Medical Properties Trust (MPW +2.17%) is in a bit of a pickle. On May 6, its largest tenant, Steward Health Care, filed for bankruptcy. Then, on May 9, MPT reported its earnings for the first quarter. The company's stock is nearly 48% off its recent highs within the last 12 months.
But could the worst be over, and could the stock thus be a buy now that there are unlikely to be any major surprises lurking? Let's investigate the answers to both of those questions by first examining how Steward's bankruptcy will affect it.
NYSE: MPW
Key Data Points
How important was Steward, really?
MPT brought in $336.6 million in rental revenue during Q4, leasing hospital floor space to healthcare companies like Steward. In that period, Steward accounted for 20.3% of the total, or roughly $68.3 million. Under the conditions of bankruptcy, it is very improbable that Steward will be able to pay its $9 billion in total liabilities, $6.6 billion of which are long-term rent obligations.
At first glance, the prospects appear to be gloomy. There are not many businesses that can sustain losing a fifth of their revenue overnight without experiencing a severe drop in their share price. The real estate investment trust (REIT) actually has it worse than others might, as it was banking on the income from the leases to pay out through 2041. Recall that REITs usually finance acquisitions of real estate using debt, which they then repay over long periods; it'll be much harder to repay those debts now, which we'll get into a bit later.
So far, as part of bankruptcy proceedings, the court has allowed Steward to borrow $75 million from Medical Properties Trust, with the possibility of borrowing another $225 million later. The loan will be used to cover the wind-down costs and the liquidation of its assets, all of which will now be sold or returned to creditors, ideally over the course of this summer. Before that sum, the company had invested $2.3 billion into the properties leased to Steward.
As of its Q1 earnings update in May, MPT has $224.3 million in cash and equivalents. It will not be easy to lend out much of anything more to Steward. Also, it may be difficult to find buyers who will be willing to pay enough to cover the outstanding liabilities, given the reasons for Steward's bankruptcy as proposed by MPT's management. Those reasons include everything from a falling volume of patient visits, labor market challenges, operational issues, and difficulty in securing timely reimbursements from insurers.
In other words, when considering the REIT's commitment to a significant cash outlay for the bankruptcy proceedings, it is tough to believe that by the time the liquidation ends, MPT will be in a more comfortable position, even under the best of scenarios. Furthermore, the loss of both cash and rental revenue will pile on another complication to the company's already-abysmal financial situation.
Right now, its debt load totals $10.1 billion. Paying that off was questionable before the bankruptcy, and it may now well be impossible.
Run away immediately
Could it be the case that MPT will be able to rally once the bankruptcy is over, thereby making contrarian geniuses out of those who are willing to buy its stock right now?
Probably not.
MPT recently slashed its dividend due to anticipated difficulty in paying it, and with even less cash flow, another cut is now firmly on the table. Its financial flexibility is now even more constrained, as it has less income and cash on hand to pay for investments in new properties or improvements to old ones. It was already selling off some of its properties last year to generate cash, and more property sales are practically guaranteed at this point, which will drive its revenue and earnings even lower.
Separately, the management team's response to Steward's bankruptcy is not exactly one that investors should be applauding. In its statement issued to "correct the record" in the aftermath of the bankruptcy, company leaders said that "rent is virtually never the primary cause of financial stress for hospitals," perhaps trying to avoid blame. Yet such overtures are, at best, irrelevant to investors, and do little to answer their questions about how MPT will keep the lights on over the long term.
The bottom line: Don't buy this stock. Sell it if you have it.
