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investment work
Medical Properties Trust, Inc. (NYSE:MPW) had a tough earnings call for the fourth quarter of 2022, with the sell-off following the sell-off since February 15, 2023 causing a drastic loss of -$1.65 billion in the company’s enterprise value.
We believe this pessimism stems from two major concerns shared by market analysts and investors alike
First, the potential bankruptcy of MPW’s tenant, Prospect in Pennsylvania, due to -$171m in property depreciation and -$112m in unbilled rent write-offs in FQ4’22. This builds on other tenant woes the company has faced to date, including Pipeline Health’s bankruptcy and Steward’s cash flow woes.
Which leads to our second point, MPW’s dividend certainty, given the company’s lower-than-expected normalized FFO in fiscal 2023 [NFFO] between $1.50 and $1.65 per share. These numbers suggest a worst-case impact of up to -12.2% yoy from the $1.71 level in FY2022.
For now, we’re not overly concerned, in part due to management’s optimistic comment of “realizing the full return on its ($420 million) investment in Prospects, including any deferred rent.” Notably, the fiscal 2023 NFFO guidance of up to $1.65 per share doesn’t include rent from Pennsylvania for the next 12 months.
Per-share NFFO guidance implies FFO of between $890 million and $990 million in fiscal 2023 versus $1.08 billion in fiscal 2022 with a median impact of approximately -12.9% in fiscal 2023 year-to-year comparison. That total, however, suggests its ability to sustain its current dividends based on the $696 million paid out in fiscal 2022 (+8.1% year over year).
Nonetheless, we agree that MPW’s short-term execution poses significant risks given its elevated long-term debt of $10.26 billion (-9% YoY) and minimal cash/equivalents on the balance sheet of $235.67 million (-48.6% yoy) ) to the last quarter. While most of its debt is well staggered through 2031, notably $483.32 million is due in 2023 and another $944.25 million in 2024, hinting at possible refinancing at elevated interest rates.
On the one hand, their hospital facilities are essential businesses with current problems attributed to the operators. However, there’s no denying that most, if not all, investors are feeling the negative impact on profitability given the possibility of a dividend cut in the near future.
Court filings from Pipeline Health’s bankruptcy
state of the pipeline
On the other hand, the recent court filing has shown that MPW will have more than legal standing to recover its lost rental income from Pipeline Health, albeit for a longer period of time. This development is indeed crucial as the precedent could be applicable to other tenants should they choose to file for bankruptcy in the future.
The company has obtained a court order giving priority to rent repayment over “other distributions or payments,” in addition to receiving prior payments in the event of “proceeds of sale of assets or other significant liquidity.”
In particular, the renewed court confirmation of a “genuine operating lease instead of a financing agreement” in the pipeline case is also proving to be decisive. This is due to the “lease-only” nature of the deal, which protects MPW’s existing REIT business model of leasing physical assets to operators versus finance leasing, where all insolvency risks can be transferred to the lessee, meaning MPW in this case.
We recognize that the court case, which has already impacted the share price and investor confidence, can be painful. Prospect’s timeline to profitability in Pennsylvania also appears particularly lengthy at 12 to 18 months due to the potential recapitalization/sale of its $1 billion managed care business. In our view, these factors point to more volatility in the medium term.
So, is MPW stock a buy?Sell or hold?
MPW 1Y EV/Sales and Price/AFFO per share valuations
S&P Capital IQ
MPW is currently trading at 11.41x EV/NTM sales and 8.61x NTM price/AFFO per share, which is relatively in line with the pre-pandemic 3-year EV/NTM sales median of 11.85x if also lower than 12.71x.
Based on FY2024 forecast AFFO per share of $1.37 and its 1yr price/AFFO per share of 10.62x, we have a modest target price of $14.54. This is also nearing the consensus price target of $14, suggesting upside potential of 32.7% from current levels.
MPW 1Y Stock Price
trading view
Based on the factors discussed above, it is evident that the sell-off was extreme. Many investors are concerned about MPW’s future dividend cut, which we see as a potential risk as three of its tenants face either liquidity problems or bankruptcy. The company’s situation is further complicated by the fact that Steward accounts for 24.2% of its wealth in fiscal 2022, in addition to Prospect’s 7.5%.
Regardless of how things play out for Stewart and Prospect, we’re cautiously optimistic that the pipeline lawsuit could paint a slightly brighter picture for MPW and its future dividend. This is significantly aided by the recycling of current investment capital, with other tenants operating smoothly to date.
Therefore, on a best-case scenario of $0.29 quarterly dividends through 2023 based on FQ1’23 numbers, we can expect an extended forward yield of 11.2% based on the current share price of $10.30. That potential return is impressive compared to the company’s 4-year average of 6.02% and the industry median of 4.34%.
Due to the excellent dividend opportunities, we classify the MPW share as a speculative buy. Meanwhile, bottom-fishing investors might try to wait for a better single-digit entry point as the Fed could announce another rate hike by the end of March 2023, with the macroeconomic outlook remaining uncertain throughout the year.
Of course, this stock is only suitable for those with a higher risk tolerance, which has been significantly worsened by the elevated short rate of 17.46% at the time of writing, despite the drastic -19.85% drop since February 15, 2023.