Medical Properties Trust Stock: Avoid This Heavy Dip (NYSE:MPW)

Introduction

I first wrote about Medical Properties Belief (NYSE:MPW) on November 4, 2022, and concluded that this specific healthcare REIT was clearly buying and selling at a big low cost to the business, however that I would not purchase it solely due to its above-average dividend yield and seemingly low cost valuation. At that time, the brief sellers’ arguments appeared convincing sufficient to me, and since I could not counter their theses, I rated the inventory Impartial and up to date my protection two extra instances after that with the identical ranking. For the reason that publication of my very first article, MPW has considerably underperformed the market:

On Aug. 8, earlier than buying and selling opened on the New York Inventory Change, MPW launched its second-quarter outcomes, which beat consensus estimates concerning FFO. Nevertheless, the inventory reacted with a drop of > 14%:

Many are actually asking: Does it make sense to purchase MPW on this sharp dip? You already know my reply to this query from the title of this text, however let me clarify in additional element.

Q2 Outcomes And Why They Brought about So A lot Bother

The principle message throughout the earnings name, which you’ll be able to learn right here, started with CEO Edward Aldag speaking about how nicely the business is doing total. Hospitals account for the most important share of healthcare spending within the U.S., estimated at ~$1.5 trillion (31% of complete spending) in 2023, with continued development anticipated resulting from an growing older inhabitants, rising demand, and expanded medical companies. Operators negotiate charge will increase of three% to six% and profit from Medicare charge will increase. Hospitals have recovered from the pandemic, enhancing efficiency and rising quantity.

Steward, a significant tenant of MPW, efficiently refinanced their ABL forward of schedule, led by third-party non-public credit score lenders managing over $50 billion. This transfer gives Steward with considerably extra liquidity and addresses market considerations, the CEO famous throughout the name. He additionally added that MPT’s funding within the credit score facility aligns with different lenders and ensures a powerful return, and it is that this participation will not be an working mortgage to Steward however is backed by safe receivables.

Steven Hamner, the CFO, supplied key monetary updates throughout the name: a web lack of $0.07 and a normalized FFO of $0.48 per share for Q2 2023 (beat by $0.11). He mentioned non-cash prices associated to lease belongings, a tax advantage of $160 million from restructuring U.Okay. belongings, and about $68 million in Prospect lease resulting from recapitalization. The corporate accomplished the sale of seven Australian hospitals and three hospitals to Prime for $100 million. They acquired a $100 million mortgage reimbursement from Steward and took part in Steward’s ABL facility for engaging returns. The 2023 normalized FFO estimate was adjusted to $1.53 to $1.57 per share (from the beforehand anticipated $1.5 to $1.61 vary), with projected FY2024 money lease will increase.

MPW has a convertible mortgage associated to PHP and an fairness stake within the enterprise. The analysts requested the administration throughout the name whether or not there can be recurring money move from these investments and the timeline for monetizing the funding. The timeline for monetizing the PHP funding is talked about as FY2024. MPW administration clarifies that the fairness reserving is included within the steerage, however it’s not a money and is reflective of the surplus worth of the managed care curiosity that MPW holds.

Hedgeye REIT Sector Head – the analyst who was one of many first to query the credibility of MPW’s administration – wrote proper after the earnings name that the PHP adjustment was not excluded from each “normalized” FFO and, extra regarding, AFFO calculations. Here is how Hedgeye adjusted MPW’s financials to make it look “extra correct”, of their view:

By the very finish of the earnings name, Jonathan Hughes from Raymond James expressed considerations in regards to the up to date steerage, highlighting that the midpoint of the projected FFO for the Q3 and This fall FY2023 would end in ~$0.28 of FFO/sh. after excluding non-cash earnings – this determine could be beneath the quarterly dividend (though it is anticipated to enhance within the subsequent yr).

Jonathan referred to earlier discussions in regards to the sustainability of the dividend and questioned whether or not the Board has thought of reducing it to retain extra funds for a sooner enchancment of the stability sheet and debt discount. In response, Steven Hamner reiterated that they’re dissatisfied with their price of capital as indicated by the share worth and emphasised that they aren’t receiving the credit score they consider they need to. He talked about that they’ve beforehand acknowledged that each one choices are on the desk, together with potential modifications in response to market situations, and that the Board is persistently evaluating and contemplating totally different methods, together with liquidity alternatives.

In different phrases, so far as I perceive it accurately, those that relied on the steadiness of the present >11% ought to assume once more in regards to the stability of their expectations. Furthermore, from an operational viewpoint, the corporate has slipped into adverse territory by way of EBIT, which can be not very reassuring:

The Backside Line

As soon as once more, I have to strongly advise traders to keep away from MPW inventory, regardless of how engaging its dividend yield appears to be proper now. That is as a result of what the bulls and bears used to argue about has, for my part, shifted seamlessly towards the bears’ facet after administration’s feedback.

The extraordinarily excessive brief curiosity in MPW inventory shouldn’t be the deciding think about leaping in. Recall the instance of ZIM Built-in Delivery (ZIM) and a number of different seemingly low cost and excessive dividend shares on the market. However the distinction between ZIM and MPW is that the previous is a cyclical story, whereas the latter is a narrative filled with credit score and administration dangers.

I once more charge the inventory a Maintain/Impartial and encourage everybody to learn the opinions of assorted analysts, not simply those that persistently charge the inventory a Purchase.

Thanks for studying!