It doesn’t happen very often, but a stock other than Tesla (TSLA) or Nvidia (NVDA) has seen significant unusual options activity in recent days, suggesting somebody has taken a shine to healthcare REIT Medical Properties Trust (MPW).
In Thursday trading, MPW had three of the top four unusually active options; in late morning trading Friday, it had the fourth most unusually active option. However, it dropped off considerably by early afternoon.
I know a little about Medical Properties Trust. I wrote about it and two other cheap REITs for InvestorPlace.com in August 2022. Fortunately, two of my three recommendations have done okay since then,
Simon Property Group (SPG) is up 36%, and Store Capital was acquired in February 2023 for $14 billion at a 20% premium to its Sept. 14, 2022, closing share price, the day the deal was announced and just a month after the article’s publication date. How’s that for timing?
The downside is that MPW stock has lost 77% of its value in the 16 months since.
It was cheap at the time of the article. However, it’s clearly got significant issues, or its share price wouldn’t be in penny-stock territory.
The unusual options activity suggests somebody knows something about Medical Properties Trust. The question is, what? Secondarily, what should options buyers do about it?
Let’s get after it.
Have a great weekend!
Is Medical Properties Trust on Life Support?
Anytime a stock loses 77% of its value in less than two years, there's usually a good reason. Admittedly, as a freelance writer, I cover a lot of stocks in a given year. Truthfully, I'd lost track of MPW until its recent unusual options activity.
MarketWatch reported on Jan. 5 that one of its tenants, Steward Health Care System, was a whopping $50 million behind on its rent. How you get that far behind on your rent -- more importantly, how the REIT let that happen -- is hard to fathom. On the same day as its lousy news, KeyBanc analysts downgraded its stock to Sector Weight from Overweight due to poor tenant health. Ya think?
“Management is pursuing steps to improve its balance sheet, which we view favorably, but pricing and execution remain uncertain,” KeyBanc said.
On Jan. 4, MPW issued a press release to update investors about Steward. It said it was working to mitigate its exposure to the country's largest, private, tax-paying hospital operator.
The problems began innocently enough with late rent payments by Steward in September and October.
However, the REIT was recently informed that its liquidity had been strained due to changes in its vendors’ payment terms. Steward was $50 million short on its rent payments at the end of December. In addition, another $50 million in rent related to the reconstruction of Norwood Hospital in Massachusetts has been deferred.
The REIT is working with Steward on a plan to right the ship.
According to its press release, “Partial cash rent payments are expected to recommence in February, including approximately $9 million in the first quarter and approximately $44 million in the second quarter of 2024.”
As a result of all of this, the REIT will take a non-cash charge of $325 million for writing off Steward’s unpaid rent receivables. More charges may be in the offing.
However, the rest of its portfolio is operating as usual, generating $236 million in the third quarter alone.
All is not lost.
Where There’s Smoke, There’s Fire
Investigative journalist Maureen Tkacik’s August 2023 article in The American Prospect entitled The Great American Hospital Shell Game detailed some of the financial maneuvers Medical Properties Trust has undertaken to keep Steward afloat after its private equity owners sold it in 2021 to its founder, Ralph de la Torre.
“Along with some senior managers, de la Torre bought out the private equity firm’s interest by taking out a $335 million loan with MPT, and shortly thereafter extracted their own nine-figure dividend from Steward. (Shortly after that, de la Torre bought a super-yacht.),” Tkacik wrote.
My wife worked in retail management for years, living through several private equity acquisitions and divestitures. Dividend recapitalizations are the lifeblood of the private equity industry.
Steward’s former private equity owner, Cerberus Capital Management, made hundreds of millions by selling hospital properties to the REIT at nosebleed valuations, Tkacik says, and extracting those proceeds as dividends, leaving Steward in woeful financial shape. Meanwhile, MPW owns 9.9% of Steward’s equity.
I suggest you read her article before investing anything in MPW.
What to Do?
This is not an investment most do-it-yourselfers should make.
I make a living writing about stocks, and I’ll admit, I missed the writing on the wall when I wrote about the REIT in August 2022. Right there on pg. 14 of MPW’s 2022 10-K is the damning evidence.
“In addition to the master leases, we hold a promissory note totaling approximately $220 million, which consists of five tranches with varying terms. On January 8, 2021, we made a $335 million loan to affiliates of Steward, the terms of which provide us opportunities for participation in the value of Steward’s growth,” states the 10-K.
“All of the proceeds from this loan were paid to Steward's former private equity sponsor to redeem a similarly sized convertible loan. Finally, we hold a 9.9% equity investment in Steward totaling approximately $126 million.”
Kudos to Tkacik for her excellent work. She’s captured the underbelly of private equity in fine style.
However, this is an article about unusual options activity, so I’ll finish with a quick synopsis.
The four unusually active options from Thursday were all puts with strike prices between $2.50 and $4.00. The put with the largest volume was the Feb. 23 $2.50 put with 40,440, 217.42x the open interest. At the ask of $0.14, someone was betting it would fall $1.04 or more and into the money in the next six weeks. It’s a bearish signal if there ever was one.
The call from today was the March 15 $4.50 call with an ask price of $0.23. It’s more of a Hail Mary bet that MPW shares will experience a dead cat bounce over the next three months.
I wouldn’t touch any of them, but that’s just me. I’m not big into risk.
Caveat emptor!
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
