With the total return of its shares collapsing by 30% in the last 12 months, Medical Properties Trust (MPW -1.10%) hasn't made its investors richer lately. The business, a hospital and clinic landlord, faces a barrage of headwinds, and the bear market certainly didn't help much.
Still, it's sometimes possible to secure outsize gains by investing in a company precisely when everything seems terrible. With that in mind, let's consider this stock's bull and bear cases so that you'll have a balanced perspective when it comes time to decide whether to buy it for yourself.
The bull thesis is lukewarm at best
To believe that Medical Properties Trust's stock or dividend will rise soon, you need to believe two things first, that it will be able to profitably operate its portfolio of hospital real estate, which is worth around $19.7 billion in assets. And second, that it will be able to grow that portfolio and generate more rent given its debt load. It'd also be a bonus if the company's valuation is low.
There is some evidence supporting those assertions. Over the last 10 years, its quarterly revenue rose by 513%, rising above $350 million, and its quarterly net income grew by 19.9%, reaching $32.7 million. In that period, its dividend also rose by 45%, so shareholders got a slice of the action, albeit a relatively small amount. To accomplish that, it successfully executed its core model as a hospital real estate investment trust (REIT), buying clinical floorspace and renting it out to tenants that overwhelmingly pay up each month rather than defaulting. Hospital companies won't find a new solution for having physical locations anytime soon, which also suggests that MPT won't struggle with vacancies.
Currently, it has more than $302 million in cash, and for the first half of 2023, it expects to make a total of $150 million in acquisitions. Given that it has been consistently profitable since 2013, at least until Q4 of 2022, there is a good chance that it will be able to continue collecting more rent than it needs to cover its costs, even when considering the ongoing economic disruptions.
And regarding its valuation, its price-to-book (P/B) multiple is only 0.6, which is relatively low. So it's hard to argue that it's overpriced, and some investors might even think of it as being valued at a bargain.
The bears are probably correct
The problem with the bull narrative is that Medical Properties' past performance doesn't take into account the impact of a few difficult financial realities moving forward.
Of its $10.4 billion in total debt, it has numerous loans maturing in the next few years that will need to be repaid in a way that will require some compromise. In 2024 it'll be on the hook for $931 million, then needs to pay $1.4 billion in 2025 and nearly $2.7 billion in 2026. Its free cash flow (FCF) in 2022 was $739 million when it paid off $870 million in long-term debt. Even if it can generate a lot more in rent in the short term somehow, and it can't, it will need to take drastic measures to avoid defaulting on its loans.
In that vein, Wall Street analysts expect that its revenue will decline by 6.7% this year and remain flat in 2024. So why do they think the company's top line will shrink despite its new acquisitions? The answer is that MPT will likely sell off some of its existing properties to pay off its debts, meaning it'll collect less rent. And in Q1, it did just that, selling off some of its holdings in Australia for AUD$1.2 billion with the express intent to use the proceeds to pay off some of its Australian-dollar-denominated debt. It wasn't the first time in recent history that the company liquidated real estate for that purpose, nor will it be the last.
When paired with lackluster dividend growth and a rising interest rate environment that makes it very unlikely that the business will be able to refinance its debt to lower its burden, this stock is tumbling. Of course, if you only looked at its past performance, you'd get a different story -- and maybe take on a very risky and likely to-lose-value investment as a result.
