Medical Properties Trust: The Roller Coaster Is Going Up

Company Overview - Medical Properties Trust (MPW) is a hospital REIT that has been dealing with the default and bankruptcy of its largest tenant, Steward Hospitals, which defaulted on rent obligations in Q4 2023 [1] - MPW has reached an agreement with Steward that will result in MPW owning both the operations and the real estate [2] - MPW has already found new operators for 15 of the 23 hospitals, making up $2.0 billion of the $2.3 billion rent base, with rent waivers for the rest of 2024 and ramping up through 2025 and 2026 [3] - MPW is giving up its claim to everything else in bankruptcy court, including $430 million in non-real estate loans, and will recognize one more large impairment at Q3 earnings [4] Bankruptcy and Transition - The agreement with Steward has been approved by Steward, MPW, and the creditors committee, with final hearing set for September 17th and no obvious obstacles to approval [5] - MPW's earnings will bottom out in Q4 2024 as it will receive no rent on these properties, but will start ramping up throughout 2025 and 2026, with FFO expected to reach $0.065/share per quarter by Q4 2026 [6] - MPW has sold several properties, receiving good prices and paying down debt, but this results in a drag on FFO [6] Dividend and Financials - MPW's dividend is restricted to $0.08/quarter, but this restriction could be lifted if Steward's hospital operations are transitioned more rapidly [7] - MPW is likely to retain capital to make up for losses on Steward's loans and invest in expansion, with limited expansion expected in 2025 [7] - MPW's share price has reacted favorably to the news, with upside potential as the greatest uncertainty is removed and the value of properties with new tenants is likely higher [8] Valuation and Future Outlook - MPW has been trading below 6x price/FFO, well below the sector average of 13.86x, with a reasonable target of 10-12x for 2025, implying a target price of $9.00-$10.80/share [12] - MPW could achieve an FFO run-rate north of $1.00/share by late 2026, with potential for expansion and a valuation multiple of 13-15x looking reasonable [12] - MPW has not issued any equity and has recovered the bulk of the real estate, with no reason to believe it won't return to former valuations [13] Historical Context - MPW faced similar low valuations during the GFC but recovered by 2011, and in this event, MPW has not issued any equity or done anything to permanently impair future returns [13] - The reward for holding MPW through the bankruptcy is substantial, and investors should not cut themselves short on the reward [13]