Medical Properties Belief Falls Like A Rock: Whole Catastrophe Or Shopping for Alternative? (MPW)

Introduction

I’ve been protecting Medical Properties Belief, Inc. (NYSE:MPW) inventory right here on Looking for Alpha since November 2022. Since then, regardless of all of the cheapness the bulls talked about, I’ve been very cautious on the subject of evaluating the attractiveness of investing within the firm.

The final time I wrote about MPW was in early November 2023, when the shares had been buying and selling at $4.8. At the moment, I concluded that MPW’s future regarded bleak as a result of the corporate was shrouded in uncertainty that I felt administration couldn’t deal with. The dip patrons strongly disagreed with my thesis. However because it turned out over time, it was higher for traders to steer clear of MPW, as a result of on the current information that Medical Properties is stepping up its efforts to get well uncollected rents from Steward Well being Care System (its largest tenant), the inventory is falling by 30% on the time of this writing:

That is really a major occasion that I couldn’t ignore. Immediately I wish to deal with the considerations of those that are watching the developments at MPW with dismay. Is that this a compelling shopping for alternative, or merely the progressive manifestation of an inevitable disaster with no sign of ending?

Why You Nonetheless Shouldn’t Contact MPW Inventory

First off, let’s discuss concerning the information itself and why it’s so important that it might trigger MPW to fall 16% inside a number of hours earlier than the market opened.

Lengthy story brief, MPW is now intensifying its efforts to get well unpaid hire and excellent loans from Steward Well being Care System, its greatest tenant. Steward cited liquidity points as a consequence of modifications in vendor cost phrases, resulting in roughly $50M in unpaid hire by December 31, 2023. To handle this, Steward is pursuing speedy strategic transactions, together with potential gross sales, and looking for a third-party capital associate. In assist, MPW is offering a $60 million bridge mortgage secured by collateral and new liens on Steward’s managed care enterprise. MPW additionally agreed to defer unpaid hire and taper 2024 rents.

Because of these challenges, MPW anticipates a non-cash cost of roughly $225 million within the fourth quarter of 2023 to put in writing off consolidated straight-line hire receivables and different gadgets. The corporate additionally expressed uncertainty about potential additional impairments to its actual property and non-real property belongings in its upcoming fourth quarter 2023 reporting.

I’m not suggesting, however I believe, that Steward could also be on the verge of Chapter 11 chapter, as evidenced by its present monetary challenges and the urgency of securing the bridge mortgage.

And lending cash to your tenant who can’t pay an current debt is, for my part, fully inappropriate on the a part of the MPW administration. All of this additionally contradicts what we’ve heard time and time once more just lately throughout earnings calls.

John Pawlowski

Okay. After which turning to storage.

Might you simply verify for me, there was one other roughly $25 million in loans offered late final yr to Steward. After which do you anticipate extra money to go to Stuart this yr outdoors of the, I suppose, the insurance coverage recoveries, prepayment.

Steven Hamner

Sure. The final query isn’t any.

We don’t anticipate any additional once more, alternate working assist, liquidity assist for Stewart apart from what you simply described in redeveloping the price. On the late 2022, there was one other $28 million that we superior.

Supply: Medical Properties Belief, Q1 2023 Earnings Name Transcript.

In fact, there’s positively one thing unimaginable happening with MPW’s valuation, as the present dividend yield is over 25% on the time of writing:

However take into consideration how a lot that yield interprets, say, 2-3 years forward, when analysts had been anticipating a pointy drop in payout this yr even with out the current information about Steward’s subsequent financing. Now MPW will almost certainly have to chop its dividend much more drastically below the yoke of the sad shareholders, which can cut back the projected forwarding 13% yield even decrease.

As well as, MPW has damaged anti-records by way of its debt burden in current quarters: from a debt-to-equity ratio of lower than 1 to greater than 3 in simply lower than 3 years.

As well as, the corporate’s repayments must greater than triple in 2025 in comparison with 2023 and 2024. Even when rates of interest fall, MPW must refinance its debt, most likely at a double-digit rate of interest, additional growing the debt burden.

Tenants’ liquidity issues might already be priced in after this sharp droop, however for my part, MPW will proceed to react very sensitively to the slightest destructive information. And to right the market’s perspective in the direction of itself, the corporate must go a great distance, and it’s not recognized when it should finish. Rebuilding a great status is a way more troublesome activity than it might appear at first look.

The Verdict

Medical Properties Belief is undervalued by just about each conceivable valuation a number of you possibly can consider. That is, in fact, a great motive to justify a purchase after the 30 p.c droop within the share value. However ask your self: what precisely do you get while you purchase MPW? A share in an organization whose administration is (pressured or intentionally) apparently performing in opposition to its personal phrases, potential issues with liquidity and debt refinancing over the subsequent yr, a broken status, and potential litigation points.

In my view, Medical Properties Belief, Inc. inventory shouldn’t be in your “purchase checklist” even when it has fallen as a lot because it has immediately. I urge everybody to stay cautious and never give in to greed.

Thanks for studying!