Medical Properties Trust (MPW) is a heavily indebted real-estate investment trust (REIT) that’s involved with medical properties. It should benefit as the U.S. Federal Reserve continues to lower interest rates in coming months. The company has also struck a deal to takeover the majority of hospitals operated by bankrupt tenant Steward Health Care Systems, which should increase Medical Properties’ cash flow. For these reasons, I’m bullish on MPW stock.
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Medical Properties’ Growth
I’m bullish on Medical Properties Trust, or MPT as the company is commonly known, because it is one of the largest owners of hospitals in the U.S. The company currently manages 435 properties in 31 American states, as well as in Europe and South America. Growth in the U.S. accelerated following its acquisition of assets from bankrupt Steward Health Care Systems. As of June 30 this year, MPT had $2.1 billion in real estate leased to Steward, most of which is expected to be sold as part of the agreement.
Steward Health Care is transferring 15 hospitals to new operators as part of its bankruptcy proceedings. MPT is providing $80 million in financing to the new operators. The new operators will start managing the hospitals effective October 1, but the rent is only due starting in January 2025. These rent payments are expected to reach 50% of the fully stabilized rent of $160 million by the end of next year. As part of the agreement, MPT expects to record impairment charges relating to its Steward exposure of approximately $700 million in this year’s third quarter.
Opportunities for MPT
The arrangement with Steward Health Care should help MPT’s finances and stock, which is another reason for my bullish stance. To adjust for the effects of the impairment charges, Medical Properties Trust reports normalized funds from operations, which is a cash-flow metric commonly used by REITs. In this year’s second quarter, normalized funds from operations stood at $0.23 per share, or $0.22 a share adjusted for a joint venture with Steward Health Care that has since ended.
I estimate the $160 million in incremental stabilized rent to be earned by MPT as a result of the aforementioned Steward agreement will result in an approximately $0.07 per share boost by the fourth quarter of 2026, or $0.27 per share on an annual basis. Additionally, the $700 million in impairment charges from this deal with Steward Health Care Systems is already priced into the stock as the company trades at a $2.4 billion discount to its book value.
Benefitting from Interest Rate Cuts
As mentioned, Medical Properties is likely to get a tailwind as interest rates move lower, which is yet another reason to be bullish on this security. The company’s debt load is hefty and accounts for 69% of its enterprise value, making the company extremely sensitive to monetary policy decisions made by the U.S. Federal Reserve. The good news is that America’s central bank just lowered its benchmark interest rate by 50-basis points and has forecast more rate cuts between now and 2026.
Nearly 10% of MPT’s debt is held at a floating adjustable interest rate. This means that the interest charged on that portion of its debt will move lower as the Fed cuts rates further. I estimate that, by the end of 2026, a cumulative 2.5% reduction in interest rates should boost the company’s cash flow. This could translate to a $0.31 per share boost by the end of 2026. Another benefit is that lower interest rates should bolster real estate valuations, which would also help Medical Properties Trust.
Is MPW Stock a Buy or Sell?
While I remain bullish on MPW stock, Wall Street doesn’t share my enthusiasm Medical Properties Trust’s stock currently has a consensus Hold rating based on one Buy, five Holds, and zero Sell recommendations. The average price target on the stock of $5.58 per share implies 6% downside from current levels.
Read more analyst ratings on MPW stock
The Takeaway
MPW stock is down 3% over the last 12 months and has declined more than 50% in the past five years. While the share price performance has been disappointing, there’s reason to be optimistic about Medical Properties Trust. A new deal with Steward Health Care Systems is likely to bolster the company’s finances and cash flow. At the same time, lower interest rates will alleviate some of the pressure on Medical Properties’ debt, and should also boost the U.S. real estate market. For these reasons, I’m bullish on this REIT.
