Market Commentary: Time To Buy This 9.12% Yield Stock?
It’s rare to find a stock offering a 9%+ yield that doesn’t have some murkiness under the hood, but is Medical Properties Trust (NYSE: MPW) that diamond in the rough?
We investigate whether this REIT that specializes in leasing healthcare facilities, a segment that has been traditionally regarded as recession-resistant, is worthy of a portfolio spot now.
Key Points
- Medical Properties Trust saw its stock plummet by 44% this year and its dividend cut recently, but there are reasons to be optimistic.
- Despite the setbacks, the company is making strides to secure its financial health. It has a conservative dividend payout ratio of 58% of projected near-term FFO, and it’s taking steps to reduce its debt through asset sales and joint ventures.
- MPW stock appears undervalued, with an estimated 25% upside to $8 per share. Nevertheless, the focus on debt reduction limits the capital available for growth, making the stock more of an income play than one for share price appreciation.
Medical Properties Took a Tumble In 2023
The stock has dropped by a staggering 44% this year, fueled by a mix of tenant financial troubles and market conditions.
A significant number of the REIT’s tenants, primarily hospital operators, are on shaky financial ground. For instance, Pipeline Health filed for Chapter 11 bankruptcy. Incidents such as these threaten cash flows for Medical Properties Trust, which in turn poses risks to the sustainability of the dividend.
Another concern stems from interest rate hikes. Medical Properties Trust carries total debt of over $10.3 billion. While the maturity of this debt stretches over multiple years, rising interest rates have caused investors to second guess the company’s refinancing capabilities.
Already management has slashed the dividend by nearly half, but is more to come?
Silver Linings
Despite the gloom, there are reasons to be positive, including that further dividend cuts seem unlikely. The new, lower dividend represents a payout of around 58% of projected near-term adjusted Funds from Operations (FFO). That’s a conservative payout ratio by any measure.
The REIT is also actively exploring avenues to reduce its debt burden, including asset sales. It has already announced a sale of Connecticut hospitals to Yale New Haven Health for over $350 million and is disposing of at least one hospital in its international portfolio for a similar amount.
Another reason to be optimistic is that the healthcare industry is showing signs of recuperation. Medical Properties Trust’s tenants are subject to rate increases of up to 6% which should boost revenues and, crucially, margins.
In addition, the long-term secular trends of aging populations in the U.S. and Europe should lead to an uptick in demand for hospital services, favoring Medical Properties Trust.
Valuation & Risk Profile
On a valuation basis, Medical Properties Trust definitely appears undervalued. We calculate as much as 25% upside to $8 per share while analysts think another $1 of opportunity exists to $9 per share.
But make no mistake about it, Medical Properties Trust remains a play for the brave-hearted. The company continues to face several key risks, and it needs to focus significantly on debt reduction, which means less capital available for growth.
While it’s not as risky as it once was—thanks to a conservative dividend cut and asset sales—it still has the potential to disappoint, and is largely a play on income versus share price growth.
