Medical Properties Trust (MPW -0.97%) (MPT) is striking back aginst its critics. The company announced last week that it filed a lawsuit against short-seller Viceroy Research. MPT claims that Vicery made accusations that "are malicious fiction, concocted to manipulate the market and to drive profits from short-selling."
The real estate investment trust (REIT) also issued a letter to shareholders on March 30, 2023. MPT's main purpose with the letter was to address Viceroy's allegations. However, I think that management also gave investors three great reasons to buy the stock.
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1. A great track record
Medical Properties Trust's share price has plunged more than 60% over the last 12 months. While this decline isn't solely due to short-sellers' actions, the REIT's lawsuit referenced analysts who believe the short attack "contributed to the sell-off." Despite the stock's performance, though, MPT emphasized in its letter to shareholders that its business has had a great track record.
In particular, CEO Ed Aldag pointed to his company's underwriting process as a key factor behind its business success. He stated that MPT evaluates multiple criteria before acquiring a property, including its location and competition. Aldag said that the REIT's goal is to buy properties that are important to meeting the healthcare needs of its community.
As a result, he argued that MPT thinks that it can usually find another hospital operator to take over a facility even when a tenant faces financial difficulties. Aldag provided an example of how its underwriting process has been tested and proven solid in the past.
He also stated that MPT "carefully structures its master leases to mitigate the risk of tenant bankruptcy." Aldag cited Pipeline Health as an example of this. Pipeline recently emerged from reorganization with a Chapter 11 bankruptcy. MPT was able to receive 100% of rent due during the bankruptcy period and had no reduction to future rents.
2. A well-diversified portfolio
MPT's letter to shareholders also highlighted its well-diversified portfolio. Aldag wrote that the company's largest investment in a single facility makes up less than 3% of its total investment portfolio.
He also noted that MPT continues to make progress toward further diversification. As a case in point, Steward made up nearly 40% of the REIT's total assets four years ago. Once the pending sale of Steward's Utah facilities closes, that number will drop to around 19%.
Aldag also mentioned that MPT is diversifying beyond general acute care facilities. Behavioral health facilities now generate 14% of the company's total revenue. In the fourth quarter of 2021, behavioral health facilities represented only 11% of revenue.
3. Continued strong business performance
MPT also emphasized that its portfolio "continues to deliver strong performance." Last year, total revenue topped $1.5 billion. Normalized funds from operations and adjusted funds from operations rose 4% year over year.
The healthcare REIT's EBITDARM (earnings before interest, taxes, depreciation, amortization, rent, and
management fees) rent coverage remains at a "healthy" level of 2.1x. He said this multiple "compares favorably to the industry average."
Aldag closed out the letter to MPT shareholders by stating that the company has "tremendous opportunities ahead." He pointed to the REIT's "highly liquid balance sheet" that it can use to service what he called "a well-laddered debt maturity schedule." He also cited the pending sale of 11 Australian hospitals as evidence that MPT is able to "attract new capital and profitable sales."
Putting it all into context
You might be wondering how these three arguments are reasons to buy MPT stock. It's important to understand the context.
As mentioned earlier, MPT's share price has fallen like a brick. One of the REIT's top tenants, Prospect Medical, hasn't paid its full rent so far this year. High interest rates could make it more expensive for MPT to refinance debt and fund future expansion plans.
But there's more context than just that. The stock now trades for only 4.8 times forward earnings. The short percentage of float stood at 28.88% as of March 15, 2023. MPT's dividend yield tops 14%. Even at the low end of the company's 2023 guidance, the dividend appears to be sustainable at current levels.
MPT's letter to shareholders should serve as a reminder about the strength of its underlying business. Sure, the company still faces some risks. But Aldag made a solid case that the sky isn't falling. With its cheap valuation, ultra-high dividend yield, and possibility for a short squeeze, MPT just gave investors some pretty good reasons to consider buying the stock.
