Medical Properties Belief Inventory: Useless Cash At Finest, Higher To Keep away from (NYSE:MPW)

Excessive-conviction Medical Properties Belief, Inc. (NYSE:MPW) buyers have didn’t carry MPW from its doldrums over the previous two months since I downgraded the inventory to a Maintain. The warning is justified, as I reckoned the challenges that hampered MPW’s bullish thesis was greater than only a hawkish Fed. I indicated that the market was probably anticipating “further financial pressure on MPW’s AFFO per share,” at the same time as MPW fell to the “A+” valuation zone.

Nevertheless, its “F” momentum grade suggests dip consumers weren’t eager to select up the items, however its seemingly “attractive” valuation. Consequently, my warning has panned out, as MPW underperformed the S&P 500 (SPX) (SPY) since my pre-earnings replace. As well as, a big occasion occurred that ought to have bolstered dip consumers to return aggressively, however they failed to take action.

Observant buyers ought to recall that the Fed telegraphed three fee hikes in 2024, though the market appears to have deliberate for extra. Consequently, curiosity rate-sensitive shares within the utilities (XLU) and actual property (XLRE) sectors have reacted positively. Consequently, MPW’s languid response to the Fed’s extra dovish posture probably dissatisfied its high-conviction holders. With that in thoughts, even MPW’s latest dip consumers should ask themselves whether or not MPW’s “A+” valuation grade suggests a price lure, implying it could possibly be lifeless cash at greatest.

MPW’s third-quarter or FQ3 earnings release in late October 2023 did not guarantee me that issues may enhance considerably for the specialised healthcare REIT in 2024. The corporate had already downgraded its quarterly dividend payout to $0.15 per share from $0.29 per share to enhance its funds whereas going through important challenges with Prospect Medical Holdings and Steward Well being Care. The market’s issues over Steward are justified, because it accounted for practically 20% of MPW’s asset and rental income base as of Q3.

I concur that the market has probably mirrored these challenges, because it’s forward-looking. Nevertheless, the tepid response from the market because it fell additional in mid-November 2023 means that draw back volatility may proceed to afflict MPW. With that in thoughts, whereas a Promote score appears too pessimistic as MPW struggles at its long-term backside, a Purchase score remains to be a distance away as buyers assess the corporate’s strategic maneuvers to scale back stability sheet dangers.

There have been issues that administration may have been overly aggressive in pursuing unsustainable progress within the pre-pandemic low-interest charges period. An analyst on MPW’s Q3 earnings conference enquired whether or not there could possibly be “potential changes in incentives for senior management.” The analyst was involved as MPW shifted towards lowering dangers relatively than pursuing progress. Accordingly, administration concurred that its board “made meaningful changes to incentives, moving away from aggressive accretive growth.” Consequently, the crucial query stays on the numerous execution dangers that would hamper MPW’s return to progress. Administration highlighted clearly that its near-term objective is to “return to affordable capital and potentially restart growth when appropriate.”

Nevertheless, MPW is between a rock and a tough place. With its monetary leverage ratio above 50%, administration has little room to wriggle to restart with out fixing its stability sheet dangers. Administration highlighted its intention to “target approximately $2 billion in liquidity transactions over the next three to four quarters.” Nevertheless, the construction of how it will monetize its property stays unsure. MPW probably did not need to decide to promoting its long-term property at comparatively unattractive cap charges, worsened by its battered valuation. As such, choices for monetizing its property by means of secured lending are anticipated to stay on the desk. In different phrases, administration may think about growing its debt load whereas attempting to borrow towards its property to navigate these challenges. Consequently, I imagine the market probably is not satisfied with its commentary that MPW is enterprise the “evaluation of potential asset sales, including exploring joint venture structures, limited secured financing of assets, and potential amendment and extension of certain bank loans.”

Consequently, I imagine buyers are anticipated to stay on the sidelines, given the dearth of readability. I count on buyers to demand a transparent roadmap of the corporate’s choices, permitting them to evaluate the potential impression on the REIT’s debt load, potential AFFO dilution, and the prices and timeline of its monetization technique. Nevertheless, with MPW going through debt maturities of practically 18% (about $1.81B) of its total debt profile in 2024-25, dip consumers aren’t anticipated to be aggressive or maintain on to their positions to permit a long-term mean-reversion thesis to play out.

We may see why consumers have remained in a state of flux, as administration hasn’t supplied sufficient readability for dip consumers to carry on to their positions. With MPW nonetheless in a medium-term downtrend, momentum buyers aren’t anticipated to return. In search of Alpha’s “F’ momentum grade corroborates my point, suggesting we need more dip buyers to hold on long enough to absorb intense selling pressure before MPW can turn the tide decisively.

Selling pressure was observed in early December as MPW went ex-dividend on December 6. Dip-buyers initially returned to lift MPW above the $5.6 resistance zone as the market reacted to the Fed’s dovish pause the following week (annotated “Dec highs”). However, MPW’s price action suggests selling pressure set in quickly, as it lost most of its weekly gains as the week closed.

Therefore, I assessed that a Sell thesis on MPW is likely overly bearish at the current levels. However, I find it inappropriate to assign a Buy thesis to MPW, given its fundamental challenges and unconvincing price action from tentative dip buyers not willing to hold the bag long enough.

With that in mind, I urge investors to remain on the sidelines and abstain from adding MPW to their portfolios. There are plenty of turnaround stocks to consider with less intense fundamental headwinds and more constructive price action with a dovish Fed.

Rating: Maintain Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

We Need To Hear From You

Have constructive commentary to enhance our thesis? Noticed a crucial hole in our view? Noticed one thing vital that we did not? Agree or disagree? Remark beneath with the purpose of serving to everybody in the neighborhood to be taught higher!