A beleaguered healthcare real estate investment trust, Medical Properties Trust, may finally be turning a corner after over two years of struggles. At least, that’s the hopeful view from one Wall Street analyst who sees the company’s beaten-down stock price soaring by more than a third in the next 12 months.
The optimistic outlook comes from BNP Paribas analyst Nate Crossett, who recently upgraded his rating on Medical Properties Trust shares from “neutral” to “outperform.” Mr. Crossett set an ambitious $6 price target on the stock, representing a potential 35% upside from current levels around $4.18.
Medical Properties Trust, which owns hospitals and other healthcare facilities that it leases to operators, has faced a perfect storm of headwinds over the past couple years. Rapidly rising interest rates crushed the attractive yield that drew many investors to real estate investment trusts (REITs) like this one in the first place.
Meanwhile, two of the company’s largest tenants – hospital chains Steward Health Care and Prospect Medical Holdings – ran into severe financial distress, putting their rent payments to the REIT in jeopardy. The combination of factors forced Medical Properties Trust to slash its dividend by 27% last year, a rarity in the normally stable REIT sector.
The stock has plummeted over 60% from its pandemic highs above $22 as investors fled. But now, Mr. Crossett and some other analysts on Wall Street think the selling has been overdone, setting up a potential rebound if the company can get its major issues under control.
Signs of Progress, But Hurdles Remain
In fairness, Medical Properties Trust has shown some signs of progress recently in righting the ship. The company announced deals in late February to sell off five hospitals and a term loan investment, raising $480 million in liquidity.
Chief Executive Ed Aldag told analysts on the Q4 conference call that more asset sales are being worked on as the REIT aims to raise at least $2 billion in total liquidity this year. Having a cash cushion will be critical as the company deals with problem tenants and the ever-present risk of needing to fund capital expenditures across its portfolio of aging hospital properties.
On that front, there was an encouraging update from Mr. Aldag on Steward, Medical Properties’ largest tenant which has fallen behind on rent payments amid its financial woes. The CEO said the REIT is “encouraged by the early progress” in efforts with Steward’s advisors to bolster its balance sheet and get current on the unpaid rent, with cash flow reports so far exceeding expectations.
Prospect Medical has also shown slight improvement, with Mr. Aldag noting the hospital operator is now current on all rent and interest obligations through January 2024. Better patient admission volumes, increased Medicaid reimbursement rates, and lower supply costs have helped boost Prospect’s profits.
Those are positive datapoints for sure. But given the volatility in the healthcare sector and the potential for more financial turbulence ahead, analysts agree that risks remain elevated for Medical Properties Trust in the near-term.
The company still refused to provide any full-year earnings guidance, citing the continued uncertainty around resolving its issues with Steward and the timing of future liquidity-raising efforts. The dividend policy is also being reviewed by the board this quarter, leaving open the possibility of another cut that would further diminish the stock’s appeal to income investors.
And while the Fed signaled this week that interest rate cuts could be on the horizon later in 2024, Chair Jerome Powell maintained that no decreases will come until inflation is clearly on a downward path – something most economists don’t see happening for several more months at least.
A High-Risk, High-Reward Situation
With both the company’s financial performance and its dividend payout remaining in flux, the risks around owning Medical Properties Trust stock are apparent. The healthcare REIT sector in general has fallen out of favor on Wall Street amid the challenging operating environment.
Yet for investors with a high risk tolerance willing to make a speculative bet, Mr. Crossett and other bulls see potentially huge upside if management can successfully navigate the turnaround. Even with a 35% rally from current levels, the stock would still be trading more than 70% below its highs.
Four other analysts currently have “buy” or equivalent ratings on the shares, with an average 12-month price target around $5.30 – implying 15% upside from here. Another five rate the stock a “hold” while three have “sell” ratings, highlighting the split views on Wall Street.
In any case, it’s clear that Medical Properties Trust is not out of the woods yet despite the recent glimmers of hope. Only the most aggressive investors should look at buying this 13.5% dividend yielder for now, as the outlook remains binary: a homerun if the turnaround plays out as bulls expect, but potentially more downside if the company’s financial situation continues deteriorating.
Whatever happens, it’s sure to be a captivating story to watch unfold in the healthcare REIT sector over the months ahead. For a company that was a stable income investment just a couple years ago, the dizzying shift to boom-or-bust status shows just how rapidly fortunes can change in today’s volatile markets.
