When you're investing in a high-yield stock like Medical Properties Trust (MPW 7.42%) that's intended as a long-term holding for the purposes of generating dividends, it pays to know about the little details that might affect your income stream in the future.
On that note, there are three things in particular that smart investors are likely to appreciate about Medical Properties Trust, thereby shaping their decisions to invest or look elsewhere. While two of the three are focused on risks, the third is a benefit that may surprise you. So let's dive in.
1. It probably won't outperform the market
The first thing that smart investors know about Medical Properties Trust and, indeed, most real estate investment trusts (REITs), is that it shouldn't be expected to outperform the market with any consistency. The reason for this is that its business model works by investing large amounts of capital into new properties (or loans backed by properties), and then leasing out those properties to long-duration tenants like hospitals and clinics for an interest rate in the high single-digit percentage point range.
For example, in the second quarter, Medical Properties bought two hospitals in Arizona and Florida for a total of $80 million, and it currently has around $257.2 million in cash and equivalents in the bank. It'll likely take in the ballpark of a decade for the company to break even on that investment.
So, if it wants to make additional purchases, it'll need to use its profits, or take out new debt -- and it already has a debt load of more than $10.1 billion, which is larger than its market cap of $8.9 billion. And with interest rates rising right now, it may not be able to borrow at a low enough rate to break even on its investments.
That makes the prospect of Medical Properties Trust growing faster than the market's long-term average of 10% to 11% quite improbable. But for investors chasing its dividend income potential, that isn't a major deterrent to buying a few shares anyway.
2. Its dividend could get cut if times get tough
Smart investors also know that dividend payments can get slashed, put on hold, or left static rather than being hiked, and this business is no exception.
In fact, in 2008, the REIT did slash its quarterly dividend payment from $0.27 to $0.20, and it didn't start to hike the payout again until 2014. Of course, the financial crisis of 2008 and the recession that followed were exceptionally difficult times to do business -- but such economic crises happen at least once per decade, so they should be expected.
At the moment, there's no reason to expect Medical Properties Trust to pause or halt its dividend increases again. On the other hand, conservative investors are likely to note the difference in dependability between the REIT and groups of stocks like the Dividend Aristocrats, which have decades-long histories of maintaining and hiking their payments regardless of economic conditions. This business could eventually join that club, but savvy investors also recognize that there's a reason few REITs manage to meet the requirements.
3. It has a built-in protection from inflation
Inflation has a way of destroying returns, but Medical Properties Trust has a safeguard in place: annual rent escalations tied to inflation. For 2022's high-inflation environment, it expects to hike rents by around 4.4%, though it could go higher if necessary. While the rent escalator clauses in its leases don't make it into a business that might actually benefit from inflation, they do ensure that its cash flows are less likely to fall behind its obligations when prices are generally rising.
Furthermore, its tenants are healthcare companies and clinics, which in the U.S. are paid by insurance companies. Given that people pay annually escalating insurance premiums regardless of whether they need to seek care at a hospital, the REIT is quite insulated from the economic effects that inflation causes for its tenants, who are themselves somewhat insulated from the effects on consumers.
That means smart investors don't expect Medical Properties' tenants to default at a higher rate than normal in an inflationary economy, at least not for a good while after the onset.