Medical Properties Trust – Is it Terminal?

Update January 2 – When we first initiated coverage on Medical Property on November 12, 2023, we suspected the stock was ripe for a rebound. Our thesis was relatively straightforward: 1) the stock was under pressure from short-sellers, 2) it had traded down 50% (in November 2022), and 3) hospitals would continue to pay rent through economic volatility, supporting the underlying value of the real estate. Despite recognizing several issues (see below), we stated that we didn’t think the stock was ‘sick.’

Our diagnosis, however, was incorrect. The stock collapsed from a $12 price range in November 2022 to $5.06 as of January 2, 2023. What happened?

Interest rates increased significantly, forcing the company to put acquisitions on hold due to the sudden spike in rates. Additionally, several customers halted payments, and transactions with certain customers (e.g., Prospect) had to be restructured, resulting in significant demands on cash. Total revenues fell from $1.162 million for the 9 months ending September 30, 2022, to $994,182 for the same period in 2023. Net income for the 9 months ending September 30, 2023, plummeted to $107.5 million compared to $1.0 billion for the same period last year. Also, normalized funds from operations dropped from $1.38 to $1.22 for the comparable 9-month period.

Why sell the stock?

The answer is relatively straightforward. Unfortunately, the company’s business model and structure are currently very complex. The restructuring of agreements for large properties introduces many unknowns and difficult-to-predict outcomes. If you’re uncomfortable with the risk and the wait for a rebound, you might seriously consider selling

 Last Update April 28, 2023 – On April 27, 2023, MPW held a conference call to report on its Q1 2023 performance, which ended on December 31, 2022. Most were expecting a disaster and a bunch of bad news. For us, we would use the French phrase “comme ci comme ca” which in English means “So-So.” 

Despite the poor stock performance, there were some positive trends. The company indicated that its U.S. hospital operator admissions has been steadily increasing over the past few months, with surgical volumes up year-over-year for the trailing 12 months Q4 2022 versus the trailing 12 months Q3 2022. The number of emergency room visits has also continued to increase since the beginning of 2022, with December seeing the highest ER volumes the portfolio had seen all year. Although we don’t like to see people get sick, it is good for business. 

There remain vocal shorts on the stock, which is clearly putting pressure on management, and we believe has scared off new and existing investors. These shorts have been questioning the business model, but from our perspective, the most important thing is liquidity.

MPW has also announced that the sale of its Australian hospital real estate investments would result in sufficient liquidity to repay the term loan used to fund the acquisition in 2019 providing significant relief to those concerned about the rapid rise in interest rates and related pressure on refinancing. The fact that it was able to sell its investment so soon, is evidence of the quality of its hospital real estate portfolio. Although we don’t like to see the company, in effect, shrinking, it is more important to deal with investor perceptions.

Although the company announced some small acquisitions, they have now put larger acquisitions on hold due to the volatility of interest rates. With liquidity at approximately $1 billion at quarter-end, plus more than $900 million from announced sales, MPW is expected to be able to satisfy all of its roughly $1.4 billion in 2023 and 2024 debt maturities. This will give it breathing room as market conditions change and/or stabilize. It also announced its Q1 dividend.

There are still some issues related to Prospect, a troubled customer of MPW. Q1 revenue did not include rent or interest income from this customer which the company recognizes on a cash-received basis. Additionally, MPW agreed to invest $50 million into Prospect via a convertible loan. Although the shorts are viewing this as a “round-trip” transaction, the investment amount was actually more short-term and a reaction to the difficulties it had to obtain banking financing. It is also not really substantively different than a landlord investing in capital improvements up-front for a tenant. More importantly, MPW indicated that Prospect had received a binding commitment from several third parties for additional financing. Once this commitment closes, we should expect to see some pressure of the stock. 

The past 3-4 month stock price decline, we believe was largely due to vocal shorts who were taking advantage of market disruptions related to the banking industry in the fourth quarter, which impacted global credit and blew up a prior financing deal that Prospect had. We believe the financing market will ultimately stabilize and are confident in MPWs long-term sustainability. With respect to the vocal shorts, MPW filed a lawsuit against some of them, showing confidence in its numbers and a willingness to stand behind its representations to the market.

Although there have been some bumps in the road, sophisticated investors should get comfortable with MPW based on the long-term sustainability of its model, including receipt of annually inflation-adjusted rents from local hospital operations. As inflation occurs, the benefits will flow through the bottom-line and as dividends to shareholders.

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