Medical Properties Trust $MPW: The Endgame

Hurricane Milton Evacuation Plans

Hello and welcome to a week of unexpected yet stressful vacation.  While we were mostly unaffected by hurricane Helene, it looks like hurricane Milton is barreling straight for the Tampa Bay area.  As it is projected to make landfall at a Category 3 or above, we are packing up our car and driving the kids to grandma’s house on the east coast of Florida on Monday.  

This means that you might not see any more writeups from me this week.

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A quick update on the situation with Medical Properties Trust (MPW):

You can find the original article here:

During the bankruptcy process of their largest tenant, Steward Healthcare, all parties have been prohibited from discussing proceedings.  The bankruptcy process, however, is known to be in the final moments.   

As a part of the final severing of MPW from Steward, ownership of three hospitals were transferred from MPW to Steward, and ownership of 15 operating companies were transferred from Steward to MPW.  Those operating companies come equipped with mountains of valuable equipment such as MRI’s, PET scanners, CT scanners, etc.  A few back-of-the-envelope calculations, and it looks like this split is an enormous value add to MPW.  The MPW enthusiasts believe that these 15 operating companies, equipment included, are worth between $500 million and $2 billion at the rosiest.  A quick chat with large language models arrives at similar numbers, but this is too far outside of a generalist's specialty to know if ChatGPT was hallucinating or not.

I don’t know why the judge split the hospital group in this way, it could be because ever since Steward Healthcare hired an outside restructuring expert, they have been hostile to MPW, and were slowing down the liquidation process.  But with debtor in possession financing, ownership of the properties, and an ironclad master lease agreement, it does appear that MPW held all of the cards, and eventually will exit with the lion’s share of the value.

There is an ongoing objection process where creditors can object to various portions of the bankruptcy conclusion.  This resolution of this process could conclude this week, October 10th at the earliest.  It is not clear what catalyst will move MPW’s stock price, it could be if MPW would send an immediate press release upon final conclusion of the Steward bankruptcy, or it could be the next quarterly earnings call, which is typically the 4th Thursday in October, or the 24th this year. The 15 hospitals all have temporary operators, shielding MPW from incurring any operating loss from the facilities.  It appears those temporary operators are intended to be the eventual buyers of the operating companies, but it is not obvious how MPW will structure the transaction.  The 15 hospitals’ temporary operators are on an escalating return to normal rent, with zero rent payments for 2024, 50% rent payments for 2025, and 100% rent payments for 2026 and beyond.  The eventual lease amount for 2026 is $160 million of income on a $2 billion asset base, or a cap rate of 8%.  That alone accounts for $0.25 of annual dividend income that will not return for a year and a half.

As of October 3rd, there were 233 million shares of MPW sold short out of a total 600 million shares.  The potential for a short squeeze is quite high, and upon a clean separation of MPW and Steward, the MPW bears don’t appear to have many arguments left.  Of course, I am hoping for a squeeze that rips faces off, but the stock market has circuit breakers and trading halts to prevent the most extreme scenarios.  I plan to play the situation by ear, but I am willing to let go of one third of my MPW position at around $8, another third around $10, and the final third I am willing to hold onto until the stock trades at 1.1x book value, or about $12.  Book value might change when transactions to sell the 15 operating companies are finalized.  

One final reminder, MPW is under a debt covenant agreement that restricts dividend payouts to $0.08 per quarter.  Since Steward was 25% of MPW’s rent, and MPW’s debt covenants required no more than 10% of their tenants to be going through bankruptcy at any time, they had to come to an agreement with their lenders.  This restrictive agreement can be canceled at any time, or expires September of 2025.  MPW might choose to keep dividend payouts low for the time being, as they have an unusual amount of flexibility for the moment.  A REIT must pay out in dividends 90% of profits, but due to the writedowns from Steward equity and the Massachusetts hospitals, MPW has an accounting loss for this year.  This accounting loss allows MPW to pay fewer dividends, which management might choose to apply toward debt repayment instead.  I don’t expect MPW to return to full dividend payments until 2026, which is longer than I had expected for the stock to return to what I would consider to be a full price.  

MPW has been quite a saga, and while I was originally quite proud of my thesis, this is starting to seem like earning money the hard way.  I would feel better about it if I had sized the position correctly so that I could have bought more at $3.25 a share at the lows.  But along with many of my early investments, my biggest mistake was the initial position size. I never in my wildest dreams anticipated that acute care hospitals would trade at a price to tangible book value of $0.25. I wonder how many times in a lifetime such an extreme valuation mismatch can occur?

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On a separate matter, I just finished my first video content, merging fundamental analysis and technical analysis, with the help of two former students, Mitch and Colin.

While we didn’t go over every one of the 80 stocks or so that I have written about in the last four months, when we compared the fundamental and the technical, our shortlist for what to buy this week with are as follows: