note: This assumes MPW spends precisely $0 on capitalized expenditures. They have net leases, but $0 is still the most optimistic value you can apply for capitalized expenditures.
If the share-based comp and debt amortization costs were small, it wouldn't matter. However, the last two years saw $.11 to $.12 in these costs (rounded) wiped out in the AFFO calculations. Technically, they are not "cash expenses."
However, if you would be fine with the company issuing a bunch of new equity for $0.00, you're not acquainted with dilution. If you think it costs the company "nothing" to issue a bunch of new equity, this article may be too advanced.
If MPW was issuing this equity at $20 and using it to buy assets or pay down debt, that would be great. But that's not the case. It's simply moving the expense from a cash expense to one paid in stock.
Does management retain all of the stock they are paid? No.
Using InsiderCow, I pulled up the history of insider trades going back to 03/15/2006. This is more than 15 years of history.
During that time there were 361 insider sales and 16 insider buys.
However, 10 of those 16 insider buys were in 2006 or 2007. That leaves only 6 insider buys since 2007.
Two of the insider buys were in 2009. That's not even the last decade.
That leaves four insider buys that occurred in either the current or prior decade. Let's look at each of them:
Therefore, in total, since the start of the prior decade, executives have purchased 1,000 shares in total without an offsetting sale occurring on the same day.
From 03/15/2006 the total sales from insiders (including shares sold to offset a purchase) came to $120 million. During the same time period, the total purchases came to less than $1 million. To be precise, the purchases came to $871,548.36. How much of that is from transactions that were offset by selling shares the same day? $711,812.02. That leaves a net of $159,736.34 in purchases that were not offset by a sale occurring the exact same day.
If management sells $120 million in stock, or $119 million net, it's fairly insane to argue that we should be adding back the stock-based compensation simply because executives were paid in stock instead of cash.
Disclosure: This is based on my calculations using the numbers pulled from InsiderCow. I cannot verify that every transaction is recorded correctly, but I have no reason to doubt it.
Sometimes investors in MPW point out that executives are heavily invested in the company. Let's take a quick look at the value of the investments by the CEO and CFO:
The REIT Forum, author calculations using data from Insider Cow
They have about $44 million combined in company stock. Insiders as a whole dumped $119 million (net of buys). Sure, they own quite a bit of stock. But it isn't that much when you consider the sales.
Note: This article was prepared during the day on 3/15/2023. At the time, shares were $8.05. They closed recently at $8.15.
I viewed MPW as a high-risk play where the potential reward wouldn't justify the risk. That prediction in early August 2022 was excellent. It was the only correct rating on MPW as shares continued to plunge. Shares are down roughly 50% since then. Shares paid out a dividend, but it was nowhere near enough to cover the losses.
I suppose I should mention that one other author came out with a bearish rating earlier this month. The stock is down about 20%, so his rating is doing well.
I'm moving from a bearish rating to a "neutral" rating. Is that because MPW is a great REIT? Obviously not. They have a big unsustainable yield. However, I think the current valuation is adequately reflecting those issues. Further, I see their move to reduce exposure to Steward as a positive development. I would like to see exposure to poor-quality tenants further reduced, but this was a big move in the right direction.
Consequently, I see the plunging share price as reflecting more overall concern in the broader market rather than reflecting further deterioration in the company. It was a raw deal at $16. Around $8, investors get twice as many shares for the same investment. At this point, it's a gamble that's priced as a gamble. The potential upside is roughly appropriate to offset the downside.
Ratings: Neutral outlook on MPW.
Risk rating: Remains at 4.5.
No price targets. I did my job. Now I'm walking away.
PS. Someone will surely suggest that there's other things that deserve to be mentioned also. That's true. There are. This is the shorter version of the article. I believe the most important thing to cover was the lack of dividend sustainability, so I included that in the public release. That's an important topic because I see investors getting bad information about the dividend sustainability and it makes me sad to see people shocked by a dividend cut that was basically destined to occur.
Insider transactions went with the discussion of AFFO because it demonstrates that paying someone in shares of stock is not the same as not paying them.
PPS. On the subscriber article members asked about the bonds in the comment section. I want to add that to the public release.
First bond:
Second bond:
Credit to Jeremy LaKosh's article for making these bonds easier to find.
If I needed to choose between the common and the bonds, I would pick the bonds easily. The common shares are a gamble where the risk/reward ratio has improved enough to call off the bearish rating. Could go up, could go down. The deal isn't bad enough to warrant maintaining the bearish rating, but I'm not turning bullish either. I still have plenty of other investments to choose from with lower risk levels.
If you don't think it's worth publishing an update to take a neutral stance, you may not appreciate that I had the only accurate (neutral ratings are not accurate or inaccurate) solo rating on MPW in a Seeking Alpha article published during 2022. To be fair, Peter F. Way, CFA suggested a pair trade using only technical factors. His pair trade idea also was a homerun.
Looking at the bonds, I would classify them as a high-risk investment. There's risk of MPW failing (particularly if management keeps flushing money on the dividend), but the odds of bondholders getting paid are good enough to consider it a viable investment. I'm not putting a rating on the bonds, merely saying that I wouldn't consider it "gambling" if investors want to pick up the debt. Of course, bid-ask spreads can be large on debt so buyers should be careful to make sure they aren't paying a nasty markup over the prior trades.
PPPS. Of course, this is the morning Bank of America (BAC) decides to downgrade MPW:
Seeking Alpha
Great job. Definitely got that one in time. 5 stars. Maybe a little sarcasm. This is a better day to be upgrading to neutral than downgrading to neutral.
