2023-08-09 13:00:00 ET
Summary
- Medical Properties Trust experienced a steep selloff, falling over 14% after a strong recovery from May 2023 lows. Investors are likely fearing the possibility of a dividend cut.
- While MPT's Q2 earnings release was solid, its performance in the second half is expected to be less impressive. Still, its narrowed midpoint guidance indicates more clarity.
- Investors who fled yesterday were likely concerned about the uncertain risk/reward profile, given its substantial maturing debt securities in 2025-26.
- With a high debt load weighing on further possible asset sales to de-lever its balance sheet, investors need to assess the impact on its earnings runway.
- While all these worries are justified, I make the case why MPW has likely bottomed out in March and May. Let me know whether you think my Strong Buy rating makes sense now.
Medical Properties Trust, Inc. or MPT (MPW) second quarter or FQ2 earnings release sent investors scrambling for cover after a hard-fought recovery from MPW's May 2023 lows.
Accordingly, MPW fell more than 14% yesterday (August 8) after it recovered to a July 2023 high of $10.7. With yesterday's steep selloff, sellers sent MPW back toward its late June lows, as dip buyers are likely assessing whether to pull the trigger.
The company posted a robust FQ2 with its normalized FFO or NFFO of $0.48, well above FQ1's $0.37. However, investors must note a $0.11 per share inclusion in FQ2's metric attributed to the " receipt of equity in PHP in lieu of cash." It indicated "previously unrecorded but contractually owed rent and interest revenue from Prospect Medical Holdings." As such, investors must consider MPT's NFFO run rate excluding the inclusion.
In other words, the positive bump in MPT's Q2 NFFO is likely transitory even as the leading hospital REIT narrowed its full-year guidance. Accordingly, the company updated its FY23 NFFO guidance range to $1.53 to $1.57 per share. Compared to the previous guidance range of $1.50 to $1.61 promulgated in late April, I believe it provides a clearer updated midpoint outlook of $1.55. As such, it corroborates the positive buying sentiments from MPW dip buyers in March and May 2023 that the worst is likely over.
Accordingly, MPT reported a first-half NFFO of about $0.85. Therefore, investors should anticipate a weaker second half in comparison based on the midpoint guidance. Based on the updated projections, we should anticipate H2 NFFO per share of about $0.7, which is still better than the previous analysts' estimates of $0.63. Hence, I assess that the consensus estimates for MPT should be revised upward subsequently.
Notwithstanding the improved outlook, MPT holders who bought into MPW recently could be stunned by yesterday's negative market reaction. While it's nearly impossible to nail down the exact reasons, I believe investors are likely assessing whether MPW could consider dividend cuts moving forward, probably implied in its forward dividend yield of 13.4% (well above its 10Y average of 6.9%).
Why? An analyst on the call queried whether MPT's board " seriously considered a cut to retain more funds to more quickly improve the balance sheet and pay down debt?" With MPT expected to post a net-debt-to-EBITDA ratio of 7.7x for FY23 (Vs. last year's 7.5x), I believe the question is justified. While the market has likely reflected a high probability of a dividend cut, investors still need to hear it directly from management to assess whether the risk/reward makes sense.
However, management's reply suggests that the company isn't keen to unveil its capital allocation strategies, even though it stressed that "everything is on the table and that's at the Board level."
As such, I believe income-focused investors will likely continue to tread carefully. They need to assess the extent of a possible cut, even though MPT could scrap through this year's payout based on its updated NFFO projections.
Despite that, I believe investors must reflect significant execution risks despite more constructive macroeconomic conditions. With more than 42% of its debt maturities occurring in 2025-26, the company will not likely be out of the woods, suggesting further asset sales/restructuring could be necessary (potentially impacting earnings).
Coupled with the hangover from possible dividend cuts, I assess that MPW buyers must remain patient as the headwinds could linger on for longer than anticipated.
Some MPW holders fled with yesterday's post-earnings selloff, which was the worst since it bottomed out in May 2023.
I assessed there's a support zone at the $8.70 level that buyers need to defend against a further slide. Failing which, it could re-test the gap between that level and MPW's May lows, which I consider the lower probability setup for now.
Hence, high-conviction investors anticipating that MPW's post-earnings selloff has flushed out weak income holders could find the current levels attractive. MPW's "A+" valuation (as rated by Seeking Alpha Quant) should continue to attract value investors. However, momentum buyers would not likely be expected to return, as MPW remains in a medium-term downtrend.
Until MPW can break decisively above the $10 level and sustain its consolidation there, investors adding here must be prepared for a volatile ride. Notwithstanding the near-term uncertainty, I believe the opportunity for long-term investors is attractive, as I expect the worst selloff in MPW to be likely over.
Rating: Maintain Strong Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Medical Properties Trust Q2: Dividend Cut Fears Are Back To Haunt Investors