Medical Properties Trust: We Were Wrong, Bullish Support Yet To Be Found (Downgrade) (MPW)

The MPW Investment Thesis Has Lost Its Bullish Support Here

We previously covered Medical Properties Trust (NYSE:MPW) in May 2023, discussing the short sellers attack by Viceroy Research. The report had caused its stock prices to drastically decline, thanks to the allegation that the REIT “buys assets at inflated prices from tenants.”

At that time, we maintained our optimistic MPW investment thesis, since its auditor, PwC, had verified the REIT’s conformation with the US GAAP accounting principles since 2008. Thanks to the depressed stock prices, we were also tempted by the rich dividend yields, naturally clouding our judgement.

For now, it appears that we have been proven wrong after four MPW Buy articles since October 2022, since it is finally apparent that the stock lacks bullish support, with the stock valuations/ prices continuing to decline, negating much of its future dividend incomes.

MPW Stock Prices Since 2008

Market sentiments surrounding MPW has been bearish since January 2022, with the stock subsequently losing much of its value to retest the 2008 lows, right when the previous recession occurred.

Most of the pessimism is really attributed to a potential dividend cut, which has yet to be announced, but nonetheless, priced in both by Mr. Market and long-term shareholders alike.

This sentiment is probably worsened by the MPW management announcing a narrowed FY2023 AFFO per share guidance range of between $1.53 and $1.57, matching consensus estimates of $1.55 at the midpoint.

It is important to note that this range has been lowered twice, compared to the previous FQ1’23 guidance range of between $1.50 and $1.61, and FQ4’22 guidance range of between $1.50 and $1.65.

For now, based on MPW’s annualized dividend of $1.16, it appears that the management is still able to sustain its current payout ratio of ~74%.

However, with the stock also losing -$2.60 or the equivalent of -25.7% of its value since the recent earnings call on August 08, 2023, it is apparent that long-term shareholders have lost much of their original capital as well.

We have observed a similar cadence with many underperforming income stocks, where long-term shareholders opted to drip and dollar cost average, with the thesis that capital gains or losses are only recorded if the stocks are sold.

Investors must also note that MPW’s drastic correction has triggered a forward dividend yield of 15.47%, expanded compared to its 4Y average of 6.96% and sector median of 4.89%.

Then again, with so many other stocks that offer either capital gain through stock price appreciation, or sustainable income with stable stock performance, we are uncertain if MPW is a wise investment for new investors, especially due to its battleground stock status. The latter suggest sustained volatility for the foreseeable future, with it remaining to be seen when the stock may encounter bullish support.

For now, MPW has reported a mixed FQ2’23 earnings call as well, with reduced revenues of $349.92M (-3.4% QoQ/ -15.7% YoY) attributed to divestitures.

This is on top of the accelerated net losses of -$42M (-228.2% QoQ/ -122.1% YoY), attributed to the $286M of amortization and $95M of rental write off, partially offset by $160M tax benefit from the UK REIT and $68M interest revenue from PHP.

However, we believe that the FQ2’23 numbers may have painted a more pessimistic outlook than it actually is, since these only reflect the impact of divestures and the CommonSpirit lease, all of which have been disclosed in previous earnings call.

While MPW may have been involved with Steward’s recent refinancing efforts, we are not overly concerned as well, since the exercise provides the operator with “significant incremental liquidity.”

MPW has been able to derisk this investment as well, by selling off $105M of its interests. While the terms of the credit sale have not been disclosed, we suppose the REIT’s prospects may lift henceforth, due to Steward’s improved capability of meeting rent.

Therefore, with the puzzles slowly falling into place, we believe the pessimism surrounding MPW may have (almost) bottomed here.

MPW’s Revenues By Operator

Nonetheless, we must also highlight these are speculative conjectures, given that Prospect Medical Holding and Steward Health Care have yet to fully resolve their financial health issues, while also requiring certain debt refinancing.

With both operators comprising 45.2% of MPW’s FQ2’23 rental revenues, the lingering pessimistic sentiments may not lift in the near term, in our opinion, until these two operators are in the clear.

So, Is MPW Stock A Buy, Sell, or Hold?

MPW 5Y EV/Revenue and Price/ AFFO Per Share Valuations

For now, MPW is trading at NTM EV/ Revenues of 10.20x and NTM Price/ AFFO Per Share of 6.16x, lower compared to its 1Y mean of 10.82x/ 8.03x and 3Y pre-pandemic mean of 11.83x/ 12.70x.

The pessimism embedded in its valuations is apparent indeed, compared to its healthcare REIT peers such as Omega Healthcare Investors (OHI) at 14.63x/ 10.82x and Healthpeak Properties (PEAK) at 8.27x/ 13.52x, respectively.

While the MPW stock may appear cheap based on its historical valuations, we are not so certain to formulate another buy investment thesis based on a rearview mirror outlook.

This is why we are no longer certain about our previous price target of $14.44, since it is previously based on the REIT’s FQ1’23 guidance of AFFO per share of $1.55 at the midpoint and 1Y Price/ AFFO Per Share of 9.32x, with it remaining to be seen if the stock’s valuations may recover to historical levels.

MPW 1Y Stock Price

Combined with the elevated short interest of 21.07% at the time of writing and the stock’s current retest of the Q2’23/ Q3’23 support levels, the MPW investment thesis is not for the fainted hearted indeed, since a floor has yet to be observed.

This volatility also suggests that it may be harder to peg a fair value to the stock, attributed to its drastic decline of -39.9% YTD and -70.7% since the January 2022 top.

As a result of its mixed prospects, we prefer to rate the MPW stock as a Hold (Neutral) here.

While there may be risks to this hold rating, especially for long-term investors with high conviction looking to dollar cost average, they should only do so if the portfolio is sized appropriately, due to the potential volatility.

For one, we believe that the much needed bullish support may not return in the near term, with market analysts already pricing in a dividend cut.

For example, this lack of support is already visible in the MPW stock’s decline after the release of the Prospect news on August 18, 2023, with it losing another -7.6% of its value within a day.

As a result, while some SA analysts may iterate their double down Buy rating, we prefer to err on the side of caution while staying off the volatile ride ahead.