AlexSecret
Medical Properties Trust’s Much-Needed Respite
Hospital REIT operator Medical Properties Trust, Inc. (NYSE:MPW) received a much-needed respite in April 2024 as MPW continued the recovery from its January 2024 lows. As a result, it has lifted the buying momentum for MPW investors, suggesting short-sellers have taken a further hit. The potential for upside/downside volatility attributed to short-sellers is expected to persist, with MPW’s short-interest ratio of more than 37% as of mid-April. Therefore, I assessed that bearish investors shorting a highly undervalued MPW stock haven’t given up, believing the recent recovery isn’t sustainable. My previous MPW article in February suggests the possibility of a value trap unless high-conviction investors have confidence that MPW’s $2B liquidity plan could work out.
Medical Properties Trust investors should be keenly aware of the positive developments over the past month. The battered hospital REIT has attempted to shore up investor confidence to generate more than $2B in liquidity for 2024. MPW stock has also outperformed the S&P 500 (SPX) (SPY) over the past two months, surprising bearish investors. It’s a stark warning for short-sellers to acknowledge the “A+” valuation grade assigned to MPW, corroborating its significant undervaluation. Coupled with MPW’s attractive dividend yield of more than 12% at the current levels, positive news catalysts could trigger further potential upside related to short-covering.
News Catalysts Drove MPW Stock Surge
Two key catalysts occurred in the first two weeks of April. The catalysts arrived at an opportune moment, underpinning MPW’s consolidation in late March. Recall that Medical Properties Trust’s most significant tenant by revenue (20.3% of MPW’s Q4 revenue base) is reportedly “selling its physician network to UnitedHealth’s (UNH) Optum Care arm.” As a result, it’s expected to help Steward Health Care ” resolve its immediate financial issues,” lowering the execution risks of Medical Properties Trust’s normalized FFO accretion. Based on MPW’s price action, the report helped support its consolidation above MPW’s $3.8 level. However, MPW and its real estate peers faced the impact of the broad market pullback in April, as long-term yields also staged their resurgence.
As a result, the two catalysts in April helped to stabilize MPW’s short-term buying momentum further, allowing investors more clarity as they await Medical Properties Trust’s first-quarter earnings release on May 9. Accordingly, MPW reported on April 9 that MPW “completed the sale of five facilities in California and New Jersey to Prime Healthcare for a total consideration of $350M.” The deal includes $250M in “immediate cash and a $100M interest-bearing mortgage note payable to the REIT in nine months.”
Medical Properties Trust followed up quickly on April 12 with another news catalyst. MPW reported selling five Utah hospitals in a newly formed joint venture. MPW retained a 25% interest in the JV and received about $1.1B in immediate cash. As a result, MPW is expected to generate about $1.45B in total proceeds with these two transactions, drawing closer to its full-year $2B liquidity target.
I assessed these transactions as providing much-needed visibility into clarifying Medical Properties Trust’s $2B liquidity plan ahead of its earnings release. As a result, it should facilitate a less “hostile” atmosphere for MPW management to justify its medium-term plans, as MPW still faces significant debt maturity risks through 2027.
MPW’s Troubles Far From Over
Moreover, MPW management will still need to reignite growth with MPW’s arguably smaller asset base, even as it has demonstrated its ability to generate significant liquidity in a short period. It has likely bolstered management’s credibility and the confidence of its relatively high-quality asset base. However, investors mustn’t forget that these actions don’t resolve the structural challenges that could impact its medium-term normalized FFO generation. As a result, MPW management must convince Wall Street of its ability to rejuvenate much-needed growth prospects amid a higher-for-longer interest rate environment. MPW investors will find it increasingly unlikely to compel a higher valuation re-rating beyond the recent surge, as the market has likely priced in the positive catalysts.
MPW Quant Grades (Seeking Alpha)
As seen above, Seeking Alpha Quant assigned MPW the worst possible “F” growth grade, corroborating the pessimism about its ability to recover. Medical Properties Trust’s weak execution is also encapsulated by MPW’s “D+” earnings revisions grade.
Therefore, besides the short-term liquidity boost, MPW management is still under immense pressure to justify its ability to overcome the REIT’s structural challenges. Given the REIT’s heavy debt load and struggling tenants, I believe these challenges have no easy solutions.
Is MPW Stock A Buy, Sell, Or Hold?
MPW price chart (weekly, medium-term, adjusted for dividends) (TradingView)
MPW’s price action suggests the mean-reversion has likely reached a top, even as this week’s market recovery also lifted MPW closer to the $5.3 level. However, investors shouldn’t rejoice so quickly, as that level formed a top two weeks ago, as bullish MPW investors received a welcomed jolt from the positive catalysts. In other words, MPW’s “toppish” price action aligns with the increase in the short-interest ratio presented earlier.
Consequently, I assessed that the risk/reward ratio is increasingly skewed toward the bearish camp as buying momentum could dissipate. Given the surge, the market will likely assess MPW management’s medium-term plans to address its normalized FFO generation.
However, MPW’s significant undervaluation discourages me from downgrading MPW to a Sell, as the potential for upside risks could result in investors selling at a low. Staying out of the action and watching from the sidelines remains a sensible move for now.
Rating: Maintain Hold.
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