According to the average estimate of Wall Street analysts, Medical Properties Trust (MPW +0.28%) stock is going to rise by 25% within a year. Given that over the past 12 months it actually fell by 39%, massively underperforming the S&P 500 index's rise of 16%, that price target deserves some skepticism, especially from investors who are considering whether to purchase the stock.
Let's unpack this issue by looking at what the company would need to do for the analysts to be right, and then think about what its chances actually are of following through on those things.
NYSE: MPW
Key Data Points
Why this stock probably won't perform as well as Wall Street hopes
For Medical Properties Trust stock to rise by as much as analysts are calling for within a year's time, three things need to happen. First, it can't cut its dividend despite having a payout ratio well in excess of 100% of its net income, as a cut would frustrate investors and likely cause its shares to fall. Second, it needs to somehow cover both its operating expenses and pay its maturing debts, as otherwise it would be insolvent. Third, it needs to do those two things without sabotaging its future prospects for growth. And there are a handful of intertwined constraints when it comes to tackling any of the above.
It has more than $1 billion in current debt that's due within the next 12 months, but it has only $302 million in cash and equivalents, and its trailing 12-month (TTM) free cash flow (FCF) totaled only $739 million. The debt means that money is tight, and the 25% decline in its quarterly FCF from three years ago isn't making the situation any easier, as it may well continue to fall. At the same time, since Q1 of 2022 it paid out nearly $700 million in dividends to its shareholders, so it will need to pay at least that much over the coming four quarters to keep investors satisfied.
But it can't just slash operating expenses to free up money for paying the dividend or servicing its debt load. As a hospital real estate investment trust (REIT), Medical Properties Trust doesn't actually operate the healthcare floorspace it owns, it just rents it out to hospital companies. In fact, aside from $160 million in selling, general, and administrative (SG&A) expenses, its operating expenses are entirely comprised of depreciation and amortization expenses, which are claimed for tax purposes and aren't actually cash charges. And since its leases are typically for many years at a stretch, with terminations being rare, it can't simply hike rent beyond what's contractually specified.
So what's the plan? It appears to be that scaling down the company's operations by selling off pieces of its portfolio for cash is the approach favored by management. Per its June investor update, it's currently in the process of selling three of its hospitals in Connecticut, one of its holdings in Utah, all of its properties in Australia, and three additional assets. Any gains on its initial investments are likely to go toward paying down debt, but in several cases its assets are expected to sell for a value very close to their original cost basis. What's more, with fewer spaces to rent, its top line will shrink -- and with it the bottom line too.
But the sales will probably be necessary to keep the business in good standing with its creditors. That means that it is quite likely that Medical Properties Trust will violate the third condition I specified as a precondition for its shares to grow in value.
It could still technically happen under the right conditions
As bearish as the above may seem, it is still possible that the analysts will be correct, and that Medical Properties Trust's shares will rise rather than fall.
As the company's management claims, higher inflation will lead to higher returns, as the company will be more empowered to raise rents on its tenants and pass on the excess to shareholders. While that effect is more pronounced over the longer term than the short term, it is something of a tailwind that could contribute to higher prices if there is suddenly an increase in the pace of inflation. There is also the possibility that it will be able to refinance some of its $10.4 billion in total debt, and that the market will receive news of such a refinancing very warmly.
If it could negotiate paying a lower interest rate on its existing burden, it would have more money in the future to spend on dividends or buying new properties, so its debt wouldn't be as much of a drag on growth as it is right now. And finally, given the stock's relatively low valuation compared to its net asset value, it is possible that bargain-hunting investors will try to buy its shares and spark a rally in which the price is ultimately bid up.
But I wouldn't bet on it. REITs are meant to be stable, dividend-paying investments that don't see their prices jump around from quarter to quarter as a result of management taking drastic short-term measures like selling productive properties to unwind long-term financial problems. And without a solid guarantee for its dividend or its share price, there's not much reason to rush to buy its shares.
