Medical Properties Trust (MPW -1.10%) is arguably one of the most polarizing stocks around. Some believe it has significant upside potential: The average analyst's 12-month price target is more than 20% above the current share price. Others think the stock is poised to plunge further: As of June 15, 29% of its float was sold short.
Which side is right? Two Motley Fool contributors offer up the bull and bear arguments for Medical Properties Trust.
The bull case
Keith Speights: I can sum up the bull case for Medical Properties Trust in four words: The worst is over. If that view is correct, the stock should deliver solid returns for investors just by paying its dividends at current levels.
MPT's dividend yield currently stands at nearly 12%. The stock could go nowhere and still be a big winner: With 12% dividends, you could double your money in roughly six years.
But is the worst really over for MPT? I think so. The company is a real estate investment trust (REIT) that leases properties to hospital operators. The hospital industry has endured tough times over the last few years. Several of MPT's tenants faced serious financial challenges.
However, reimbursement levels have increased. Admissions are up. So are procedure volumes. All of this bodes well for hospital operators and for MPT.
Aggressive interest rate hikes by the Federal Reserve have also caused grief for REITs, including MPT. But the Fed has moderated its rate increases. Although a couple of small bumps could be on the way this year, it seems likely that rates will begin to decrease in 2024.
The bear case
Adria Cimino: Medical Properties Trust share prices have dropped nearly 40% over the past year. That's as two of its biggest tenants -- Prospect Medical and Steward Health Care -- faced financial troubles. But while Steward continued to add to revenue in the most recent quarter, Prospect has been unable to pay rent -- and that means it contributed nothing to the healthcare REIT's revenue in the quarter.
Prospect recently completed new financing with lenders. And MPT said in its earnings call that it expects to resume collecting some monthly rent from Prospect in September. Though this is positive news, the situation shows us how vulnerable the REIT is to difficulties at hospitals.
On top of this, today's rising-interest-rate environment could present another hurdle for Medical Properties Trust. That's because higher rates may weigh on its ability to borrow and expand. And the extra costs created by higher rates may make it more difficult for the REIT's tenants to make rent payments. So even if the Prospect financing leads to brighter days with that particular tenant, MPT could still face similar challenges down the road.
I have one final concern about Medical Properties Trust: the ability of the healthcare property giant to maintain its dividend. Many investors seek out this sort of investment specifically for dividend payments. Right now, MPT pays $1.16 per share. This produces an extraordinarily high yield of around 12%, due to recent share declines.
However, a look at Medical Properties Trust's debt-service coverage ratio could add to investor worries. This is a measure of an entity's ability to repay loans:
MPW Operating Income (Annual) data by YCharts.
Medical Properties Trust recently said a sale of its Australian portfolio will help cover its debt maturities through 2024; that's good news. But it's still not clear how the REIT will address debt payments down the road -- without cutting its dividend.
The dividend divide
It appears that a key difference between the views of Medical Properties Trust bears and bulls is whether or not the REIT's dividend is sustainable. What happens with interest rates could tilt the balance to either side.
However, Medical Properties Trust CFO Steven Hamner noted in the company's first-quarter update that nearly all of MPT's leases have contractual rent increases tied to inflation. Interest rates will only rise if inflation remains stubbornly high. Hamner maintained that MPT's business model is built to withstand interest-rate volatility.
Higher interest rates certainly aren't great for Medical Properties Trust. But if Hamner is correct, it's possible that they won't force the company to cut its dividend.
