Is Medical Properties Trust Stock a No-Brainer Buy After Its Big Sell-Off?

Things appeared to be a turning around this year for Medical Properties Trust (MPW 4.61%) after a dismal 2022. Its shares were up more than 20% year to date by late January. Only a few days ago, Medical Properties Trust stock still had a double-digit percentage gain in 2023. 

But all of the previous momentum that Medical Properties Trust had evaporated last week. Shares of the real estate investment trust (REIT) sank after its 2022 fourth-quarter update on Feb. 23. Investors were especially concerned about the company's outlook for full-year 2023. 

Such declines sometimes present great opportunities for investors, though. Is Medical Properties Trust a no-brainer stock to buy after its big sell-off?

Medical Properties Trust's bad news

To answer that question, we first need to look at Medical Properties Trust's bad news in its Q4 update. And, unfortunately, there was plenty of bad news.

First, the company posted a net loss of $140 million, or $0.24 per diluted share, in Q4. This loss stemmed in large part from an impairment of $171 million related to four Pennsylvania properties leased to Prospect Medical Holdings. In addition, Medical Properties Trust wrote off around $112 million in rent to Prospect.

Second, the healthcare REIT provided weak guidance for full-year 2023. Medical Properties Trust expects earnings will be between $0.83 and $0.98 per share. By comparison, the company posted earnings of $1.50 per share for full-year 2022. It also projects normalized funds from operations (NFFO) of between $1.50 to $1.65 per share. NFFO for last year was $1.82 per share.

Prospect's financial difficulties are the main source of Medical Properties Trust's lower outlook. The leases for the 14 properties leased to Prospect make up 7.5% of the REIT's total assets. Those properties generated 11.5% of Medical Properties Trust's total Q4 revenue.

Don't look for many, if any, acquisitions in the near term to fuel growth. Medical Properties Trust CEO Ed Aldag said in the Q4 conference call, "Until we get a new norm for where interest rates are around the world, there's not going to be a whole lot of acquisitions from us."

Some good news, too

It's also important to examine Medical Properties Trust's good news. One bright spot is that there's increasing optimism, in general, for the hospital operators who lease properties from the REIT. Aldag stated in the Q4 update that the outlook for improving margins across the hospital industry looks brighter this year.

The picture for Prospect isn't entirely bleak, either. Prospect is making headway with its plans to divest its operations in Connecticut and Rhode Island with deals expected to close later this year. The hospital operator's managed care business has been valued at close to $1 billion and should be attractive to potential acquirers. This progress has led Medical Properties Trust to fully exit all of its investments in Prospect outside of California and reinvest the proceeds.

As a result, Medical Properties Trust is upbeat about recovering most and possibly all of its original investments in Prospect's properties outside of California as well as any interim rent deferrals. The REIT's CFO, Steven Hamner, said in the Q4 call that Prospect's potential sale of its managed care business should be a lot more than enough to offset Medical Properties Trust's $171 million impairment taken in the fourth quarter.

As previously mentioned, the healthcare REIT doesn't plan on making any acquisitions until interest rates stabilize. However, Medical Properties Trust still has a strong pipeline of potential deals in the U.S., Europe, and South America as well as in new markets.

Finally, even going with the worst-case scenario for 2023, Medical Properties Trust's dividend appears to be safe. Hamner said that the low end of the company's full-year outlook translates to close to $1.29 per share in adjusted funds from operations. That's well above the current annualized dividend payout of $1.16 per share.

A "yes-brainer"

With all of this in mind, I don't think that Medical Properties Trust is a no-brainer stock to buy after its sell-off. However, I do think that it's a "yes-brainer" stock to buy right now -- for some.

The uncertainty related to Prospect and interest rates should cause investors to seriously think about whether or not Medical Properties Trust stock aligns well with their individual risk-tolerance levels. We're probably not going to see a quick resolution on either of these fronts. The Federal Reserve seems likely to continue raising interest rates this year. Prospect's divestitures could take 12 to 18 months.

On the other hand, Medical Properties Trust's future should be brighter than its recent past. Conditions for its hospital operator tenants are improving. Even with its disappointing guidance, the healthcare REIT should remain quite profitable. And we can't overlook the fact that the dividend yield of 11% is alluring. My view is that Medical Properties Trust stock is one for income investors who aren't highly risk-averse to consider buying.