Shares of Medical Properties Trust (MPW -0.34%) have lost a third of their value this year. This pushed the real estate investment trust (REIT) into high-value territory. The hospital owner is trading about eight times its 2022 estimate for funds from operations (FFO), nearly 50% below the 15 times 2022 FFO of its healthcare REIT peers. Because stocks are so cheap, they offer a high dividend yield which currently sits at 7.7%.
One of the factors weighing on its value is that the market gives it no credit for its portfolio of investments in hospital operating companies. This is what leads the Healthcare REITs to shine a light on this hidden value so that investors can see its untapped upside potential.
The Anatomy of a Hospital Agreement
Medical Properties Trust generally acquires hospital properties in sale-leaseback transactions with the operator of the establishment. These purchases will also sometimes occur as part of a larger transaction where another entity will purchase the operating company (OpCo) while Medical Properties Trust will purchase the property.
For example, in 2019, Brookfield Business Partners (BBU -0.49%) (BBUC -1.89%)the private equity arm of Brookfield Asset Management (BAM -0.41%), has agreed to buy Australia’s largest hospital operator, Healthscope, for $4.1 billion. Alongside this transaction, Medical Properties Trust purchased 11 Australian hospitals affiliated with Healthscope for $859 million. The property sale allowed Brookfield to help fund its purchase of Healthscope, which operates 43 hospitals in Australia and 24 pathology labs in New Zealand.
Medical Properties Trust will also sometimes receive an equity stake in the operating company as part of a larger transaction. REITs may invest up to 25% of their total assets in non-real estate assets and derive 25% of their income from non-real estate related sources. By investing directly in the operating company, Medical Properties Trust gains an additional advantage in the transaction while further aligning its interests with those of other stakeholders.
The company’s ability to conclude transactions involving the entire company gives it a competitive advantage. It allows the REIT to acquire mission-critical infrastructure that other investors would have a harder time buying. He has made several OpCo investments over the past few years, including:
- Steward: A $363 million loan investment in the operator with built-in upside participation features.
- Priory: Investment of $156 million for a 9.9% passive interest in operations and an investment in a syndicated floating rate loan.
- Aspris Children’s Services: A passive equity investment of $16 million.
- Prospect Medical Holdings: A loan of 113 million dollars earns 8% interest.
- spring stone: A $197 million investment consisting of an 8% interest-bearing loan component and a 49% equity interest in the operator.
- International joint venture: An investment of 231 million dollars comprising a loan bearing interest at 7.5% and a 49% stake in the capital of the operator.
- Aevis Victoria: A passive investment of $152 million in Swiss Medical Network and a passive ownership of $73 million from the majority owner of Swiss Medical, Aevis Victoria.
Instead of seeing these OpCo investments as assets, investors see them as liabilities. This leads Medical Properties Trust to take steps to showcase the value of its investments in OpCo.
He recently announced a deal highlighting the value of one of his OpCo investments. LifePoint Health has agreed to acquire a minority stake in Springstone Health Opco from the current management group. The deal values the company at $250 million. Medical Properties Trust had invested $190 million, mostly in the form of a loan, and received a minority stake in Springstone in 2021 when it invested $760 million to buy its 18 behavioral hospitals. Medical Properties Trust will receive $200 million to fully satisfy the loan. He will also retain his minority stake, offering shareholders the opportunity to participate in Springstone’s future rise. LifePoint has also agreed to extend the term of its existing head lease on eight hospitals with Medical Properties Trust by five years to 2041. This will more fully align its operations with Medical Properties Trust.
This is the latest transaction highlighting the value created by one of his investments in OpCo. The company has also entirely exited several OpCo investments over the years. Last year, the REIT sold its stake in ATOS Clinics International and MEDIAN in separate transactions, earning double-digit internal rates of return on those sales. Meanwhile, in 2018, Medical Properties Trust sold its remaining stake in Ernest Health to One Equity Partners for $175 million. This represented a 13% unleveraged rate of return on his initial $96 million investment.
With several remaining OpCo holdings, the company has similar upside potential as it monetizes them going forward. Future transactions could still unlock the value of his portfolio. They would also give him more capital to recycle into new transactions to acquire additional income-generating hospital properties and option value in the form of OpCo investments.
High income and growth potential
Investors are not crediting the full value of its assets to Medical Properties Trust because they overlook its investments in OpCo. Instead of being a liability, they turn out to be a source of hidden value. The company strives to highlight this value by entering into agreements involving its investments in OpCo. In the meantime, investors are being well paid while waiting for the market to realize the full value of this REIT.
Matthew DiLallo holds positions at Brookfield Asset Management, Brookfield Business Partners LP and Medical Properties Trust and has the following options: $40 December 2022 short put options on Brookfield Asset Management. The Motley Fool fills positions and recommends Brookfield Asset Management. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV. The Motley Fool has a disclosure policy.