Medical Properties Trust (MPW -1.10%) is a real estate investment trust (REIT) that invests in hospitals. In recent years, healthcare has unfortunately not been a great place to invest due to the pandemic.
But the stock could be mighty tempting to contrarian investors right now. If the bears are wrong about the business and its financials improve and it continues paying a huge dividend, there could be some mammoth profits and returns to be made from owning the stock. There are, however, many ifs and uncertainties along the way that investors need to consider. Below I'll look at how the company may do over the next five years, and whether it's a worthwhile investment to consider during that time frame.
Interest rates could put a damper on growth prospects
A big obstacle facing many REITs these days is high borrowing costs. As long as interest rates remain high, that can inhibit REITs from taking on additional debt to fund property purchases and acquire more properties, which, in turn, leads to more recurring rent revenue.
As of March 31, Medical Properties had $10.4 billion in debt on its books. While the company says it has no debt maturities until 2025, it still has to pay interest, which can weigh down its financials. Interest expense during the first three months of the year totaled $97.7 million, which was 7% higher than in the prior-year period. That on top of challenging economic conditions has made it difficult for the REIT to keep its bottom line from falling; adjusted funds from operations (AFFO) totaled $179 million last quarter, and declined by 18% from a year ago.
If the REIT's financials don't improve, then not only could Medical Properties' growth prospects be limited, but the dividend could also be in danger.
Will the dividend remain intact?
The big question surrounding Medical Properties stock these days has to do with its dividend. At 11%, the REIT offers an incredibly high yield when you consider the S&P 500 average is just 1.5%. But as with many high-yielding dividend stocks, there are risks that come with it.
Medical Properties has had problems with one of its largest tenants, Prospect Medical, failing to pay its full rent this year. If that doesn't change soon or Medical Properties can't find suitable replacements for troubled tenants, that could have a huge impact on its ability to continue making dividend payments. The company could sell assets to help improve its financial position, but that's not an ideal solution for investors, especially if it's just to keep the dividend going.
The good news is that the healthcare industry appears to be rebounding and moving in the right direction, with hospitals and companies returning to more normal operations. Earlier this year, health insurer UnitedHealth Group said there was pent-up demand for surgeries. That should bode well for many of Medical Properties' tenants, and for its ability to find strong businesses to fill empty space or replace underperforming tenants.
Recently, however, Medical Properties' funds from operations haven't been enough to cover the company's dividend payments.
While there's risk here, if conditions in the healthcare industry improve, the dividend might be much safer in the not-too-distant future.
Should you invest in Medical Properties Trust today?
Over the past 12 months, shares of Medical Properties Trust have declined by 37%. The healthcare stock has bounced off of 52-week lows, but there's still ample bearishness surrounding the business. The challenge for investors today is that a lot depends on where interest rates go and how hospitals will perform during the next five years, as both could have a significant affect on Medical Properties and its ability to continue paying its current dividend.
For at least the short term, investors may want to hold off on buying the stock right now given the uncertainty. After a few more earnings reports and potentially some clarity about whether interest rates are going to come down anytime soon, investors will be in a better position to evaluate whether Medical Properties' financials are improving and whether the risk has come down enough for it to be a good buy. For now, it's too early to make that call.
