Will Medical Properties Trust Cut Its Ultra-High Dividend? 3 Reasons Not to Worry

There are dividend stocks. And there are ultra-high-yield dividend stocks. You can put Medical Properties Trust (MPW 2.65%) in the second group -- and put extra emphasis on the "ultra" part. Its dividend yield currently tops 15%.

Anytime a dividend yield gets that high, the inevitable question will be raised: Is a dividend cut coming? I think that's an appropriate question to ask in this case. Will Medical Properties Trust be forced to cut its ultra-high dividend soon? Here are three reasons not to worry.

1. The prospects related to Prospect aren't that bad

Let's first address the 800-pound gorilla in the room for Medical Properties Trust. That gorilla's name is Prospect Medical. In Medical Properties Trust's recent quarterly update, CFO Steven Hamner revealed that Prospect has not paid its full rent for January and February 2023. The low end of Medical Properties Trust's guidance range for 2023 even assumes that Prospect won't pay any rent this year.

This gorilla is indeed a hefty one. Prospect ranked as Medical Properties Trust's third-largest tenant in 2022. It made up 7.5% of total assets and generated more than 10% of total revenue.

That said, the prospects related to Prospect really aren't that bad. Hamner said in the Q4 call that the low end of the guidance range (with no revenue from Prospect) translates to adjusted funds from operations of $1.29 per share. That's more than enough to cover the current annualized dividend per share of $1.16.

Importantly, Medical Properties Trust thinks that there is only a "remote possibility" that it won't collect at least some rent from Prospect this year. In addition, the company expects that it will recover most or all of its investments plus any deferred rent payments within the next 12 to 18 months at the latest as Prospect completes some divestitures.

2. Hospital operators are in stronger financial positions overall

But what about Medical Properties Trust's other tenants? Several of them, including the biggest one -- Steward, have faced challenges in the recent past. Pipeline Health even filed for Chapter 11 bankruptcy protection in October.

However, Medical Properties Trust CEO Ed Aldag stated in the Q4 call, "We find the outlook for our tenants extremely encouraging on all fronts." He noted that public comments made recently by several U.S. hospital operators were optimistic. Staffing costs for hospitals have fallen significantly. The revenue picture is also improving thanks to reimbursement increases. 

As for Pipeline, the company reorganized and emerged from its bankruptcy process on Feb. 6. Medical Properties Trust received all of its outstanding rent payments from 2022 plus rent for January and February 2023. Although it did agree to defer $5.6 million of rent this year, that rent should be repaid with interest in 2024. 

3. Higher interest rates aren't as problematic as some might think

Medical Properties Trust is a real estate investment trust (REIT). It's no secret that higher interest rates aren't great for REITs because they result in increased borrowing costs. I don't think this issue is as problematic for Medical Properties Trust as some might think, though -- at least over the near term.

The company's debt totaled $10.3 billion as of Feb. 17. Medical Properties Trust will almost certainly have to refinance some of its debt over the next few years. It's quite possible that the company will have to do so at higher interest rates that its previous loan arrangements.

However, the healthcare REIT's liquidity stands at close to $1.2 billion. This amount plus cash from rent and interest payments from tenants should enable Medical Properties Trust to fund all operations, service its debt, and pay dividends at current levels this year.

What could change

Based on what is known at present, investors shouldn't be too worried about Medical Properties Trust reducing its dividend anytime soon. However, I can't completely rule out the possibility of a dividend cut in the future. 

What could change that might cause Medical Properties Trust to lower its dividend? If more of its big tenants can't pay their rent, that would probably do the trick. It's also not entirely out of the question that the REIT could find an investment opportunity so promising that it reduced the dividend payout to help fund the deal. Perhaps soaring interest rates in 2024 or beyond could make debt refinancing so expensive that the company would be forced to slash its dividend.

I don't think a dividend cut is on the way. I won't be surprised in the least, though, if Medical Properties Trust's ultra-high dividend yield falls due to the stock rebounding. But that's the kind of change that investors would applaud.