Medical Properties Trust (MPW -1.10%) hit a two-month low on Aug. 8 after it fell 14%. The hit to the shares of the hospital-focused real estate investment trust (REIT) came after it reported a net income loss as well as a year-over-year revenue decline in the second quarter.
There are legitimate concerns about MPT, which owns and leases 444 hospitals, with 64% of them acute-care facilities in the U.S. and nine other countries.
For me the biggest worry is that starting in 2025, the company has $1.41 billion in debt that will mature. If Medical Property Trust needs to refinance that debt, the chances are that it will have to pay more in interest thanks to rising interest rates. In the short term, it paid around $104.5 million in interest in the second quarter, 19% more than it did in the same quarter last year.
Some of MPT's tenants, most notably Steward Health Care Systems and Prospect Medical Holdings, have struggled; this has led to nearly $135.3 million in rent write-offs so far this year.
Investors are also jittery about the dividend, one of the biggest reasons many bought the stock to begin with. At its current price, the yield is outstanding at 13%. And the company has increased its dividend for 10 consecutive years (though not yet this year).
However, decreased revenue in the quarter could lead MPT to cut its quarterly dividend of $0.29 per share. It trimmed its dividend at the end of the Great Recession in 2008, paring it from $0.27 to $0.20 per share each quarter. During the second-quarter earnings call, the company didn't say that it would cut the dividend, but it didn't take the move off the table either. If the dividend is cut, the stock would likely spiral further downward.
Why I still like the stock
However, a lot of the problems in MPT's second-quarter earnings report are likely temporary. Revenue was down 16% year over year, and there was a net loss of $42 million in the quarter. But much of that was due to the early termination of Steward Health Care System's leases of five Utah hospitals in May, which have since been re-leased to CommonSpirit. There was also a rent write-off of $95 million.
However, the most important metric for a REIT is funds from operations (FFO), which are needed to continue paying the dividend. FFO actually rose 23.5% year over year to $339.6 million; FFO per share rose to $0.57, compared to $0.46 in the same period a year ago. That leaves the company with an FFO payout ratio of 50.8%, meaning it can continue paying the dividend as long as FFO doesn't drop dramatically.
It's also worth noting that the company only slightly adjusted yearly guidance, and not all of that move was downward. It predicts annual normalized funds from operations (NFFO) to be between $1.53 and $1.57 per share, compared to an earlier range of $1.50 to $1.61, so the bottom end of the guidance has been raised. MPT also upgraded its guidance for annual EPS to be between $0.33 and $0.37, compared to an earlier range of $0.06 to $0.17.
While some of MPT's clients have struggled, it's worth noting that its tenant base consists of hospitals. Now that the COVID-19 pandemic is subsiding, admissions are up, as well as procedures. In the world of REITs, hospitals are a much safer bet than office buildings or apartment buildings. If one of Medical Property Trust's tenants has difficulties, MPT can sell the property or find another tenant.
Medical Properties Trust owns hospital buildings, not the businesses themselves. The company looks for attractive situations for any hospital, not just the current tenant; these include a good demographic mix in the area, a modern building, and a well-traveled location.
Hospital revenues, after dipping at times during the pandemic, are back on the rise according to U.S. Census Bureau data. Many hospitals still have a backlog of procedures that were put off during the pandemic. A survey by Cowen, taken this past spring, looked at 300 nonprofit hospitals and found 7.5% year-over-year growth in revenue in May. That's more than twice the 3.5% revenue rise shown in April.
Thanks to the bad news in its second-quarter report, Medical Properties Trust is trading at an absurdly low price-to-book ratio of 0.6. If the company doesn't decrease its dividend, buying the stock at its current price would lock in a yield of 13%. At that rate, investors would more than double their returns in six years, even if the stock stays at its current low price -- and I think it has plenty of room to go up.
