Buy, sell or keep medical real estate? Key tips ahead of third quarter earnings

Medical Properties Trust, Inc. MPW, also known as MPT, plans to release third-quarter 2024 earnings results on Nov. 7, before the opening bell. The Zacks Consensus Estimate for normalized funds from operations (FFO) per share and earnings for the reported quarter is 20 cents and $241.2 million, respectively.

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The Zacks Consensus Estimate for third-quarter normalized FFO per share has declined two cents to 20 cents over the past two months. This figure implies a year-on-year decline of 47.4%. The Zacks Consensus Estimate for quarterly earnings is calling for a year-over-year decline of 21.3%.

For the current year, the Zacks Consensus Estimate for Medical Properties’ normalized FFO per share is pegged at 85 cents, indicating a decline of 46.5% year-over-year. Consensus estimates for 2024 revenue are projected at $1.01 billion, representing year-over-year growth of 15.8%.

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Over the last four quarters, this Birmingham, Alabama-based healthcare REIT has topped the Zacks Consensus Estimate three times and missed the Zacks Consensus Estimate once, with an average surprise of 13.2%. This is depicted in the following diagram.

Medical Properties Trust, Inc. Price and a surprise for the promotion

Medical Properties Trust, Inc. price-eps-surprise | Quote: Medical Properties Trust, Inc.

Our proven model doesn’t predict a clear surprise in Medical Properties’ FFO per share this season. The combination of a positive earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of hitting FFO, which is not the case here.

Medical Properties has an Earnings ESP of 0.00% and currently carries a Zacks Rank of 5 (Strong Sell). You can find the best stocks to buy or sell before they’re even reported using our Earnings ESP filter.

You can see See the complete list of today’s Zacks #1 Rank stocks here.

The rent reduction will likely impact the company’s quarterly revenue. The Zacks Consensus Estimate for third-quarter rents is pegged at $167.1 million, suggesting a decline from the $183.8 million reported in the prior-year quarter and $229.3 million in the year-ago period. The consensus estimate for finance lease revenue is $18.4 million, representing a decrease from the $27.6 million reported in the prior-year quarter and the $26.1 million reported in the year-ago quarter.

In addition, high interest expenses in a higher interest rate environment and the impact of some troubled operators are expected to cloud the company’s quarterly results.

However, MPT is pursuing a disciplined capital recycling strategy through which it divests non-core assets and reallocates proceeds to acquisitions of premium assets and development projects. In July 2024, the company sold the 50-bed Arizona General Hospital in Mesa, Arizona, and seven free-standing emergency departments to Dignity Health for $160 million. This sale resulted in a gain on the sale of the property of approximately $85 million and a write-off of approximately $20 million in direct rent receivables.

The consensus estimate for direct rent is valued at $40.5 million, which implies an increase from the $38.4 million reported in the prior quarter and $21.5 million in the year-ago period.

Medical Properties has elected to conduct liquidity transactions in excess of $2.5 billion year-to-date through August 6, 2024. The move was aimed at strengthening its balance sheet position.

Shares of Medical Properties are up 0.6% over the past three months. This compares to the Zacks REIT and Equity Trust – Other industry’s gain of 4.9% and the S&P 500’s gain of 11.2% over the same period.

His industry colleagues such as Ventas VCR and Healthpeak properties DOC also left Medical Properties behind, with shares of those companies up 10% and 5.7%, respectively, over the same period.

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The stock trades at a forward 12-month price to FFO of 5.77X, which is well below the industry average of 16.40X. Its forward 12-month price to FFO ratio is above the median of 4.27X and close to the yearly high of 7.46X.

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Medical Properties has recently been the subject of allegations from short sellers. However, in October 2024, the company’s board released the results of an independent investigation that found no misconduct or misconduct by management. The company previously terminated its partnership with Steward Health Care System, allowing operations to be immediately transferred to 15 hospitals across the country.

In addition, risks associated with some troubled operators, as well as high interest costs, remain concerns. Analysts’ southward revisions to FFO estimates reflect similar sentiment.

While Medical Properties stock is currently trading at a discount to its industry peers, this valuation differential may not be as favorable as it appears. A lower price may indicate underlying problems rather than a clear investment opportunity.

Therefore, new investors may want to stay away from this stock for now. Those eyeing the stock may want to wait for a better entry point as the company overcomes carrier concentration issues. However, existing investors who have held MPW for a long period may want to consider taking profits at this point as the company’s previously discussed issues in the third quarter of 2024 are cause for concern.

Note: Everything related to earnings presented in this article is funds from operations (FFO), a widely used metric to evaluate the performance of a REIT.

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