Why 1 of the Biggest Medical Properties Trust Bulls on Wall Street Now Recommends Selling the Ultra-High-Yield Stock

Medical Properties Trust (MPW -1.10%) is a decidedly polarizing stock. The average 12-month price target for the stock reflects an upside potential of more than 40%. However, nearly 29% of the stock float was sold short as of Jul. 31, 2023.

Views about the healthcare REIT can also change in a split second. Here's why one of the biggest Medical Properties Trust bulls on Wall Street now recommends selling the ultra-high-yield dividend stock.

A vocal cheerleader not long ago 

Around three months ago, Raymond James (NYSE: RJF) analyst Jonathan Hughes wrote to clients that Medical Properties Trust offered a "margin of safety" with its low valuation. He thought that the stock's bargain valuation would attract investors.

What about the REIT's sky-high dividend yield? Hughes didn't believe that a dividend cut was on the horizon in May. 

The Raymond James analyst liked that Medical Properties Trust planned to sell its Healthscope hospitals in Australia. He was upbeat about the pending sale of three Connecticut hospitals as well. Hughes predicted that the deals could "effectively 'reset' the MPW portfolio" and regain investors' confidence.

Because of his optimism, Hughes rated Medical Properties Trust stock as a strong buy. He set a 12-month price target of $14, nearly 70% above the share price at the time.

An unabashed pessimist now

That was then. Medical Properties Trust announced its second-quarter results on Aug. 8, 2023. Three days later, Hughes downgraded the stock from a strong buy to an "underperform" -- the equivalent of a sell recommendation. 

What happened? Hughes seems to have completely soured on the healthcare REIT's management team. He acknowledged that the fundamental financials for the company's hospital operator tenants has improved. However, he wrote that this positive has "been more than overshadowed by growing questions" about a list of issues, including "management communication, credibility, disclosure transparency" and more.

The straw that broke the camel's back, in Hughes' view, was management's decision to continue investing in its top tenant, Steward. The REIT was part of a group of seven lenders that refinanced an asset-based loan for Steward.

Hughes also argued that the comments by Medical Properties Trust's management team raised questions about the sustainability of its dividend at current levels. He said that Raymond James now thinks that a dividend cut could be on the way.

Probably the most damning statement from Hughes was, "We believe MPW management will be spending years trying to regain investor confidence and repairing its cost of capital, subsequently impacting the ability to grow, and we can no longer recommend even a neutral rating." This former strong bull is clearly now a strong bear.

Is Hughes' right?

I think that some of Hughes' comments are on point. Medical Properties Trust could very well decide to cut its dividend in the not-too-distant future. Investing more heavily in Steward does increase the healthcare REIT's risk level.

Another analyst, RBC Capital's Michael Carroll, wrote to clients that Medical Properties Trust needs to cut its dividend as well as sell additional facilities to reduce leverage. He also noted that there are more questions about the liquidity position for Steward. Carroll also cut his price target for Medical Properties Trust from $12 to $10 but still rates the stock as an "outperform." 

In my view, Carroll's assessment of Medical Properties Trust is more objective and level-headed than Hughes'. It's appropriate to be more cautious about the REIT in light of its Q2 update. Like Carroll, I hope the company reduces its leverage.

But I have more confidence in Medical Properties Trust's management team than Hughes does. CEO Ed Aldag and his team have successfully led the company through challenging times in the past. I understand their reasoning behind the additional investment in Steward, even if I wish it wasn't necessary. 

Does Medical Properties Trust have nothing but blue skies ahead? Emphatically no. But I don't think the sky isn't falling. Perhaps three months from now, Raymond James' Hughes won't, either.