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Shares of Medical Properties Trust (NYSE: MPW) fell hard on Friday, down 8.6% on the day.

The hospital-focused real estate investment trust (REIT) has been absolutely hammered this year, as quickly rising interest rates have not only hurt valuation, but also forced the company to grow at a slower pace and attempt to de-lever the business with asset sales.

While some may be hoping for a recovery, one analyst downgraded the stock again today, adding insult to injury.

Stifel downgrades Medical Properties

Today, Stifel (NYSE: SF) analyst Stephen Manaker downgraded Medical Properties from buy to hold, citing persistently tight financial conditions.

Not only do interest rates hurt Medical Properties’ valuation, but high rates also make it difficult for it to get financing. In addition, struggling hospital tenants may also have trouble getting financing for their operations, which may imperil rental payments to Medical Properties.

Manaker also noted a potential problem with one of Medical Properties’ recent asset sales. During 2023, Medical Properties has found itself in need of de-leveraging and has sold off some properties to do so. Earlier this year, Medical Properties even cut its dividend almost in half in September in order to help it pay off debt and increase flexibility.

One such sale was the sale of three hospitals to Prospect Medical Holdings. However, that sale was conditioned on Prospect then selling the hospitals to Yale New Haven Health. Manaker’s diligence has showed there is now some argument between Prospect and Yale New Haven, which could imperil the deal or result in Medical Properties getting less than previously agreed.

What can turn the situation around?

With a lower amount of assets post-divestitures, Medical Properties is estimated to only earn $0.36 in earnings this year, but $0.85 next year, according to Wall Street analysts.

That may seem cheap, given that Medical Properties’ stock is down to just $4.26, thereby trading at about 5 times next year’s estimates.

However, Medical Properties also has a massive amount of debt, as most real estate companies do, making the valuation on an enterprise value basis much higher.

Medical Properties needs its hospital tenants to recover, with more regular and elective surgeries after the COVID-19 slump, while keeping its personnel costs in check. In addition, it would also be helpful if interest rates were to come down, as their recent surge has catapulted mortgage rates higher.

Those are a lot of things that need to go right, making this high-dividend REIT still a risky play.

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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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