With a gargantuan forward dividend yield that's currently around 11%, it's no wonder investors are pondering whether to buy shares of Medical Properties Trust, (MPW -1.51%), and stat. Locking in such a high yield for the long term could generate a ton of cash, assuming the company is able to keep up the payment.
And that's exactly what might be the issue with this stock: That dividend might not be there for shareholders in the future. So let's investigate this company a bit further to see if an investment is worth the risk of its passive income potential falling short.
The risk of mediocre or zero growth looms large
The key to understanding MPT's worthiness as an investment is appreciating that it's a real estate investment trust (REIT) and what that means for its growth prospects. As a REIT, its primary means of generating revenue is from the rent it collects from tenants, which are typically hospital companies that need clinical space in one of its facilities. For 2022, its rents led to $934 million in funds from operations (FFO), a small decline from the $976 million it made in 2021.
The company also occasionally makes money by selling properties that have appreciated in value thanks to time, scarcity of land, or the improvements it made. For example, in October 2022, it sold off three of its properties for $457 million, leaving it with cash holdings of $236 million by the end of Q4. The company needs big chunks of capital on hand so that it can invest in buying new rent-bearing assets. It makes its money back over many years or perhaps even a couple of decades.
That means its growth rate will be limited by the amount of capital it has available to use to buy properties. It accumulates capital by taking on debt or selling properties. Selling its properties means making less money from rent, so taking on debt is typically the preferred method.
MPT already has more than $10.2 billion in debt, leaving debt-to-equity near 120%, which is quite high compared to other healthcare REITs. The weighted average interest rate for its outstanding debt is 3.6%, which isn't half-bad, but the debt it takes out in the future is almost certainly going to be at a higher interest rate. So growing the bottom line and consistently hiking its dividend is going to get significantly harder. And to make matters worse, it has more than $2.5 billion in debt coming due in 2026.
In other words, there is a very high chance that something is going to have to give within the next three years. Will MPT sell off more of its rent-bearing properties, thereby reducing its revenue, or will it issue pricey new debt and increase its leverage just to tread water and pay off its liabilities? It could also dilute its shareholders by issuing new stock, or perhaps slash its dividend to throw more money into repayment -- a move it last did in late 2008. And none of the above would make Medical Properties Trust investors very happy, to say the least.
There are better places to invest your money for dividends
Despite the risks talked about above, there is little chance MPT will go out of business. It owns hospital spaces, and hospitals will continue to be something that society needs for pretty much forever. Plus, its line of business isn't exactly rocket science; there isn't any chance of MPT getting into a competitive showdown with other healthcare REITs, driving its margins down, and it doesn't need to do much of anything in the way of innovation to keep collecting rent.
Still, with its risk profile being significantly less appealing than the typical REIT, Medical Properties Trust is probably not a good pick for most people, especially not for those who need to rely on it for steady income for years into the future. The risk of it continuing to underperform the market is quite high, and its dividend is far from being rock-solid in the medium-term and beyond, especially as the company sold off some of its holdings in late 2022 and refrained from hiking its dividend for 2023. If anything, the lack of a dividend increase this year is a strong sign that management sees the company's problems continuing, which is a red flag for pretty much anyone who might be interested in buying it.
There is a possibility that the company will be able to keep rewarding its shareholders with the dividend at its current size even with the upcoming headwinds. But unless you're a risk-tolerant dividend-seeker who doesn't actually need the income for anything critical, it's a better move to stay away. If its performance in the rest of 2023 is somehow different from the trend of the last year, however, it'll be time to reassess the merits of a purchase.
