2 Big Knocks Against Medical Properties Trust Could Be Way Overblown

Poor Medical Properties Trust (MPW -2.15%). Its shares have plunged more than 50% over the last 12 months. Short-sellers have piled on, driving the short percentage of float to over 27%. Even some investors who liked the stock in the past have changed their minds.

There are several good reasons to be concerned. However, Medical Properties Trust (MPT) might not be in as dire straits as some would have you believe. Here are two big knocks against the company and its stock that could be way overblown.

Big knock No. 1: Financial challenges are overwhelming

One narrative about MPT is that the financial challenges for its tenants are jeopardizing the company's own financial position. And the idea is that in turn poses a major risk to the company's dividend.

To be sure, several of MPT's tenants have faced financial challenges. Its biggest tenant, Steward, has experienced issues. In 2022, another major tenant, Pipeline Health, filed for Chapter 11 bankruptcy. Yet another one, Prospect Medical, is behind on its rent payments so far this year.

But are these tenants' financial challenges really jeopardizing MPT's own financial position and dividend? Not at this point. The real estate investment trust (REIT) continues to generate positive net income and normalized funds from operations. It continues to be able to fund the dividend without any cuts.

CEO Ed Aldag stated on the company's first-quarter conference call that conditions for hospital operators are improving. He noted that admissions are "steadily increasing" with surgical volumes looking "even better." 

Steward hasn't missed any rent payments. Pipeline exited bankruptcy with MPT receiving all the money it was due. MPT said that Prospect now has "a binding commitment from a third-party lender that will provide significant liquidity." The REIT expects to begin collecting rent from Prospect again in September. It remains confident that it will recover its full investment in Prospect.

Big knock No. 2: Rising interest rates are a huge threat

Another big criticism related to MPT is that rising interest rates present a huge threat. The premise is that the company will be forced to refinance its significant debt at a higher cost. The thinking is that this could ultimately cause MPT to cut its dividend.

But this might not be as big of an issue for MPT as you might think. It's certainly not an imminent one. As CFO Steven Hamner noted in the Q1 call, the company will be able to easily pay all of its debt maturing in 2023 and 2024. 

What about going forward? It's first important to note that all of MPT's long-term debt is at fixed rates. Higher interest rates won't impact the REIT unless and until it needs to refinance debt.

Hamner noted that MPT "carefully plan[s] on staggered maturities." Only a portion of its total debt will mature during any given year. The biggest chunk -- nearly $2.7 billion -- will come due in 2026. 

Perhaps the most important thing to understand, though, is that MPT's business model anticipates the possibility of rising interest rates. Nearly all of its leases include annual contractual rent escalators tied to inflation.

Inflationary pressures lead to higher interest rates. MPT's leases are basically designed to go up enough to cover increases in interest rates. As Hamner put it, the REIT's rents should "increase at rates at least comparable to interest rate increases in our maturing debt issues." In other words, if MPT has to refinance its debt at higher interest rates, its rent payments will increase enough to offset the higher interest costs.

Overblown, but still there

Are these two knocks against MPT way overblown? I think so. However, that doesn't mean the issues are nonexistent.

Even with improving financial conditions for hospital operators, MPT's tenants aren't out of the woods yet. That means the risk level for the REIT remains elevated. I suspect that MPT's executives are right to be optimistic about fully recovering all money invested in Prospect. There is still a chance, though, that MPT could lose some money.

And while the interest rate issue for MPT probably isn't as bad as some make it out to be, it's still problematic. Aldag acknowledged in the Q1 call that the REIT doesn't expect to make any significant acquisitions for now. Higher interest rates absolutely dampen MPT's growth prospects.

Because of these two factors, MPT isn't an ideal stock for risk-averse investors. But with a sky-high dividend yield of over 13% and the real possibility that a short squeeze could happen, my view is that this is a stock that aggressive investors willing to go against the conventional wisdom might want to at least check out.