A growing number of Wall Street analysts are throwing in the towel on Medical Properties Trust (MPW -1.10%). Shares of the hospital-focused healthcare REIT have cratered over the past year. The sell-off gained renewed steam after it recently reported its second-quarter results. That has pushed its dividend yield up close to 15%.
A barrage of analyst downgrades has weighed on the stock. They're growing more concerned that a dividend cut is imminent. Here's what drives their worries.
Cutting its view across the board
RBC Capital recently lowered its estimates on Medical Properties Trust following the healthcare REIT's second-quarter earnings report, which it called "disappointing." While the bank still has an "outperform" rating on the stock, it added a speculative risk qualifier to its rating. In addition, the bank cut its price target from $12 to $10 per share.
Several factors are driving its more bearish view of Medical Properties Trust. Analyst Michael Carroll highlighted the continued uncertainty surrounding its largest tenant, Steward Health Care. While the hospital operator recently refinanced its asset-backed lending (ABL) facility five months early with several lenders, the REIT was one of those creditors. It elected to invest up to $140 million into the four-year $560 million credit facility.
Steward's continued issues are driving Carroll's view that Medical Properties Trust will cut that tenant's rent by 20% in the first quarter of next year. It also sees continued issues with another large tenant (Prospect Medical), affecting results. These factors drove the analyst to cut his estimates for the REIT's adjusted funds from operations (FFO) to $1.14 per share in 2023 (down from $1.21), $1.16 per share in 2024 (down from $1.31), and $1.14 per share in 2025 (down from $1.31). That would put the REIT's cash flow at or below its current dividend outlay ($0.29 per share each quarter or $1.16 annually).
Carroll believes Medical Properties Trust "will need to be more proactive in reducing leverage and improving liquidity via dispositions, and a near-term dividend cut is likely needed." He expects a 35% reduction to $0.75 per share annually. The analyst also wrote, "We will be incrementally more concerned if these don't occur."
A deluge of downgrades
Raymond James and Bank of America analysts also recently downgraded their views on Medical Properties Trust. Raymond James analyst Jonathan Hughes slashed his rating from "strong buy" to "underperform" because of concerns about management communication and credibility, leverage, and other issues. The analyst noted that management's commentary on the second-quarter conference call about the dividend's sustainability hinted that a cut is forthcoming.
Meanwhile, Bank of America analyst Joshua Dennerlein downgraded Medical Properties stock from "neutral" to "underperform." A big driver was its increased exposure to top tenant Steward by participating in the ABL facility. Private credit funds (instead of banks) led the transaction, suggesting it was a high-risk facility. The analyst also questioned the company's guidance.
An unhealthy payout
Medical Properties Trust's ultra-high-yielding dividend isn't likely to last much longer. The healthcare REIT's largest tenants continue to deal with a liquidity crunch, affecting their ability to pay rent. That's causing liquidity and balance sheet issues for the REIT, which also faces additional headwinds from surging interest rates. These factors have several Wall Street analysts growing very bearish on the company's near-term prospects.
The REIT has been selling select hospital assets to help repay debt and shore up its balance sheet. While that has bought it time since it now has no debt maturing until 2025, it needs to continue the deleveraging process because it has significant debt maturities post-2025. Cutting the dividend would help accelerate its deleveraging process because it can use that cash to repay debt. That's why it seems like a reduction is imminent. Adding to that view is that the REIT has yet to declare its next dividend payment, something it has historically done before or when it reports quarterly earnings.
