Day: December 25, 2023

Excessive-conviction Medical Properties Belief, Inc. (NYSE:MPW) traders have did not 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 “additional monetary strain on MPW’s AFFO per share,” at the same time as MPW fell to the “A+” valuation zone.

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

Observant traders ought to recall that the Fed telegraphed three charge hikes in 2024, though the market appears to have deliberate for extra. In consequence, 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 patrons should ask themselves whether or not MPW’s “A+” valuation grade suggests a worth entice, implying it could possibly be lifeless cash at greatest.

MPW’s third-quarter or FQ3 earnings launch in late October 2023 did not guarantee me that issues might 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 dealing with important challenges with Prospect Medical Holdings and Steward Well being Care. The market’s issues over Steward are justified, because it accounted for almost 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. Nonetheless, the tepid response from the market because it fell additional in mid-November 2023 means that draw back volatility might 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 continues to be a distance away as traders assess the corporate’s strategic maneuvers to scale back stability sheet dangers.

There have been issues that administration might have been overly aggressive in pursuing unsustainable progress within the pre-pandemic low-interest charges period. An analyst on MPW’s Q3 earnings convention enquired whether or not there could possibly be “potential adjustments in incentives for senior administration.” The analyst was involved as MPW shifted towards decreasing dangers somewhat than pursuing progress. Accordingly, administration concurred that its board “made significant adjustments to incentives, transferring away from aggressive accretive progress.” In consequence, the crucial query stays on the numerous execution dangers that might hamper MPW’s return to progress. Administration highlighted clearly that its near-term aim is to “return to inexpensive capital and doubtlessly restart progress when acceptable.”

Nonetheless, 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 “goal roughly $2 billion in liquidity transactions over the following three to 4 quarters.” Nonetheless, the construction of how it might monetize its belongings stays unsure. MPW probably did not need to decide to promoting its long-term belongings at comparatively unattractive cap charges, worsened by its battered valuation. As such, choices for monetizing its belongings by way of secured lending are anticipated to stay on the desk. In different phrases, administration might contemplate rising its debt load whereas attempting to borrow towards its belongings to navigate these challenges. In consequence, I consider the market probably is not satisfied with its commentary that MPW is endeavor the “analysis of potential asset gross sales, together with exploring three way partnership buildings, restricted secured financing of belongings, and potential modification and extension of sure financial institution loans.”

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

We might see why patrons have remained in a state of flux, as administration hasn’t offered sufficient readability for dip patrons to carry on to their positions. With MPW nonetheless in a medium-term downtrend, momentum traders aren’t anticipated to return. In search of Alpha’s “F’ momentum grade corroborates my level, suggesting we want extra dip patrons to carry on lengthy sufficient to soak up intense promoting strain earlier than MPW can flip the tide decisively.

Promoting strain was noticed in early December as MPW went ex-dividend on December 6. Dip-buyers initially returned to carry MPW above the $5.6 resistance zone because the market reacted to the Fed’s dovish pause the next week (annotated “Dec highs”). Nonetheless, MPW’s worth motion suggests promoting strain set in shortly, because it misplaced most of its weekly positive factors because the week closed.

Due to this fact, I assessed {that a} Promote thesis on MPW is probably going overly bearish on the present ranges. Nonetheless, I discover it inappropriate to assign a Purchase thesis to MPW, given its basic challenges and unconvincing worth motion from tentative dip patrons not keen to carry the bag lengthy sufficient.

With that in thoughts, I urge traders to stay on the sidelines and abstain from including MPW to their portfolios. There are many turnaround shares to think about with much less intense basic headwinds and extra constructive worth motion with a dovish Fed.

Score: Preserve Maintain.

Essential be aware: Traders are reminded to do their due diligence and never depend on the knowledge offered as monetary recommendation. Please at all times apply unbiased considering and be aware that the score will not be supposed to time a particular entry/exit on the level of writing except in any other case specified.

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