If you're like most investors who know about Medical Properties Trust (MPW -0.22%), you've probably drooled over its shockingly high forward dividend yield, which is around 11% as of this writing. But as the old saying goes, not all that glitters is gold, and there's a lot more to this stock's story than its yield -- and its story has been darkening substantially over the past six months.
Smart investors know three critical things about this company that average investors might be missing. Let's examine each and figure out whether this business is actually as tempting as it might appear to be at first.
1. Its top line might shrink (again), and stagnation is likely
Smart investors understand that MPT's base of revenue rises when it procures more properties, because gaining rentable floor space yields more rent. At the same time, if it sells off its real estate to pay back debt or to realize a gain on its investments, its top line will contract, since it can't collect rent from assets it no longer owns. The company can also bring in more revenue by hiking rents, and in 2023, it expects this move to bring in an additional $57 million.
Company revenue was down slightly in 2022 as compared to 2021, with the fourth quarter notching a 7% year-over-year drop to $380 million. That quarterly drop is likely a result of MPT's move in October 2022 to sell off three of its leased facilities for $457 million. Wall Street analysts predict that the company will bring in only $1.49 billion for 2023 compared to its total revenue of $1.54 billion in 2022. Estimates for 2024 look largely the same as 2022, which implies that the amount of rental income won't be growing.
And in the company's guidance for 2023, published with its latest earnings update in late February, management said that its revenue and earnings estimates didn't account for "the possible future impact of deleveraging and other capital markets strategies." That language was conspicuously absent from its guidance for 2022, which could imply a shift in priorities, and it should certainly prompt shareholders to reassess their investing thesis for the stock.
In other words, don't expect MPT to make any big new investments anytime soon, and it will likely continue to try to deleverage, which I'll discuss more later in this article. If anything, savvy investors anticipate that the company will continue to sell off property to accomplish that goal. That is a bad sign, because for it to have any hope of hiking its dividend over time, the top line needs to keep growing, as there aren't any major efficiency improvements to its operations that would yield the necessary bottom-line growth to then pay out to shareholders.
2. Interest rates are moving in the wrong direction for MPT to succeed in the near term
The second thing canny investors know about this healthcare real estate investment trust (REIT) is that its future returns are largely determined by its cost of borrowing money. Because the company needs to take out huge swaths of debt to make pricey purchases of hospital real estate, low interest rates make for much better earnings, and the reverse is also true.
For example, if MPT can buy a property for $1 million using debt with an interest rate of 3.5% and make $100,000 (10%) per year by renting the property out, it won't have any problem pocketing the spread between the $35,000 it pays toward interest and the amount it charges in rent, even when considering the cost of paying off the principle at the same time. And in that situation, there's plenty of leftover cash to pass on to the shareholders via the dividend.
Right now, MPT's weighted average interest rate is about 3.6% for its $10.3 billion in debt. The trouble is, borrowing costs are rising for everyone as a result of inflation and the Federal Reserve's quest to keep inflation under control, and they might not stop rising anytime soon. This means that the properties MPT buys in the near future from which to make rental income will yield less than the ones it bought in the past, which is highly bearish for its shareholders.
3. A colossal amount of debt will soon be due
The final thing smart investors are attentive to is that Medical Properties Trust has a boatload of borrowing that's coming home to roost, and quite soon. In 2025, the company will be on the hook for more than $1.3 billion. In 2026, it'll need to cough up more than $2.6 billion, and in 2027, it'll need to pay in the ballpark of $1.6 billion. For reference, MPT currently has only around $236 million in cash, and its cash from operations (CFO) for 2022 was $812 million.
See the problem? Even if the company can make as much CFO in 2023 through 2025 as it did last year, it'll still potentially come up short with the amount it needs for its balloon payments in 2026, and the debt due in 2024 is already so large that committing the entire annual CFO is unlikely to cover it. So it's possible that MPT might not be able to save up cash to help with the paydown before the money is due, at least not without selling off more of its holdings or reducing its commitment to paying its dividend at the current rate. And given that it opted not to increase its payout for 2023, the dividend is looking increasingly unreliable.
Per its annual report, the company expects to need to refinance at least some of the debt before it matures, but it's unclear how that could work in the current environment of rising interest rates.
Smart investors can see that the company might need to sell off assets to have enough money to pay the bank, and there's no way that would be good for shareholders.
