It's an unhappy new year for Medical Properties Trust (MPW -1.10%) shareholders. The stock plunged 56% in 2023. Barely a week into 2024, it's down another 28%.
Last Thursday, Medical Properties Trust (MPT) provided a bleak update on its largest tenant, Steward Health Care, and many investors headed for the hills. For those who didn't, is it time to throw in the towel on this 17%-yielding dividend stock?
The light at the end of the tunnel
In November 2023, I wrote that I thought "there's a light at the end of the tunnel for MPT." The healthcare real estate investment trust (REIT) had met analysts' expectations with its third-quarter results.
One of its beleaguered tenants, Prospect, had resumed paying rent for its California properties and was on track to return to paying full rent in March. MPT CFO Steven Hamner sounded generally optimistic about Steward, despite noting that the hospital operator continued to face "near-term cash flow headwinds."
But I'm beginning to think that the late poet Robert Lowell might have been right when he stated, "The light at the end of the tunnel is just the light of an oncoming train." It now appears that the situation for Steward is far worse than I thought.
MPT plans to write off rent receivables of around $225 million in the fourth quarter of 2023 because of Steward's difficulties. It's funding a $60 million bridge loan to the troubled hospital operator while it tries to move forward with a plan to shore up its finances.
However, the REIT stated in its press release last week, "There can be no assurance that Steward will successfully execute its plans or that the Company [MPT] will recover all of its deferred rent and loans outstanding to Steward." MPT has engaged a financial advisor and a law firm to help it attempt to recover the rent and remaining loan payments that Steward owes.
A few positives
As dismal as the picture looks right now, there are still a few positives for MPT. First, the steps Steward is taking appear to be good ones. It plans to try to sell or find new tenants for some of its hospitals and divest non-core operations. It has "intensified measures" to reduce its collections backlog. The company also plans to find a capital partner for its managed care business.
If these efforts are successful -- and they very well could be -- MPT should be able to recover much of its unpaid rent. Over time, the REIT could even reduce its exposure to Steward, which would be great news for shareholders.
MPT's dividend appears to be relatively safe, too. The company's press release last week noted that its Q3 adjusted funds from operations (AFFO) would have been reduced by $0.11 per diluted share if all contributions from Steward were removed. This hypothetical worst-case scenario would have given the REIT an AFFO of $0.19 per share, well above its quarterly dividend payout of $0.15 per share.
The stock's valuation also looks cheap. MPT's shares currently trade at only 2.9x AFFO (annualizing its Q3 result). Even taking Steward out completely, that multiple would increase to just 4.6x. There's a decent argument to be made that all of the bad news for the REIT is priced into its stock.
Throw in the towel?
Is it time to throw in the towel on MPT? Maybe, but not necessarily.
If you're an income investor only interested in the REIT's juicy dividends, I suspect you'll be OK holding onto the stock. There's a possibility that MPT will rebound at least somewhat. Interest-rate cuts this year could provide catalysts; so could any positive news from Steward.
However, investors who aren't as focused on income can, without question, find stocks to buy with more appealing risk-reward propositions in light of Steward's issues. Your money could make better returns invested elsewhere.
