Is Medical Properties Stock A Buying Opportunity As It Nears $10? (NYSE:MPW)

Elevator Pitch

I raise my investment rating for Medical Properties Trust (NYSE:MPW) from a Hold previously to a Buy now. In my prior article for Medical Properties Trust written on October 4, 2022, I compared MPW’s valuations with its peers and historical trading averages.

With this latest write-up, I come to the conclusion that a good investment opportunity has emerged for Medical Properties Trust in view of its share price underperformance. MPW’s last traded share price of $11.39 as of December 16, 2022 is nearing the REIT’s one-year stock price low of around $10 recorded in late-October. Medical Properties Trust’s current undemanding valuations and the presence of potential re-rating catalysts make this stock a Buy in my opinion.

Why Did Medical Properties’ Stock Price Drop?

MPW’s share price has fallen by -7%, -21%, and -49% for the past one-month, six-month, and one-year time periods, respectively. If adjusted for dividends received, Medical Properties Trust’s total return for the last one year would have been a slightly better -44%, but this is still far worse than the Dow Jones Equity REIT Total Return Index’s -21% correction in the same time frame.

In other words, although REITs in general did poorly in a rising rate environment for 2022, MPW’s price performance in the current year was inferior to that of the overall REIT sector.

On December 16, 2022, Morgan Stanley (MS) issued a research report (not publicly available) studying the performance of 163 REITs titled “A Rocky Start As Expectations Reset.” In MS’ report, it was highlighted that the share prices of REITs boasting relatively higher dividend yields (higher than 5%), dividend payout ratios (exceeding 80%) and financial leverage metrics (high single-digit debt-to-EBITDA multiple and above) dropped to a larger extent than their peers this year.

Medical Properties Trust’s key metrics as outlined in the subsequent section help to provide an explanation for Medical Properties Trust’s underperformance in 2022.

MPW Stock Key Metrics

As mentioned in the preceding section, the market had penalized REITs whose leverage ratios and dividends were above average, as evidenced by the inferior stock price performance for the group of REITs boasting such characteristics.

Based on S&P Capital IQ data, Medical Properties Trust offered a consensus forward next twelve months’ dividend yield of 10.3% as of December 16, 2022, and it had traded at a forward dividend yield in excess of 5% for most of 2022. The sell-side’s consensus financial figures also pointed to estimated dividend payout ratios of 83% and 84% for MPW in fiscal 2022 and fiscal 2023, respectively. The dividend payout ratio was calculated as dividends per share divided by AFFO or Adjusted Funds From Operations.

The market most likely held the view that MPW’s high dividend yield and generous payout ratios were unsustainable. As such, certain investors might have switched from MPW to other REITs which offered reasonable dividend yields based on more sustainable payout ratios.

Separately, Medical Properties Trust’s gross debt-to-EBITDA and net debt-to-EBITDA ratios were 7.3 times and 7.0 times, respectively on a trailing twelve months’ basis as per S&P Capital IQ data. MPW is in the process of deleveraging; its gross debt-to-EBITDA and net debt-to-EBITDA ratios were even higher at 8.1 times and 7.8 times, respectively as of end-2021.

MPW indicated at its most recent Q3 2022 results briefing on October 27, 2022 that it will “continue our reduction in (financial) leverage”, and this suggests that management also holds the opinion that the REIT’s optimal financial leverage metric should be lower. It won’t be a surprise that investors prefer REITs with lower financial leverage ratios in the current environment of macroeconomic uncertainty and rising rates.

In the next section of the article, I look at the prospects of a potential rebound in Medical Properties Trust’s stock price.

Is The Share Price Likely To Rebound?

Medical Properties Trust’s shares last closed at $11.39 at the end of the December 16, 2022 trading day, and this represents a -13% pullback as compared to its one-month stock price peak of $13.12 as of November 30, 2022. More importantly, MPW’s current share price isn’t that far away from its 52-week trough of $9.90 registered during intra-day trading on October 21, 2022.

In my view, MPW’s shares are poised for a rebound with two potential re-rating catalysts on the horizon.

Medical Properties Trust’s first catalyst is accelerated deleveraging.

Seeking Alpha News reported on October 10, 2022 that MPW has appointed an investment bank to seek acquirors for the “11 Australian hospitals operated by Healthscope” in its property portfolio.

At its most recent quarterly results call in late-October, Medical Properties Trust made reference to the “pretty attractive cap rates on well underwritten hospital real estate” when answering a question on the potential sale of Healthscope’s assets. Therefore, MPW is most probably going to be able to sell its Australian assets at a reasonably good price. As a reference, Medical Properties Trust purchased Healthscope’s Australian properties for around $840 million three years ago, and it is likely that MPW can realize a decent gain on sale and monetize the same assets for more than a billion dollars.

Assuming that MPW does complete the sale of its properties in Australia, this will provide the REIT with more excess cash flow and capital to engage in more aggressive deleveraging.

The second catalyst for MPW is higher-than-expected bottom line and dividends for the REIT in 2023.

The market’s consensus fiscal 2023 and FY 2024 FFO (Funds From Operations) estimates for Medical Properties Trust have been lowered by -6% and -9%, respectively in the past six months. Specifically, the sell-side expects MPW’s EBITDA and FFO to decrease by -5% and -2% to $1,377 million and $1,063 million, respectively next year as per S&P Capital IQ data. In the preceding section, I also highlighted that unsustainable dividends could be one of the main reasons for MPW’s weak stock price performance. In other words, investors and analysts have low expectations of Medical Properties’ 2023 financial performance.

Medical Properties Trust is well-positioned to deliver positive surprises with its 2023 results. Particularly, it is noteworthy that MPW highlighted at its Q3 2022 investor briefing that the EBITDA for its key tenant Steward Health Care System could potentially rise from “$50 million to $80 million (for this year) to the $350 million next year” thanks to expense optimization initiatives achieving the desired results.

However, the forward-looking consensus numbers for MPW (as outlined above) imply a decline in its FFO and EBITDA for 2023 and suggests that Wall Street remains skeptical about the potential improvement in Steward’s performance for the following year.

In conclusion, there is a good chance that Medical Properties Trust’s actual deleveraging progress and financial results for 2023 will exceed the market’s expectations, and drive a rebound in MPW’s share price.

What Are The Price Targets?

The sell-side analysts’ consensus mean target price of $15.92 implies that MPW’s stock price has the potential to increase by as much as +40% in the next year (the typical time frame for analysts’ recommendations).

In contrast, only eight of the 14 analysts covering Medical Properties Trust’s shares have either a Strong Buy or Buy rating awarded to its stock, with the other six analysts viewing MPW’s shares as a Hold.

In my opinion, although the sell-side remains cautious about MPW’s near-term financial outlook as seen with the analyst ratings, the analysts clearly recognize the undervaluation of Medical Properties Trust’s shares as evidenced by MPW’s average price target.

Is MPW A Buying Opportunity?

Medical Properties Trust is a buying opportunity, because it is realistic for MPW’s share price to rise to the analysts’ average target price.

MPW currently trades at a consensus forward next twelve months’ Price-to-AFFO or P/AFFO valuation multiple of 8.2 times based on its last traded stock price of $11.39 as of December 16, 2022. If MPW’s share price goes up by +40% to $15.92, this will still only translate into a modest forward P/AFFO ratio of 11.5 times. Most healthcare REITs are currently valued by the market at forward P/AFFO multiples in the mid-teens or even higher based on S&P Capital IQ data, so a target P/AFFO multiple of 11.5 times isn’t demanding.

As such, it is reasonable to expect MPW’s share price to rise and hit the analysts’ consensus target price in time to come.

Bottom Line

Medical Properties Trust deserves a Buy rating. With the recent correction in MPW’s share price in the past few weeks after hitting a one-month high at the end of November, MPW’s valuations have become attractive. Moreover, there are catalysts in place which are supportive of a rebound in its stock price.