2023-08-09 04:54:08 ET
Summary
- Medical Properties Trust stock dropped >14% after releasing its Q2 results. Let's find out why - Read on.
- The CEO highlighted the positive outlook for the healthcare industry, but concerns were raised about the exclusion of certain adjustments in MPW's financial calculations.
- The stability of MPW's dividend and the company's operational performance are also questionable.
- Once again I recommend to avoid MPW stock and not buy the heavy dip.
Introduction
I first wrote about Medical Properties Trust ( MPW ) on November 4, 2022 , and concluded that this particular healthcare REIT was obviously trading at a significant discount to the industry, but that I wouldn't buy it solely because of its above-average dividend yield and seemingly cheap valuation. At that point, the short sellers' arguments seemed convincing enough to me, and since I couldn't counter their theses, I rated the stock Neutral and updated my coverage two more times after that with the same rating. Since the publication of my very first article, MPW has significantly underperformed the market:
On Aug. 8 , before trading opened on the New York Stock Exchange, MPW released its second-quarter results, which beat consensus estimates regarding FFO. However, the stock reacted with a drop of > 14%:
Many are now asking: Does it make sense to buy MPW on this sharp dip? You already know my answer to this question from the title of this article, but let me explain in more detail.
Q2 Results And Why They Caused So Much Trouble
The main message during the earnings call, which you can read here , began with CEO Edward Aldag talking about how well the industry is doing overall. Hospitals account for the largest share of healthcare spending in the U.S., estimated at ~$1.5 trillion (31% of total spending) in 2023, with continued growth expected due to an aging population, increasing demand, and expanded medical services. Operators negotiate rate increases of 3% to 6% and benefit from Medicare rate increases. Hospitals have recovered from the pandemic, improving performance and increasing volume.
Steward, a major tenant of MPW, successfully refinanced their ABL ahead of schedule, led by third-party private credit lenders managing over $50 billion. This move provides Steward with significantly more liquidity and addresses market concerns, the CEO noted during the call. He also added that MPT's investment in the credit facility aligns with other lenders and ensures a strong return, and it's that this participation is not an operating loan to Steward but is backed by secure receivables.
Steven Hamner, the CFO, provided key financial updates during the call: a net loss of $0.07 and a normalized FFO of $0.48 per share for Q2 2023 ( beat by $0.11 ). He discussed non-cash charges related to lease assets, a tax benefit of $160 million from restructuring U.K. assets, and about $68 million in Prospect rent due to recapitalization. The company completed the sale of seven Australian hospitals and three hospitals to Prime for $100 million. They received a $100 million loan repayment from Steward and participated in Steward's ABL facility for attractive returns. The 2023 normalized FFO estimate was adjusted to $1.53 to $1.57 per share (from the previously anticipated $1.5 to $1.61 range), with projected FY2024 cash rent increases.
MPW has a convertible loan related to PHP and an equity stake in the business. The analysts asked the management during the call whether there will be recurring cash flow from these investments and the timeline for monetizing the investment. The timeline for monetizing the PHP investment is mentioned as FY2024. MPW management clarifies that the equity booking is included in the guidance, but it's not a cash and is reflective of the excess value of the managed care interest that MPW holds.
Hedgeye REIT Sector Head - the analyst who was one of the first to question the credibility of MPW's management - wrote right after the earnings call that the PHP adjustment was not excluded from both "normalized" FFO and, more concerning, AFFO calculations. Here's how Hedgeye adjusted MPW's financials to make it look "more proper", in their view:
@HedgeyeREITs, posted on X [corrected by the author]
By the very end of the earnings call, Jonathan Hughes from Raymond James expressed concerns about the updated guidance, highlighting that the midpoint of the projected FFO for the Q3 and Q4 FY2023 would result in ~$0.28 of FFO/sh. after excluding non-cash income - this figure would be below the quarterly dividend (even though it's expected to improve in the next year).
Jonathan referred to previous discussions about the sustainability of the dividend and questioned whether the Board has considered cutting it to retain more funds for a faster improvement of the balance sheet and debt reduction. In response, Steven Hamner reiterated that they are dissatisfied with their cost of capital as indicated by the share price and emphasized that they are not receiving the credit they believe they should. He mentioned that they have previously stated that all options are on the table, including potential changes in response to market conditions, and that the Board is consistently evaluating and considering different strategies, including liquidity opportunities.
In other words, as far as I understand it correctly, those who relied on the stability of the current >11% should think again about the stability of their expectations. Moreover, from an operational point of view, the company has slipped into negative territory in terms of EBIT, which is also not very reassuring:
The Bottom Line
Once again, I must strongly advise investors to avoid MPW stock, no matter how attractive its dividend yield seems to be right now. That's because what the bulls and bears used to argue about has, in my opinion, shifted seamlessly toward the bears' side after management's comments.
The extremely high short interest in MPW stock should not be the deciding factor in jumping in. Recall the example of ZIM Integrated Shipping ( ZIM ) and a host of other seemingly cheap and high dividend stocks out there. But the difference between ZIM and MPW is that the former is a cyclical story, while the latter is a story full of credit and management risks.
I again rate the stock a Hold/Neutral and encourage everyone to read the opinions of various analysts, not just those who consistently rate the stock a Buy.
Thank you for reading!
For further details see:
Medical Properties Trust: Avoid This Heavy Dip