Medical Properties Trust, a REIT with a 7.5% Yield and a 30% Margin of Safety, Buffett dumps $GE, Dividend Stocks in Frothy Markets
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Main Topic: Medical Properties Trust is selling at a 7.5% yield and a 30% margin of safety
· MPW is the only pure-play hospital triple net lease REIT yielding 7.6% at current cost
· Payout ratio of ~73% leaving some to grow with.
· Major Trend: aging baby boomers is a tailwind
· Opportunity cost: not many REITs with this kind of margin of safety are selling at 7.6% yield
· Margin of Safety of ~30% based on near term improvements in AFFO
Medical Properties Trust is an income idea with a 7.5% starting dividend yield
There are a lot of folks out there who are trying to increase their income from investments, so today’s episode is about a particular investment idea that has a dividend yield of 7.5% and has plenty of room to grow.
This episode is about an investment idea in the Real Estate Investment Trust space (REIT for short). REITs are often a good vehicle for income. To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Medical Properties Trust (MPW) is a REIT created in 2003 that bridges the gap between the growing demand for high-quality healthcare and the ability to deliver it cost-effectively. Medical Properties is the only publicly traded real-estate investment trust that invests solely in hospitals.
Specializing in acute-care, community and rehabilitation hospitals, this healthcare real estate investment trust (REIT) provides operators access to capital for facility improvements, technology upgrades, staff additions and new construction through long-term net leases of real estate assets.
MPW is internally managed. Some REITS are externally managed and have to pay management fees.
“Unlike other real estate investment trusts - even those categorized as healthcare REITs - MPT focuses exclusively on providing capital to acute care facilities of all kinds through long-term triple-net leases. And, unlike other sources of capital, MPT provides 100 percent financing to reduce an organization's overall cost of capital by unlocking the value of its real estate assets.
By allowing healthcare operators to tap the value of their real estate and channel that capital into facility improvements, technology upgrades, staff additions and even new construction, MPT bridges the gap between the growing demand for high-quality healthcare and the ability to deliver it efficiently and cost-effectively. In essence, MPT enables hospitals to increase their returns from what they know best - operations.
So this REIT is rolling up all kinds of hospitals throughout the U.S., Germany, the U.K., Spain and Italy by buying the land under the hospital and leasing it back to the owner. This frees up all that capital for the client of the REIT. The REIT owns 269 properties, and growing. More than 31,000 licensed beds in 29 states and five countries. 31 hospital operating companies.
MPW recently invested $1.4 billion to acquire IASIS Healthcare operations which added $3.3 billion worth of new properties.
84% of the REITs holdings are general acute care hospitals, with another 7% inpatient rehab and the rest other types.
Operator concentration became an issue for the company when one of the hospital operators filed for bankruptcy. Although the financial performance of MPW has not been impacted by the bankruptcy, sentiment on the company did suffer.
Those of you who are paying attention know that in allocating capital, I focus on three things:
· Opportunity Cost
· Major Trends
· Margin of Safety
So let’s look at this investment idea through the lens of capital allocation.
Starting with Opportunity Cost, we would need to compare MPW with other types of investment ideas where our goal is investment income.
· Assuming a five year holding period, five-year US Treasuries are yielding 1.8%, much safer, but at a far lower yield
· Corporate bonds are slightly safer, but are only yielding 2.5% to 5% and bonds do not increase their interest payments.
· High quality blue chip common stocks average yield is less than 3% and the S&P 500 earnings yield is 5.5%
· Some preferred stock is selling for a similar yield of 7% with relative safety, but they cannot increase their dividends and MPW can.
· You can find other REITs yielding 7.5% or higher, but those are mostly more risky than MPW (at least the ones I’ve analyzed).
Obviously I haven’t compared MPW to every single investment out there but you get the idea. You should have at least two or three other ideas to compare any investment idea with.
The next leg of the capital allocation three-legged stool is Major Trends. I prefer to invest in ideas that have a tailwind behind them that could cause outperformance over the long run.
Since MPW is in the health-care space, this meets a major trend requirement. The world is getting older, and the baby boomers are reaching the age where they will need far more healthcare than ever before. This is a trend that will last several decades and MPW is well positioned to be part of it.
Finally, there is the Margin of Safety requirement. For income-focused investments, I am comfortable with a lower margin of safety than I would prefer with investments without an income component.
At current prices in the mid 12’s, company is selling at
· 1.2x book
· Pro-forma EBITDA is $785mm. At 10x, EPV would be $7.8B and it is selling for about that.
· Current AFFO of $1.26 for an AFFO yield of 10% today and more than 10% in 2018.
· Accretive AFFO from the recent Steward Health Care acquisition should grow AFFO by .10 and net income by .05.
· 2017 Normalized FFO between $1.29 and $1.31 per diluted share
· 2018 Normalized FFO between $1.42 and $1.46 per diluted share. At 1.42 normalized forward AFFO, stock should be valued at 12x normalized AFFO or $17. Selling at $12.50 with margin of safety of ~30%
· Starting forward AFFO yield is $1.42 / $12.50 or 11% which is excellent compared to the S&P 500 earnings yield of 5.5%
· Pro-forma leverage will by 5.7X, near the higher end of leverage for similar REITs
Dividend cut in 2008, steady at .20 per quarter for a few years. Started growing again in 2014 conservatively.
Mostly fixed rate debt, mostly due in 2022.
· More large hospital operators have financial issues
· Lease cost / EBITDAR coverage ratios could decline
· Health care regulation changes could impact the profitability of hospitals
· Dilution from equity raises as REIT grows
· Increased leverage from debt issuance to fuel growth
· MPW is a health-care triple-net lease REIT with a starting dividend yield of 7.5%
· Health care demand is a major trend and will increase every decade
· AFFO should grow by 10% in 2018
· MPW has a number of ways to grow AFFO in the future
· MPW’s debt profile is manageable in the near term.
DISCLOSURE: I / we are long MPW
Ask JB: How did Warren Buffett dump his GE stake?
JB Says: Buffett has a number of ways to sell his public holdings. Selling a position the size of his GE stake could be done on the open market over a period of weeks pretty easily given it was worth only $315mm. Average volume per day is 39 million shares and he only held around 10 million shares. Another way would be to sell to a fund or rich guy directly. He knows a lot of rich people and funds and he can sell to them in blocks.
submitted 6 hours ago by Oidewurschthaut
JB Says: Most of the time, it won’t matter much if you hold stocks that pay dividends or not. There are times when everything is correlate and you will still have prices of even dividend stocks decline, usually when a nasty recession in looming. You are also trying to eek out a 2% or 3% dividend gain and the chances are the stock will drop by a lot more than 2 or 3 percent if the crap hits the fan.
Be sure to only have money in the market you can leave in for five years .Stick with 30% in cash in times like this when the Buffett Indicator is reaching extreme levels. Only start putting the 30% to work when the market has pulled back 10% and put a third in. Put the next third of cash in if the market has fallen 20% from its peak. Put the last of your cash in only if the market has fallen 30% or more from its peak.
That is a much better strategy than trying to get a few percentage points just before a market collapse.
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