The maxim “buy low, sell high” is a staple of investing advice, but knowing when a beaten-down stock is truly undervalued versus continuing to fall can be challenging. Healthcare real estate investment trust (REIT) Medical Properties Trust (MPT) has seen its share price plunge over 55% year-to-date in 2023.
While the company recently reported decent third quarter earnings, uncertainty still clouds the stock. Is MPT’s massive dividend yield a reason to buy shares hand over fist, or is the company’s stock still akin to the proverbial “falling knife”?
Encouraging Signs Emerge In MPT’s Q3 Earnings
In the press release announcing MPT’s third quarter 2022 results, CEO Ed Aldag stated “Our business model remains strong and stable.” Strength and stability are exactly what shareholders want to see after the stock’s steep decline this year. MPT’s Q3 results provide some cautious reasons for optimism.
The healthcare REIT reported Q3 net income of $0.19 per share, meeting analyst expectations. MPT also generated normalized funds from operations (NFFO) of $0.38 per share in the quarter.
One major area of uncertainty for MPT has been tenant Prospect Medical Holdings. However, Rosa Hooper, MPT’s Senior Vice President of Operations, said on the Q3 earnings call that Prospect resumed paying rent for its California properties in September and October. The hospital operator is expected to begin paying full rent again in March 2023.
MPT owns an interest in Prospect’s managed care company PHP Holdings. Prospect plans to put PHP Holdings up for sale soon, with MPT set to receive a portion of the sale proceeds. This transaction is anticipated to close sometime in 2023 according to CFO Steven Hamner.
Investors also welcomed MPT’s moves to reduce debt levels. The company has announced multiple asset divestitures and plans to raise around $2 billion in additional liquidity over the next 12 months. This will come through further sales, joint ventures, and some secured debt financing.
Uncertainty Remains Around Major Tenant Steward Health
Despite the encouraging quarter, several big questions still loom for MPT. One major lingering concern is the financial health of Steward Health Care, MPT’s largest tenant. As of June 30, 2022, Steward comprised 19% of MPT’s total assets.
Steward has faced significant cash flow issues recently. CFO Hamner acknowledged on the Q3 call that Steward continues to grapple with “near-term cash flow headwinds,” especially relating to revenue cycle management and accounts payable backlogs.
However, Hamner expressed confidence in Steward’s long-term outlook. He noted that Steward’s facilities in Massachusetts and South Florida make up about two-thirds of its leased MPT properties and are critical healthcare assets in those regions.
Dividend Cut Raises Questions
Another worry for investors is that MPT’s asset sales are diluting adjusted funds from operations (AFFO), which could pressure the dividend payout. MPT recently slashed its dividend by 29%.
But CEO Aldag stated the dividend reduction provides MPT with “a near-term AFFO payout ratio below 60%.” He said the dividend is now at a comfortable level to handle further asset sale dilution.
Still Too Risky To Buy MPW Stock ‘Hand Over Fist’?
The old investing maxim “don’t try to catch a falling knife” cautions against aggressively buying beaten-down stocks before clear signs of a rebound emerge. Is MPT still too much of a falling knife to buy hand over fist?
It’s impossible to predict if MPT’s stock will bounce back soon or keep declining in the near term. The exact timing of MPT’s return to growth also remains uncertain. With these lingering risks, conservative investors are better off looking at more stable stocks.
However, there appears to be a light at the end of the tunnel for MPT. The company’s underlying business should be more stable than the plunging share price implies. MPT looks likely to maintain its dividend at the reduced level.
For aggressive investors comfortable with some risk, initiating a position in MPT could pay off over the long run. The stock offers a high 12% dividend yield at current levels. Once MPT works through its challenges, its share price could rebound sharply.
In summary, uncertainty persists for Medical Properties Trust after its terrible 2022 performance. While conservative investors should steer clear, its high dividend yield gives aggressive investors reasons for cautious optimism. MPT appears poised to reward those willing to look past short-term volatility.