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Article Thesis
On Thursday, Medical Properties Trust, Inc. (NYSE:MPW) saw its shares explode upwards by 16% as the market priced in a positive development when it comes to MPW’s bankrupt tenant Steward Health Care System. The two companies agreed to transfer control of MPW’s real estate to MPW, which will allow MPW to transfer operations to stronger operators that will pay rent on time. MPW continues to have issues, but this deal shows that the underlying value of MPW’s assets could be significantly higher than the current share price implies. A short squeeze is possible due to a high short interest ratio.
Past Coverage
I have written about Medical Properties Trust several times here on Seeking Alpha, most recently in May, around four months ago. I focused on Steward Health Care System’s bankruptcy back then, arguing that this was good news for MPW over the long run. My buy rating back then has worked out fine so far, with shares returning 37% since May 7, 2024. With additional news emerging about the agreements between MPW and Steward, and with more than a quarter having passed since my last update, it is time to take another look at Medical Properties Trust today.
What Happened?
On Wednesday, we got the news that a new settlement deal between Medical Properties Trust and Steward Health Care got initial approval from bankruptcy court judge Christopher Lopez. This deal had been crafted around two weeks ago, but with the approval from Steward’s bankruptcy judge, it can now go into effect. On Thursday, the market responded to this deal, sending MPW’s shares higher, with them trading at $5.60, up 16% on the day, at the time of writing.
The Deal Between Medical Properties Trust and Steward Health Care
With Steward Health Care System having declared bankruptcy a couple of months ago, it has been clear for a while that there would be changes in Medical Properties Trust’s tenant base. Steward wasn’t able to continue to operate all of its hospitals, so new tenants would have to be found. It was not clear, however, how long this process would take, whether Steward would want to get any additional concessions, how easy re-tenanting would be, and so on.
But with the deal that has now been approved by the bankruptcy judge in charge of this case, we now know a lot more about what the transition of the Steward portfolio to new tenants will look like. These are the important facts and what they mean for Medical Properties Trust and its shareholders (for sources, see here and the articles on Seeking Alpha that are linked above):
– Steward Health Care System will drop all potential claims against Medical Properties Trust. This does not put any money into MPW’s pockets directly, but it gets rid of one risk — although not very likely, there was the possibility that Steward would squeeze out some additional money from MPW in court. With Steward dropping all claims, that is now not a risk any longer.
– The deal covers 23 hospitals in total, owned by Medical Properties Trust and leased to (and operated by) Steward Health Care. Medical Properties Trust will take over control of the operations at these hospitals and is free to re-tenant these hospitals immediately.
– Among these 23 hospitals, 15 have been re-tenanted to new tenants already. In total, four new tenants are taking over operations at these four hospitals. I believe that this indicates that the hospitals owned by Medical Properties Trust are, generally, attractive — otherwise the company would not have found a range of willing tenants so quickly. MPW’s management states (see link above, emphasis by author):
We have been working tirelessly to identify replacement operators and negotiate new lease terms, and we have been encouraged by the enthusiasm and eagerness of multiple operators to manage these important facilities despite declines in Steward’s operations during its restructuring process. As a result, we were able to rapidly come to terms with several new tenants. We have also collaborated closely with state regulators to put orderly transition plans in place that would avoid hospital closures, protect jobs, and ensure continuity of care for patients.
With multiple hospital operators being quite interested in taking over, it looks like the hospitals themselves weren’t the problem — the way Steward operated them was the problem. Otherwise, other operators would likely not be this eager to take over. I believe that this is excellent news for MPW, as it suggests that MPW’s assets themselves are strong and in high demand. The main issue has been taking on the wrong tenants and being too involved with Steward, but that is now being corrected.
– Medical Properties Trust made some rent concessions with the new tenants but will begin receiving rent in 2025, less than four months from now, with rent rising over the coming years. By the end of 2026, Medical Properties Trust should receive $160 million annually for these 15 properties, or around $40 million per quarter. This is, according to MPW’s management, equal to 95% of the cash rent Steward would have owed at that time. While this is a small reduction, it is still very positive news — getting 95% of something is a lot better than not getting 100% of something. With Steward being unable to pay rent on time in the past, and with it going through bankruptcy now, MPW would likely not have received a lot of money if Steward was still the operator of these hospitals by 2026. But following this deal, MPW will receive cash on time from a diversified base of tenants. The average initial lease term for these 15 hospitals is 18 years, according to MPW, meaning the REIT has locked in reliable rent revenue for a very long time.
It is important to note that the approval of this settlement is an initial approval, meaning there is a minor risk that it will ultimately not get approved. The final approval should happen on September 17, when there is a hearing for final approval at the bankruptcy court.
MPW: Potential For A Short Squeeze?
Medical Properties is a widely shorted REIT, with its float being 40% shorted, which pencils out to a short interest ratio of 19.6. When a company is shorted this heavily, positive news can result in a short squeeze. When shorts want to exit their positions, they have to buy shares, which can result in substantial additional demand for shares, thereby driving up the stock’s share price. A couple of years ago, this happened to an extreme with GameStop Corp. (GME). I do, of course, not expect any GameStop-like returns from Medical Properties Trust, but the combination of positive news around Steward and a high short float could still result in some upwards pressure in the near term. The strong gains we have seen on Thursday may have been partially driven by shorts closing their positions. This alone is not a reason to buy at all, but it is still good news for those who own MPW for other reasons — a potential short squeeze might be a nice return booster.
Is MPW A Good Investment?
Medical Properties Trust is up almost 100% from the 52-week low of $2.90, thus the best time to buy has clearly passed. Currently, investors are not buying MPW at the lows if they decide to enter or expand a position in Medical Properties Trust.
That being said, there could be substantial upside still. Medical Properties Trust’s book value per share stood at $10.30 as of the most recent report, with depreciation on its real estate already being accounted for. Shares trade for $5.60 following Thursday’s massive gains, meaning shares trade only slightly above 50% of book value. I do not believe that shares will hit book value soon, but even if shares were to recover to 70% or 80% of book value over the coming year or two, that could make for substantial returns.
MPW is not a low-risk stock, as debt levels remain high, but with interest rates likely declining in the future as the Fed is getting more dovish, the REIT’s debt should become less problematic over time.
Following the recent dividend cut, Medical Properties Trust offers a dividend yield of around 6%, which is not ultra-high, but very nice. I continue to hold my position, waiting for the Steward situation to clear up further, which could result in further share price upside. Meanwhile, I’m collecting a nice dividend yield.
