Hospital real estate investment trust (REIT) Medical Properties Trust (MPW 4.61%) currently offers an eye-popping dividend yielding more than 10%. That ultra-high yield is largely due to the steep slide in its stock price over the past year, with shares tumbling 55% since the beginning of 2022. The company is battling several headwinds, including rising interest rates and tenant-related financial challenges.
While many of its tenants have taken steps to improve their finances over the past year, others are still hurting. That's causing concerns that the dividend isn't healthy. Here's a look at what the healthcare REIT sees ahead in 2023 and what that means for its big-time payout.
A solid year despite the headwinds
Medical Properties Trust recently reported solid fourth-quarter and full-year results. The REIT earned $0.43 per share of normalized funds from operations (FFO) for the fourth quarter. That was right on the mark with analysts' expectations. It pushed its normalized FFO to $1.82 per share for the full year, a 4% increase from 2021's level.
That enabled the REIT to generate enough money to cover its dividend with room to spare. The company's most recent dividend payment of $0.29 per share represented a dividend payout ratio of 85% on an adjusted FFO basis. While that's an elevated level, it's adequate to maintain the payout.
Medical Properties Trust grew its normalized FFO in the face of higher interest rates and the impact of its capital recycling program. The company closed about $1.8 billion of asset sales last year and had another $650 million on track to close in 2023. It used those funds to strengthen its balance sheet and make selective accretive investments. The REIT acquired nearly $1.1 billion of properties last year and has over $400 million of development projects currently underway.
The tenant issues continue
Several Medical Properties Trust tenants have experienced significant financial pressures following the pandemic. While those pressures are starting to ease for many hospital operators, they remain a problem for Prospect Health. Those issues will impact Medical Properties Trust for the next several quarters.
Prospect's Pennsylvania hospitals, which it leases from Medical Properties Trust (among others), are facing financial hardship. That led Medical Properties Trust to write down the value of those properties and write off the rent due.
Given the uncertainty of that situation, Medical Properties Trust gave conservative guidance for normalized FFO this year. The REIT expects it to be in the range of $1.50 to $1.65 per share. The high end reflects the company's base case that it will start receiving rent from Prospect during the second half of this year, while the low end represents a worst-case scenario where it doesn't recover anything in 2023. That expected decline in FFO will cause its payout ratio to rise this year. Its adjusted FFO payout ratio could be over 100% at the low end.
However, Medical Properties Trust fully expects to eventually recover the rent and most, if not all, its investment in hospitals leased to Prospect. That company is working to turn around its operations and sell assets. Medical Properties Trust estimates this process will take about 12 to 18 months. It will enable the REIT to sell some of the properties currently leased to Prospect, giving the company the funds to allocate toward new investments.
In addition to that tenant headwind, higher interest rates will continue impacting Medical Properties Trust. The REIT plans to slow its acquisition pace this year until we get to a new normal on interest rates. It expects to focus on only making very strategic investments that it can fund with non-core asset sales. Longer-term, the REIT believes that it can ramp its acquisition pace back up as market conditions improve. It sees a very strong pipeline of potential deals that could help grow its normalized FFO in the future.
Not recovering as quickly as hoped
Medical Properties Trust continues to battle interest rates and tenant-related headwinds. The latter will likely have a big impact on its cash flow this year, which could affect the REIT's ability to maintain its dividend. While it expects to eventually receive that rent, it could take up to a year and a half. As a result, investors need to monitor this situation closely.
