Medical Properties Stock: Time To Be Greedy And Load Up (NYSE:MPW)

My Thesis

Medical Properties Trust (NYSE:MPW) stock fell 29% on January 5, 2024, and has fallen more than 70% overall in the past year, according to Seeking Alpha data. This was due to concerns about the management’s transparency, liquidity issues with the trust’s largest tenant, and concerns about the company’s enormous debt-to-equity ratio, which predicts a lot of problems in 2025 and beyond. However, I think MPW is too cheap to pass up at today’s valuation even with a full dividend cut – especially considering the very high short interest and strong support level left from the 2009 crisis. I believe the risk/reward ratio in this story is shifting towards dip buyers – at least in the medium term.

My Reasoning

Medical Properties Trust, founded in 2003, has grown into one of the world’s largest hospital real estate owners with 441 facilities and 44,000 licensed beds as of September 30, 2023, utilizing a financing model that enables operators to unlock real estate value for facility improvements, technology upgrades, and operational investments.

In general, the addressable market in which the company operates has a lot of tailwinds in the medium term. Just look at the aging boomer generation, whose real demand (backed by the ability to pay) for medical services should support the industry’s healthy growth rate for years to come.

Speaking of concrete figures: The analysts at Precedence Research forecast that the global market for hospital services will grow at a CAGR of 8.7% during the forecast period from 2022 to 2030. According to Statista, the United States Hospitals market is projected to reach a revenue of $1.476 trillion by FY2024, leading globally in hospital market revenue and generating the highest per capita revenue of $4,320 in 2024. The favorable background for the development of MPW, about which I write above, is thus confirmed by dry numbers.

But of course, one cannot ignore the recent situation with Steward, which caused MPW’s stock to plummet on January 5, 2024, and caused astonishment and a kind of disgust among many shareholders and outside observers.

The future of Steward has sparked considerable speculation, fueled by concerns about its financial viability, including delayed rent payments and planned hospital shutdowns, prompting Medical Properties Trust (MPT) to intensify efforts to recover outstanding rents and loans from Steward.

MPT hired financial and legal advisors, revealing a total unpaid rent of approximately $50 million under their master lease. While Steward explores strategic transactions, MPT provided a $60 million secured bridge loan, deferring unpaid rent and additional amounts to facilitate potential asset sales or re-tenanting. MPT’s management expressed uncertainty about Steward’s ability to meet lease payments, leading to a non-cash impairment charge of around $225 million.

But even if we subtract Steward’s and Prospect’s revenue contributions for Q3 – and that’s what the market is afraid of – we’d get an adjusted FFO of ~$95 million (~$0.16 per share, based on my napkin calculations). That’s more than enough to avoid cutting the dividend to 0 (another Mr. Market’s fear).

Yes, a substantial portion of MPT’s net assets, totaling $3.77 billion, is exposed to Steward (that’s ~19.8% of MPT’s total assets). No doubt, the potential bankruptcy of Steward could jeopardize various MPT’s passive equity investments, rent receivables, and loans. However, even in a hypothetical scenario considering significant asset write-offs, MPT’s net asset value remains at $1.94 billion, suggesting that the current market cap is almost at NAV.

We know that MPW is expected to report earnings on February 22, 2024, according to NASDAQ data. Considering the fairly good adjusted FFO payout ratio, I think management doesn’t have to cut the dividend as massively as the Street may expect it to do. Basically, a lighter cut should theoretically stabilize the public panic.

And while I’m on the subject of dividends, it’s worth noting that the forward dividend is over 18% after the one-day 29% plunge recently. This means that even if it turns out that this forecast is overstated by 50%, we get a projected yield of over 9% per annum with a possible recovery of the payout amount in 2025. So the yield itself is not bad even in such a negative scenario.

MPW is also very cheap if we consider not just the P/E, EV/EBITDA, etc. but also the ratio of FCF and FFO to market capitalization. So the room for recovery growth, if the fourth quarter results and commentary turn out better than priced in, appears to be huge.

The technical analysis paints a two-part picture: on the one hand, the momentum is frightening, on the other hand, we have approached a strong demand zone from the 2009 crisis, from which there is theoretically a very high probability of buying pressure. This is easy to explain logically: Many short sellers are setting their take-profit orders at local lows (all-time lows in this case ) or slightly higher. We are almost there.

At the same time, the number of shares sold short at today’s level is higher than ever before in MPW’s history. Just imagine the stock’s reaction if a massive short covering occurs.

Due to a combination of factors, I believe that the medium-term risk/reward ratio of MPW is skewed to the upside.

Risks And Conclusion

I’m sure you know well that investing in Medical Properties Trust stock entails notable risks, especially concerning concerns about the quality of its assets and the worsening leverage and rent coverage metrics of its operators. The financial health and stability of MPW’s tenants, comprising hospitals and healthcare facilities, pose a critical risk to consider. The company’s dependence on the financial well-being of its operators makes it vulnerable to changes in market conditions, potentially impacting rental income and overall asset values.

The escalating leverage risk adds another layer of concern. If MPW maintains high levels of debt, it becomes more susceptible to economic fluctuations and changes in interest rates. The company’s profitability and cash flow could be adversely affected by increased interest expenses, potentially straining its financial position. Additionally, the deteriorating rent coverage metrics of operators raise the specter of financial strain on MPW’s tenants, which could result in missed or delayed rent payments. This scenario not only jeopardizes MPW’s revenue stream but also raises doubts about the financial stability of the healthcare providers it relies on for its operational success.

Despite these risks, which are compounded by the market’s general mistrust of management’s actions, I tend to believe that MPW shares are more likely to recover than fall in the medium term. First, MPW’s current valuation seems reasonable even under the worst-case scenarios. Second, the company’s FFO seems sufficient to avoid a complete dividend cut. Third, we have approached a critical low from which strong buying pressure will most likely follow. Fourth, the addressable market should continue to grow, providing a favorable backdrop for the company’s recovery in the foreseeable future.

From the combination of all the above 4 pro-factors, I conclude that MPW is a ‘Strong Buy’. I think it’s time to be greedy when others are fearful and load up the truck. But proceed with caution and do your own due diligence before making an investment decision (and not only that).

Good luck with your investments and trades!