What happened
Shares of Medical Properties Trust (MPW -1.51%) slumped 17.8% in June, according to data provided by S&P Global Market Intelligence. Analysts have concerns about the hospital-focused real estate investment trust's (REIT) ability to continue growing amid higher interest rates and its falling stock price.
So what
J.P. Morgan analyst Michael Mueller downgraded the bank's rating on Medical Properties Trust from overweight to neutral in June. The analyst also reduced the stock's price target from $24 a share to $18. Mueller made that change due to the healthcare REIT's rising funding costs. Following last month's slump, shares of Medical Properties Trust have tumbled over 30% this year. That's making it more expensive for the REIT to issue equity to fund acquisitions. Further, with the Federal Reserve increasing interest rates, it will be more costly for Medical Properties Trust to borrow money, especially since it doesn't have an investment-grade credit rating. In Mueller's view, this makes "the math more difficult to pencil out for acquisitions." Because of that, Mueller believes the company's acquisition activity level will be less predictable.
Medical Properties Trust discussed its potential funding headwinds on its first-quarter conference call in late April. The REIT's CFO, Steven Hamner, said on the call that the company expects to make between $1 billion and $3 billion of acquisitions this year. While he's "confident the investment opportunities are there," the CFO warned that "the ultimate volume this year will be related to the amount and timing of our access to attractively priced equity capital." He pointed out that the company expects this capital to come from select hospital sales and joint venture transactions, not from selling more stock. If the company can obtain equity capital through those two sources, it can continue making accretive acquisitions.
Meanwhile, Jefferies analyst Jonathan Petersen lowered the firm's price target on Medical Properties Trust last month. The analyst reduced it from $19 a share to $15 while keeping its hold rating. Petersen made that move due to the potential of a recession, which could weigh on REIT stock prices. The analyst prefers REITs focused on property types with rent inflation potential like industrial, storage, residential, data centers, towers, and senior housing. While Medical Properties Trust has some inflation protection in its rental agreements, it can't increase rents to market levels like some of those property types.
Now what
Medical Properties Trust has been under a lot of pressure this year due to concerns about its ability to fund new acquisitions. While its falling stock price and rising interest rates will make it harder to finance deals, the company still has some levers to pull. Because of that, it should be able to continue growing its high-yield dividend in the future.
