At a 7 percent dividend yield, Medical Properties Trust seems like one of the most attractive investments among healthcare REITs, so much so that some investors have wondered whether it is even capable of covering its dividends. However, there are reasons to believe that the healthcare REIT will have no problems doing so, which in turn, suggests that its shares might be undervalued.
Before explaining why shares of Medical Properties Trust might be undervalued, it is important to explain how it has come to its present state. In short, REITs have to issue either debt or equity if they want to speed up their expansion because they are obligated to pay most of their taxable income to their investors in the form of dividends. This means that Medical Properties Trust was not doing anything unusual when it chose to issue 43.8 million common shares in order to fund its purchase of additional healthcare properties.
Unfortunately, it chose to do so right before the mass sell-off in 2015, which forced it to scale down its plans from 43.8 million to 25 million common shares. Combined with the general lack of demand, this caused Medical Properties Trust’s share price to fall 20 percent in a single month, though it still managed to purchase seven hospitals in exchange for $900 million raised through the issuance of equity and debt.
In response to the fall in its share price, Medical Properties Trust has been taking some steps to fix the problem. For example, it has switched over from lines of credit to fixed debt, which should result in controlled costs over the long run. Furthermore, it is raising $550 million by merging an owned operator with a healthcare operating company called RegionalCare (linked to Apollo Global Management, LLC), which will put it in a much better position to satisfy its outstanding debt. Something that should improve its net debt to pro forma EBITDA, which is estimated to go below 6 times over.
Based on these facts, it is no wonder that Medical Properties Trust is projecting FFO growth of 4 percent in 2016 in spite of its difficulties with expansion because of its low share price. As a result, REIT investors might want to take a second look at the healthcare REIT, which could be on its way to a rebound in its share price.
Source:Medical Properties Trust Inc.(NYSE:MPW)
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