To The Moon

$Medical Properties(MPW)$ $Macerich(MAC)$

The greatest returns in real estate investing often come from purchasing shares of companies that appear to be on the verge of bankruptcy, only for them to defy expectations, survive, and eventually recover to more typical valuations. A prime example of this is the case of Macerich. The company was highly over-leveraged as the pandemic approached, which led to a sharp drop in share price to $5—an 80% discount to our estimated net asset value. Several of Macerich's peers had already filed for bankruptcy, and the market feared it would follow suit, which would have likely wiped out equity holders. That’s why the stock was priced so low. However, we believed the market had overreacted and that the risk of bankruptcy was lower than the market suggested. This led us to buy a significant number of shares at around $5 per share in March 2020, bringing down our average cost basis to $8 per share. Fast forward four years, and we can confidently say we were right. The company survived the pandemic, strengthened its balance sheet, and eventually returned to a more typical valuation, resulting in a quadrupling of the share price.

I bring this up because several other companies in similar situations today could see their share prices rise significantly in the coming years.

Now, before we continue, let me remind you that the investments I’ll discuss are speculative. You don’t get the potential for doubling, tripling, or even quadrupling your investment without taking significant risks. These companies could go bankrupt, and in that case, your equity could be wiped out. However, we believe that the risk-reward ratio is attractive, particularly as part of a well-diversified portfolio. These are relatively small positions for us, so even if they go to zero, we would still bounce back. But we think the chances are more favorable that these companies will survive and eventually see significant upside, which could greatly improve our portfolio performance.

BRANICKS Group AG

The first company I want to discuss is BRCK (ticker symbol: BRNK), a German landlord currently priced as if bankruptcy is imminent, trading at an 85% discount to its net asset value. The risks are quite high due to the company’s significant leverage, approaching debt maturities, and the current tough market conditions for selling assets. However, as we highlighted in an earlier update, we believe the market has mispriced the probability of bankruptcy. While bankruptcy is certainly a possibility, we think it’s more likely that lenders will work with BRCK to provide more time to sell assets and pay off debt.

Now, let’s dive into the latest news. The big development is that the lenders have agreed to extend the debt terms and relax some loan covenants, giving BRCK more breathing room to sell assets and repay its debt. Since then, the company has successfully sold more assets, allowing it to repay bridge financing ahead of schedule. This has lowered the loan-to-value ratio from 57.6% to 55.3%, leaving more room under the loan covenants. The company believes it will reduce the loan-to-value ratio below 50% within a year, and I think this target is achievable. They’re generating significant cash flow, which they’re using to pay down debt organically. The transaction market is also clearly recovering, as shown by recent sales, and we expect cap rates on their properties to compress slightly with recent interest rate cuts.

If BRCK can pull this off, I expect its share price to rise substantially, as this would greatly reduce the likelihood of bankruptcy. Even if the stock price doubled from here, it would still be trading at a 70% discount to its net asset value. If it tripled, it would still be at a 50% discount. The company is so confident that they’ve shifted their focus from short-term survival to midterm growth ambitions, as demonstrated in a new chart in their investor deck. They’ve also announced the launch of a $300 million fund focused on renewable energy investments. It’s very unusual for a company on the brink of bankruptcy to launch a new fund, so this is a positive sign.

Their midterm goal is to become a major asset manager in the renewable energy space, in addition to industrial and office real estate. It’s easy to forget that before the surge in interest rates, BRCK was successfully raising funds and rapidly growing its assets under management, as well as the fee income associated with it. If they can survive this challenging period, strengthen their balance sheet, and reinvent themselves as an ESG-focused asset manager with a strong renewable energy portfolio, the stock price could potentially quadruple over the next five years, similar to the recovery seen by Macerich after the pandemic.

Of course, the risks are very high, but the potential reward is significant. For this reason, we view BRCK as a high-risk, high-reward position within a well-diversified portfolio, and we’ve continued to buy more shares for our international portfolio.

Medical Properties Trust (MPW)

The second company I want to discuss is Medical Properties Trust (MPW). Let me emphasize upfront that this is a very risky investment, similar to what Macerich was a few years ago. Medical Properties Trust focuses on hospital property investments, and this sector has faced struggles, including weak tenants, frequent lease defaults, and for MPW, a heavy reliance on a small number of struggling tenants. Additionally, the company is overleveraged, which creates a concerning mix that could push it into bankruptcy. The company has significant debt maturities ahead, and to meet these obligations, it has been selling off assets, which is reducing its cash flow and dividends. The loan-to-value ratio is also high, in the mid-50% range, meaning MPW will likely need to refinance at higher interest rates, assuming they can do so.

However, there’s still some hope. MPW recently resolved its biggest issue, which was the bankruptcy of its largest tenant, Steward Health Care. Steward represented over 20% of MPW's rental income. Although MPW hasn’t earned any income from this tenant in a while, it has now re-leased 15 out of the 23 hospitals originally leased to Steward. The new operators will begin paying rent in the first quarter of this year and will gradually ramp up to full rent payments by the end of 2025. The good news is that these 15 properties are expected to generate about 95% of the rent Steward was paying under the original lease. Many analysts, including us, had feared MPW would need to offer significant rent reductions to re-lease these properties, so this is a positive development.

However, MPW’s challenges don’t end there. Recently, another tenant representing about 7% of its rental income, Prospect, filed for bankruptcy. Although this wasn’t unexpected, given that Prospect hadn’t paid rent since June 2024, it highlights that MPW has more struggling tenants. The big question is whether the company can limit the damage by re-leasing or selling some of its properties. If MPW can manage this, its cash flow could bounce back, allowing it to address its near-term debt obligations.

In a recent update, we estimated that MPW's annualized funds from operations (FFO) per share will settle around 85 cents. However, accurately predicting the company's cash flow bottom is challenging because the increase in rent collection from the former Steward hospitals may be offset by the need to sell more properties and rising interest expenses. That said, we believe the FFO per share will likely be between 80 cents to $1 over the next few years. If the company successfully addresses its tenant and leverage issues, extends its debt maturities, and resolves survival concerns, it could eventually return to a 10x FFO valuation multiple. This would push the share price to around $8 to $10, approximately three times its current value.

Conclusion

In summary, the risks for Medical Properties Trust are very high, and the company still faces several challenges. But if it can navigate these issues, the upside could be significant in the next few years.

A final note: these investments are very speculative and could go to zero, especially if another market shock occurs. So, invest only if you have a high-risk tolerance and make sure to diversify. These positions are just part of a broader, diversified REIT portfolio, which includes more stable, long-term investments like Essential Properties, Royalty Trust, and V Properties.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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