Companies selling at a significant discount to book value are normally difficult to find. After all, if they fell in your lap, investing wouldn’t be any harder than opening up presents on Christmas morning. One place to look for these bargains are in industries which have lost favor with Wall Street, which is where I stumbled upon MediTrust (MT). MediTrust is a paired share REIT, meaning it is comprised of two entities, an operating company and an REIT. The advantage of this is MediTrust is not required to pay any corporate income tax, so long as it passes through ninety percent of earnings as dividends.
Investors don’t want to touch MediTrust with a ten foot pole. In late 1998 MT was trading at almost $15 a share, from which it gradually slid to its current price of below $3. Why? In late 1998 the company announced a restructuring plan which involved the selling of golf and racetrack assets in order to focus on long term healthcare and mid priced lodging. The REIT portion of the company owns and manages the healthcare and lodging properties, while the operating company operates the lodging properties, which consists of La Quinta Companies, a chain of 300 mid priced hotels. The bad news is that due to changes in Medicare regulations the long term healthcare sector has taken a severe hit. Many providers, including some MediTrust does business with, have been forced to declare bankruptcy. At the same time, the mid priced lodging industry is facing an oversupply of rooms, especially in the geographic areas La Quinta is located. So within a short period of time, both industries the company operates in have fallen on hard times.
Setting aside the difficulties the company faces for a moment, take a look at the reported book value as of June 30, 2000:
Total assets: 5.047 billion
Total liabilities: (2.456 billion)
Preferred stock: (0.2 billion)
Goodwill: (0.47 billion)
Share holder’s equity applicable to common: 1.92 billion
Share’s outstanding: 142,013,000
Reported book value per share: 13.52
Therefore, after backing out goodwill and $200 million worth of preferred stock, there is $13.52 of reported book value behind every share of common, which has been selling below $3.
Of course, the question is how solid is that book value. As of early 2000, MediTrust has embarked on yet another restructuring plan. Anticipating an eventual rebound of the mid priced lodging segment when supply and demand rebalances, the company has elected to focus on La Quinta. A significant amount of the healthcare assets were sold off to pay down debt, a number of executives left and management more familiar with the mid priced lodging industry was brought in, including some who had worked at Red Roof Inns. The company has succeeded in selling almost a billion dollars worth of healthcare assets at about 75 cents on the dollar. On the other hand, in my opinion La Quinta can be taken for its reported value. In the words of Thierry Perrein, head of REIT research at DLJ, “What investors tend to forget is that La Quinta assets are very good properties, mostly brand new.” The total assets number of 5.047 billion above breaks down as 2.659 La Quinta and 2.388 health care. Taking the health care at 75 cents on the dollar leaves 4.45 billion in total assets, reducing the book value per share to $9.32.
As part of the 2000 restructuring the company also decided to begin paying the minimum dividend possible to maintain REIT status, or ninety percent of earnings. As the company has been reporting a loss due to losses on the sale of their health care assets, the dividend has been suspended, further depressing the stock price.
Another method of valuing La Quinta would be to use EBITDA. Red Roof Inns, another mid priced lodging provider, went for 7.6x EBITDA in a buy out. Assuming MediTrust were able to dispose of it’s healthcare assets at 75 cents on the dollar, that leaves 665 million of long term debt for La Quinta. Working from the company’s last 10Q, namely the six month results for MediTrust operating company, a cocktail napkin calculation of EBITDA for an independent La Quinta would look like (all numbers in thousands except per share numbers):
Revenue from hotels: 307,120
Hotel Operations: (151,536)
General and Administrative: (13,992)
Debt Maintenance at 13% for six months: (43,225)
EBITDA for 6 months: 98,367
Per share for full year: 1.38
For those of you following along at home, all rents and royalties due to MediTrust would be moot as La Quinta would be independent. EBITDA of 1.38 per share makes a 7.6x valuation of $10.49 per share.
These two valuations of $10.49 and $9.32 leave a significant margin of safety over the current price, which has dipped as low as $2.50. A valuation this low leads me to think the market assumes MediTrust is headed for the bankruptcy courts, but I would beg to differ. Since January the company has succeeded in liquidating almost a billion dollars worth of health care assets at better than 75 cents on the dollar. Total debt is now down to $1.6 billion, $676 million coming due in 2001. MediTrust has also voluntarily reduced its revolving credit line from $850 million to $400 million, not the sign of an insolvent company.
At about a $10 value selling for $2.50, in my opinion MediTrust represents a good enough value to not need any catalyst to eventually rebound. With that in mind, as more sales of health care assets go through, the stock should see a significant pop. Also, as cash flow becomes positive MT will be forced to resume paying a dividend or lose REIT status, which will buoy the stock price short term, although pulling possible investing capital from La Quinta. The new management has also instituted a franchising plan, which if successful could be a significant growth engine.
|Subject||Quality of remaining long term|
|Entry||10/21/2000 02:08 PM|
|Has MT given any guidance as to whether it was their "best" or most problematic healthcare properties sold. My concern is that they sold the ones that were sellable, where there is real cash flow, but the ones that are remaining are the ones is truly dire situation, that couldn't be sold. Have they given any stats about the revenues, EBITDAR and EBITDAR margins of remaining vs. sold properties?
If the ones sold were the good ones, then maybe a 50% or 75% discount on the remaining would be necessary?
On the La Quinta assets, another thing to remember is that LQ went through a major cap-x spending program prior to its purchase by MT, so the properties should be in good shape.|
|Entry||10/22/2000 11:34 PM|
|If you used cash flow to value the remaining healthcare assets as opposed to book value how would your analysis change?
Also, are you assuming the preferred gets paid off in your analysis?|
|Subject||Regarding cash flow|
|Entry||10/26/2000 07:08 PM|
|I would not make an analysis concerning the cash flow of the remaining healthcare assets. As many of the operators are declaring bankruptcy, any cash flow cannot be considered dependable.
Looking back at my cash flow analysis I realize I forgot the preferred! This changes the numbers as follows:
EBITDA for 12 months (before preferred): $196,734,000
Dividends to pay preferred: $18,000,000
Adjusted EBITDA: $178,734,000
Adjusted EBITDA per share: $1.26
EBITDA * 7.6 multiple: $9.58
I picked an aribtrarily high interest rate of %13 on La Quinta's debt to be conservative, so under my scenario, it would make sense for La Quinta to maintain the preferred stock at its current %9.
|Subject||Re: Quality of remaining prope|
|Entry||10/26/2000 07:49 PM|
|In my research I have not seen any disclosure of EBITDAR of remaining vs. sold properties.
I have it from a completely unverifiable source (a yahoo message poster who has a good reputation of disclosing facts in the past) that around 20% of the 959 million sold properties were run by bankrupt operators, while about half of what is left are run by bankrupt or soon to be bankrupt operators. This might very well be an accurate piece of information, but I can't find any info to verify it. As of their 6/30/2000 filing, MT lists Sun, Integrated, Mariner, and Genesis as operators claiming bankruptcy, and these operators comprised 25% of the healthcare portfolio at the time. Of course, the two pieces of data don't jive. Either more operators have gone out of business, or the poster is being overly pessimistic.
Of course, it is up to each person to determine how much they think the health care assets are worth in comparison to their reported value. Valuing them according to the properties already sold may be naive, but it does at least rest on existing information. I would not stray far from a 25% discount until more information becomes available.
|Entry||12/13/2000 07:25 PM|
|They largely sold their mortgage portfolio in the last nine months. What is left is a much higher percentage of real property, which should take longer to get rid of than mortgage assets. More important, the mortgage assets are where the discounts to net book value are taken; the real property sold in the last 9 mos netted only about 4 mill below net book. A little less than half of the remaining properties are run by bankrupt operators. Realize, though, that this does not necessarily affect the value of the properties. These operators largely are suffering from fatal indigestion rather than a fatal bullet wound to the head. Or even if it is a bullet in the head, management did it to themselves. My assessment is that we are dealing with less than a 25% discount to net book, which already includes provisions for real-world valuation differences. I'm eduguessing around $840M, but most other conservative people I know are sticking to $750M.
The Bass family put the current chairman in place to fix things, and the 830,000 he bought in August was bought from the Basses at a "bargain" price in order to give him a gift along with proper incentive. The bargain price? $2.32.
All this said, the worry seems to be bankruptcy - I read a CSFB note today that expresses grave concern over the $450M in debt due next year and pairs this concern to a "sell" rating. What a joke. I don't see any problem there with the assets backing up the debt, the cash flow, and even a liquidation plan in place for $1B of those assets. The Sept 5 amendments to debt were largely voluntary.
Moreover, the new CEO is the former Red Roof Inns guy. He came he saw he fixed he sold. Shareholders are probably in good hands here, ALTHOUGH I don't see where he owns any shares yet. Other than him, insiders have been buyers.|
|Subject||Updated thoughts on value|
|Entry||08/22/2001 02:25 PM|
Very good pick. Do you have any updated views on value for this company?
|Subject||Short answer - not really|
|Entry||09/06/2001 11:55 AM|
|Well, there is someone out there!|
Currently I only own the LQI preferred, and have not been following the company as closely as I would otherwise. They have succeeded in selling down more of the health care assets and some franchising for La Quinta, but claim the current economic climate is hurting results.