Poor earnings and analyst downgrades are two negative events that can impact the price of a stock. When a company reports disappointing financial results, it may reflect potential problems with its business operations, a lack of growth or overall financial difficulties. It typically sends investors rushing to the exits.
If an influential analyst subsequently downgrades that stock, it stokes even more fears about the overall health of the company. The result: More investors will dump their shares, putting further downward pressure on the stock price.
Such was the case the other day with Medical Properties Trust Inc. MPW, a real estate investment trust (REIT) that's struggled for over a year but has now lost even further value following a weak earnings report and a three-level downgrade from a well-known analyst.
Medical Properties Trust is a Birmingham, Alabama-based healthcare REIT that owns and operates 444 general acute care and other properties across the U.S. and in nine other countries, with locations in Europe and Australia. It has a portfolio valued at $19.2 billion, of which 64% is general acute care hospitals. About two-thirds of its properties are in the United States.
On Aug. 8, Medical Properties Trust reported its second-quarter operating results. Funds from operations (FFO) of $0.48 missed estimates of $0.70, although it was an increase of 4.35% from FFO of $0.46 in the second quarter of 2022. Revenue of $337.39 million also missed the estimates of $351.38 million and was 15.7% below revenue of $400.23 million in the second quarter of 2022.
Medical Properties Trust also reported a net loss of $42 million versus net income of $190 million a year ago because of the early termination of five Utah hospital leases and a straight-line rent write-off of $95 million. Forward guidance on FFO was tightened from $1.50-$1.61 to $1.53-$1.57.
The weak report caused Medical Properties Trust shares to drop by over 14% in one day, from $10.10 to $8.68. Shares continued to slide over the next two days, ending at $8.13 on Aug. 10. But there was even more pain to come for shareholders.
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On Aug. 11, Raymond James analyst Jonathan Hughes downgraded Medical Properties Trust three levels from Strong Buy to Underperform. Hughes cited underperformance in comparison to other healthcare REITs and general REIT average performance. But Hughes had other concerns as well.
"Improving operator fundamentals have been the lone positive in recent quarters but have been more than overshadowed by growing questions surrounding management communication, credibility, disclosure transparency, operator health, corporate governance, leverage and dividend sustainability," Hughes wrote.
It's bad enough when a stock is downgraded one level, like Overweight to Equal-Weight. But a three-level downgrade is a significant negative, and traders reacted the way one might expect — the stock opened down another 5% and touched a low of $7.45 before rebounding to close at $8.08.
Wall Street analysts tend to pile on after a prominent analyst downgrades a stock, so it was not surprising that later in the day, Bank of America Securities analyst Joshua Dennerlein also downgraded Medical Properties Trust from Neutral to Underperform and lowered the price target from $9 to $8.
Dennerlein's concern, like many analysts, has to do with Medical Property Trust's ongoing exposure to Steward Health Care, its top tenant, as well as its financial relationship with Prospect Medical Holdings Inc., another top tenant.
Throughout 2022 and the first three months of 2023, Medical Properties Trust shares experienced a severe decline related to concerns about its relationships with its operators and allegations of a lack of transparency. During this time, Medical Properties Trust was one of the worst-performing REITs, declining 67% from its high of $20.89 in January 2022, to a low of $6.88 in March.
The stock rebounded nicely over the next four months, reaching an intra-day high of $10.73 on July 27. But then came the second-quarter earnings report along with the downgrades and all of that changed.
With bearish sentiment presently so pervasive and a heavy short ratio of 14.9, it appears that the stock could retest those March lows again. This is a healthcare REIT that could find itself in intensive care for some time to come.
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