Medical Properties Trust (MPW), a healthcare real estate investment trust (REIT) yielding over 12%, has analysts sharply divided on its prospects. While some see light at the end of the tunnel, others remain staunchly bearish. Let’s examine both perspectives.
The Bears: What Have You Done for Me Lately?
MPW shares have plunged over 50% in the last year amid tenant troubles and rising rates, prompting dividend cuts andanalyst downgrades. The bears see no turnaround on the horizon.
Several top MPW tenants faced difficulties in 2022, impacting rent payments. While some like Steward have improved, doubts linger on overall tenant health. Without rental income, MPW struggles to pay dividends.
Soaring interest rates have further pressured MPW as a yield-oriented stock. Rate hikes make MPW’s high dividend yield less attractive. They also make it costlier for MPW to raise capital and service existing debt.
50% Dividend Cut Signals Distress
MPW slashed its dividend by nearly half in August 2023 to preserve capital. While necessary, this move made the stock far less appealing for income investors and raised questions on the sustainability of even the reduced payouts.
The bears don’t see clear catalysts to drive a rebound soon. Interest rates may even rise further in 2023. Without evidence of substantially improved tenant health and rent coverage, the bears expect to stay negative on MPW.
However, the bulls see signs that the worst is over for MPW. They point to stabilizing tenants, debt reduction plans, and an income outlook still among the best in its class.
Tenants Showing Signs of Recovery
Bulls highlight that some top MPW tenants like Steward have improved rent coverage in 2022. Additionally, operators overall expect healthcare utilization trends to normalize in 2023 as COVID headwinds fade.
MPW aims to raise $2 billion in liquidity by early 2024 through asset sales, joint ventures, and secured debt options. This should allow MPW to pay down near-term debt maturities without needing to slash its dividend further or raise dilutive equity capital.
Even after its cut, MPW’s dividend payout ratio remains a healthy sub-60% of 2023 adjusted funds from operations, a key cash flow metric for REITs. This suggests dividends are safe for now. The low payout ratio also gives room for future hikes as conditions improve.
Essentially, the bull argument is that Wall Street has excessively punished MPW, creating a disconnect between price and fundamentals. MPW may not rebound overnight, but patient investors could be rewarded for sticking through near-term turbulence.
Our Take: Lean Bullish, but Neutral Near-Term
We see merits to both sides of this debate. MPW undoubtedly faces reckoning after an ambitious growth-focused era laden with risks. Its turnaround will be gradual amid a difficult macro climate.
However, the bears seem overly pessimistic on the dividend safety. Barring an outsized recession, MPW’s tenants and portfolio should generate enough cash for reduced payouts. And we have witnessed glimmers of Tenant stabilization that suggest the dividend is defensible for now.
Ultimately, our stance is moderately bullish but neutral over the next 6-12 months until we get more clarity. Aggressive income seekers may want to nibble at the tempting 12% yield. But we suggest averaging in slowly given the volatile path ahead.
The wide analyst divide over MPW highlights why thorough due diligence is essential before buying battered yield plays like MPW. Don’t assume the high dividend means easy money. But for those willing to accept some turbulence, MPW could still emerge a long-term winner.