Medical Properties Trust (MPW 0.65%) stock is trading at a little more than a $1 higher than its 52-week low, and its dividend yield is an enticing 14%. However, the real estate investment trust (REIT) is facing multiple issues with struggling tenants and a recent short-seller attack. The stock is down more than 62% in the past year, and so far in 2023, it is down more than 27%.
The healthcare REIT said on March 30 that it was suing Viceroy Research, calling the short seller's allegations about the company baseless. (A short seller hopes to profit when a company's shares decline.) The company is seeking compensatory and punitive damages from Viceroy, which has published 11 different articles slamming Medical Properties Trust this year alone, saying the REIT is overstating its assets and will have no choice but to cut its dividend.
Given the concerns about Medical Properties, is it safe to buy the stock now that it's selling for only roughly 5 times earnings, or would investors be attempting to catch a proverbial falling knife?
It has a stable business model
Medical Properties is the second-largest non-governmental owner of hospital assets in the world, with 444 properties in 34 states and 10 countries. Its portfolio includes 202 general acute-care hospitals and 112 inpatient rehabilitation care facilities.
The company has in recent years focused on diversifying it tenant base. Its largest tenant, Steward Health Care System, is responsible for 19% of the company's portfolio, down from nearly 40% a few years ago. Medical Properties also holds a rising number of behavioral health facilities, and its 67 properties in that category produce 14% of its revenue.
While there was an 84% rise in large healthcare bankruptcies last year, with 46 bankruptcies among companies with more than $10 million in liabilities, according to a report by Gibbins Advisors, only two hospitals filed for bankruptcy: Pipeline Health in El Segundo, California (which leased from Medical Properties Trust), and Children's Hospital in San Juan, Puerto Rico.
There are still plenty of economic stresses affecting hospitals, including rising labor costs, supply chain bottlenecks, lower investment returns, and higher interest rates.
It's important to note, though, that even when one of its tenants filed for bankruptcy, Medical Properties Trust was able to adapt, either by working with the company, selling the property, or leasing it to a new tenant. The restructuring of Pipeline Health still meant that the REIT was paid 100% of the company's bankruptcy-period rent, and the leases were affirmed with no reduction in future rents, it said in a recent shareholder letter. Whenever it has sold assets, it has managed to do so at a profit, it said.
Medical Properties Trust's stock rose recently after it said that it was selling 11 Australian hospitals that are operated by Healthscope to affiliates of HMC Capital, including HealthCo Healthcare & Wellness REIT, for $800 million. The deal is expected to close in the second half of this year. What that shows is that hospital properties are still in strong demand. It also allows Medical Properties Trust to pay down debt.
The dividend does face some risk
At the current share price, the company's quarterly dividend of $0.29 delivers a yield of more than 14%. A yield that high normally comes with flashing warning signs, but there are mitigating factors to that risk here.
First, as a REIT, the company is required to distribute at least 90% of its taxable income through dividends every year. If you take into account the company's quarterly adjusted funds from operations (AFFO) per share of $0.34, the dividend's AFFO payout ratio is 85% -- a little high, even for a REIT, but certainly sustainable in the short term.
Medical Properties Trust has raised its dividend for 11 consecutive years and management knows it can't cut that payout without sending investors sprinting for the exits. That doesn't mean the company won't trim its dividend if it needs to, as it did in 2008 during the Great Recession. However, looking at the company's situation, a cut is unlikely to happen unless more of its tenants go into default.
The company's decision to jettison some properties may help its bottom line, but it also means it will have less cash flow coming in to pay future dividends. It's telling that the company hasn't announced a dividend increase for 2023 yet -- in the past two years, it had done so by February.
However, given that its lawsuit against Viceroy calls the short seller's claims baseless, it would be hard for Medical Properties Trust to cut its dividend now. It's more likely that it will maintain its dividend at the current level until its cash flow improves.
MPW Dividend Data source: YCharts.
Strong financials in 2022
Last year, Medical Properties Trust's revenue declined by 0.1% -- not a huge drop -- to $1.542 billion. Meanwhile, its net income rose 38% to $903.8 million, or earnings per share (EPS) of $1.50 compared to $656.9 million and $1.11 in EPS in 2021. Adjusted funds from operations (AFFO), a better metric for judging REITs than net income, ticked up by 4.8% to $850.1 million, with AFFO per share of $1.42 compared to $1.37 in the prior year.
Overall, the company is still pretty healthy, especially as a long-term investment. If you want to buy a high-yielding dividend stock at a reasonable price, it's still a fairly safe bet, particularly at its current reduced price. However, realize that management may not deliver a dividend increase this year.
