We previously covered Medical Properties Trust, Inc. (NYSE:MPW) in August 2023, discussing its pessimistic prospects as the bears won the battle and the stock plummeted. Thanks to multiple tenants’ cash flow issues and the real estate investment trust’s (“REIT’s”) eventually impacted profitability, we also believed that its dividends might be cut in the near term, further cementing the bear thesis.
In this article, we will be discussing MPW’s penny stock status, with its prospects unlikely to lift in the near term as the management cuts dividends to preserve cash and divests its assets to generate liquidity.
We believe that its dividends per share growth may be stagnant over the next few years, as the management navigates an extremely challenging period of elevated interest rate environment, further destabilizing its income investment thesis.
The MPW Investment Thesis Remains Highly Speculative, With No Floor In Sight
MPW’s investment thesis has unfortunately further deteriorated since our previous Hold rating, despite the excellent results reported in the FQ3’23 earnings call. This is why.
On the one hand, MPW has reported Q3 revenues of $306.58M (-9.1% QoQ/ -12.9% YoY) and funds from operations (“FFO”) of $0.38 (-20.8% QoQ/ -15.5% YoY), with the QoQ decline only reflecting the seasonal fluctuations in its income from financing leases of $26.06M (-61.9% QoQ/ -48.9% YoY) and interest incomes of $29.69M (-51.1% QoQ/ -29.8% YoY).
Otherwise, the REIT continues to record a pretty decent operating lease revenue (including rent billed and straight-line rent) of $250.81M (-3.1% YoY) in the latest quarter, with the YoY decline reflecting a -$24M impact from its disposal, offset by a $12M gain from its new acquisitions.
Most importantly, investors may want to note that MPW’s rental revenues are still up by +$8M QoQ, attributed to its rental escalators tied to the CPI, implying its robust near-term prospects.
The management also moderately narrowed its FY2023 FFO per share guidance to between $1.56 – $1.58, compared to the original range of $1.50 – $1.65 in the FQ4’22 earnings call and $1.53 – $1.57 in the FQ2’23 earnings call. This is against the FY2019 levels of $1.30 (-5.1% YoY).
This is on top of the projection of $2B in additional liquidity over the next few quarters (through divestiture or debt), with its two major tenants, Prospect Medical Holdings and Steward Health Care, appearing to be in much better shape financially.
On the other hand, we can also understand why Mr. Market has temporarily turned bearish on the MPW stock, with its top and bottom lines seemingly unpredictable with many moving parts.
This is especially given the multiple tenant troubles, divestitures, tenant financings with rumors of insolvency, short sellers attack, and ongoing litigation with its existing shareholders, amongst others.
The Consensus Forward Estimates
In addition, it does not help when the consensus forward estimates appear to be underwhelming, with MPW expected to report an impacted top and bottom line CAGR of -4.6% and -5.9% through FY2026, compared to its historical CAGR of +19.1% and +3.7% between FY2016 and FY2022, respectively.
While the management has opted to drastically cut dividends by -48.2% to save up to $335M of cash flow for operational uses, we believe many investors now question the viability of its dividends. This is because the REIT’s acquisitions and divestitures since late 2021 has been a net negative to its AFFO by -$0.21 per share.
Combined with $2.25B of debts maturing over the next two years, it is not surprising that MPW’s investors are less certain about how its ongoing asset divestitures may actually generate additional value and liquidity.
For now, while MPW’s TTM Interest Coverage ratio of 1.43x and its FWD FFO Dividend Coverage Ratio of 1.65% remain decent, compared to the sector median of 1.77x/ 1.59%, respectively, it is apparent that bullish sentiments have vanished.
This is observed in the stock’s tremendous price decline by -80.6% since the December 2021 peak and highly discounted FWD Price/ FFO valuation of 3.06x, compared to its 1Y mean of 5.53x, 3Y pre-pandemic mean of 10.78x, and the sector median of 11.69x.
Most importantly, we expect MPW’s dividends per share growth to be stagnant over the next few years, as the management navigates an extremely challenging period of uncertain macroeconomic outlook.
This implies that there may be no more turning back to its previously robust income investment thesis, as the bulls fled to safe haven stocks and US Treasuries.
It also remains to be seen when we may see a reversal, with the REIT sector being sold-off over the past few months, as the highly leveraged business model faces elevated interest rate environment.
While the October 2023 CPI has shown promising signs of deceleration and the market analysts priced in a rate freeze in the upcoming FOMC meeting in December 2023, we do not know when the Fed may actually pivot and ease the pain. Only time may tell.
So, Is MPW Stock A Buy, Sell, or Hold?
MPW 19Y Stock Price
While some may argue that MPW now offers a compelling forward dividend yield of 12.63%, thanks to its depressed stock prices trading near its 15Y lows, it is uncertain if there may be a floor to this decline in the near term, with most investors likely already in the red.
Furthermore, investors have to understand that REITs typically raise funds through debt and capital offering, also known as, share dilution. With its share prices already plummeting to penny stock status, there may be more pain to long-term shareholders indeed, as its value increasingly becomes cheaper and lesser capital are raised.
Lastly, with an eye-watering short interest of 22.76%, we believe that MPW’s investment thesis has changed drastically, with it no longer trading based on fundamentals, and now “considered speculative, high-risk investment as it experience higher volatility and lower liquidity.”
With Medical Properties Trust, Inc. being a new battleground stock, we believe that the volatility from aggressive short sellers may negate the potential upside from these bottom levels.
As a result, we maintain our previous Hold (Neutral) rating on Medical Properties Trust, Inc. shares, since those who remain are likely highly-convinced strong-fisted investors with higher risk tolerance.
However, while the yields may be tempting, we prefer to adopt a wait and see attitude from the sidelines. There may be more pain in the near-term.