Medical Properties Trust: Dividend safety is the biggest question (NYSE: MPW)

Investment thesis

Medical Properties Trust, Inc. (NYSE: MPW) had a rough earnings call for the fourth quarter of 2022, with sale after sale triggering a drastic -$1.65 billion loss in the company’s enterprise value since February 15, 2023.

We estimate this pessimism can be attributed to two major concerns shared by market analysts and investors

First, the potential bankruptcy of MPW tenant Prospect in Pennsylvania due to -$171 million in real estate writedowns and -$112 million in unbilled rent writedowns in Q4’22. This builds on other tenant issues the company has faced so far, including Pipeline Health’s bankruptcy and Steward’s cash flow issues.

This brings us to our second point, the safety of MPW’s dividends, attributed to the normalized FFO (NFFO) per share below the company’s expectations for fiscal 2023 of between $1.50 and $1.65. These numbers suggest a worst-case impact of up to -12.2% year-on-year from its FY2022 levels of $1.71.

For now, we’re not too worried yet, in part because of management’s optimistic comment about realizing “the full return on its investments ($420 million) in Prospects, including any deferred rent.” In particular, its forecast for fiscal 2023 in NFFO per share up to $1.65 does not include Pennsylvania rent for the next twelve months.

The NFFO per share forecast implies FFO for fiscal year 2023 of between $890 million and $990 million, compared to fiscal year 2022 levels of $1.08 billion, with a mid-term impact of approximately – 12.9% YoY. However, that sum suggests its ability to sustain its current dividends, based on the $696 million (+8.1% yoy) paid out in fiscal 2022.

Nonetheless, we agree that there are notable risks in MPW’s near-term execution, attributed to elevated long-term debt of $10.26 billion (-9% YoY) and minimal cash/cash equivalents on the balance sheet at $235.67 million (-48.6% YoY) in the last quarter. While most of its debt is well staggered through 2031, in particular $483.32 million will be due in 2023 and an additional $944.25 million due in 2024, suggesting potential refinancing at interest rates students.

On the one hand, their hospital assets are essential businesses with current challenges attributed to operators. However, there is no denying that profitability headwinds remain a major concern for most, if not all, investors due to the possibility of a short-term dividend cut.

Pipeline Health Bankruptcy Court Filings

On the other hand, a recent court filing showed that MPW will be more than legally qualified to reclaim its missed rental income from Pipeline Health, albeit within an extended time frame. This development is indeed crucial, since the previous one can apply to other tenants, if they decide to declare bankruptcy in the future.

The company has obtained a court ruling, in which the repayment of rent will take priority over “other distributions or payments”, in addition to receiving previous payments in the event of “any proceeds from the sale of assets or other significant liquidity”.

In particular, the court’s reconfirmation of a “true operating lease rather than a financing agreement” in the Pipeline case also proves crucial. This is due to the “pure lease type contract” protecting MPW’s existing REIT business model of leasing physical assets to operators, against the leasing contract, where all risk of bankruptcy can be transferred to the lessee, which in this case means MPW.

We admit that the legal process can be painful, a process that has already impacted its share price and investor confidence thus far. Prospect’s profitability timeline in Pennsylvania also looks particularly long at twelve to eighteen months, attributed to the potential recapitalization/sale of its $1 billion managed care business. These factors suggest, in our view, greater volatility over the medium term.

So is MPW Stock a buySell ​​or Keep?

MPW 1Y EV/Revenue & Price/ AFFO Stock Valuation

MPW is currently trading at an EV/NTM revenue of 11.41x and an NTM/AFFO price per share of 8.61x, relatively in line with its pre-pandemic 3-year EV/NTM revenue average of 11 .85x, although less than 12.71x, respectively.

Based on its projected FY2024 AFFO per share of $1.37 and its 1-year price/AFFO per share of 10.62x, we are looking at a moderate price target of $14.54. This is also approaching the consensus price target of $14, suggesting upside potential of 32.7% from current levels.

MPW 1Y stock price

Due to the factors discussed above, it is evident that the sell-off has been extreme. Many investors are worried about MPW’s dividend cut going forward, a risk we suspect is a potential risk, with three of its tenants either experiencing cash flow problems or bankruptcy. The company’s situation is further complicated by the fact that Steward represents 24.2% of its assets in fiscal 2022, in addition to Prospect’s 7.5%.

Nonetheless, regardless of how things turn out for Stewart and Prospect, we are cautiously optimistic that the Pipeline case could paint a slightly brighter picture for MPW and its dividend going forward. This is greatly aided by recycling its current investment capital, with other tenants performing well so far.

Therefore, with a best-case quarterly dividend of $0.29 through 2023, based on the FQ1’23 figure, we could be looking at an expanded forward yield of 11.2%, based on its current price. of $10.30. This 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 opportunity, we are pricing MPW stock here as a speculative buy. Meanwhile, bottom-fishing investors may be tempted to wait for a better single-digit entry point, as the Fed may announce another rate hike by the end of March 2023 as the macro outlook remains uncertain throughout. year round.

Needless to say, this stock is only suitable for those with a higher tolerance for risk, greatly compounded by the high short interest of 17.46% at the time of writing, despite the drastic drop of -19.85% since February 15, 2023.