Medical Properties Trust (MPW -1.10%) has seen its shares fall by 48% this year -- and by 79% from their early 2022 peak. Yet, analysts on Wall Street have extremely high expectations for the healthcare-focused real estate investment trust (REIT). On average, those that cover the company see its stock rising by 82% within the next 12 months. I don't think that estimate will prove to be correct. Here's why.
Scaling down doesn't make for upward share prices
The crux of the problem with Medical Properties Trust is that it's stuck between a rock and a hard place, with massive debts coming due and not enough ability to pay them down. As a REIT, it makes money (in theory) by buying hospital and clinical properties using debt, then renting that space out for a higher annual return than its debt servicing costs.
When things are working as planned, its rental income is larger than its loan payments, and it can pass some of the extra cash on to investors via the dividend while retaining the rest to save up to purchase additional properties, or by paying down its non-current debt ahead of time.
But things aren't working as planned. Medical Properties Trust has more than $10 billion in debt, all of which is due within the next eight years. Its trailing 12-month cash from operations was $607 million, and it paid $698 million in dividends in the same period. If its cash from operations metric held steady through 2031, and the REIT paid 100% of it toward its debt in that time, it would end up retiring less than $5 billion of its $10 billion-plus debt load.
Even if it slashed its dividend to zero, massively pumping up its cash from operations, then paid all of that toward its debt for the next eight years, it'd still just barely be able to pay it off. And shareholders would be left holding the bag in the meantime, as the company wouldn't be able to expand at all.
Management recognizes that the debt load is a threat, but its options are limited. They've already cut the dividend sharply, but that won't be enough to solve Medical Properties Trust's problems. It only has $324 million of cash and equivalents on hand. Any new debt that it takes out will almost certainly be at a higher interest rate than its older debt due to the Federal Reserve's fight against inflation, which means its rate of return on investments will need to be even higher than it already is to break even.
Furthermore, it's being forced to sell its properties to generate more cash to pay off its loans, the bulk of which are due before 2027. But with fewer income-generating assets, its rent collections drop. Take a look at this chart:
MPW Revenue (TTM) data by YCharts.
Does that look to you like the financial performance of a stock that's going to rise 82% in 12 months?
The coming years could bring more troubles
Another complication is that due to now-higher interest rates, the REIT probably won't be able to refinance its debt anytime soon. Nor will the recent dividend cut be sufficient to stabilize its finances unless all of its growth activities are brought to a standstill for years, as shown by the prior calculations.
But Medical Properties Trust isn't hitting pause. It's still moving forward with new investments and pursuing development projects, even as it's selling off other holdings and downsizing. In the last 12 months, it issued more than $198 million in debt, the proceeds of which were likely largely used to pay off earlier-dated loans.
That doesn't mean Wall Street's estimates are guaranteed to be false. Via some combination of a bold restructuring plan, new leadership, or a deus ex machina of some kind, it could somehow impress the market enough to send its shares flying. But I'd bet against it. There's no way you'd get me to buy this stock as matters stand right now.
