Especially for dividend investors, Medical Properties Trust (MPW -1.10%) is rife with pitfalls that are liable to burn your money. If that's news to you, don't feel like you're gullible; this stock is a tricky one to understand, and the factors driving its riskiness are not obvious.
Let's explore what I mean by discussing three of the biggest traps menacing shareholders with this stock.
1. Falling for the high dividend yield
The thing that draws most investors to consider an investment in Medical Properties Trust stock is its eye-popping high dividend yield, currently topping 15%. Most real estate investment trusts (REITs) feature higher-than-average dividends, with higher yields too. But in this case, it's the most obvious trap. Dividends can be cut, and this one likely will be, perhaps soon.
Its payout ratio is already far above 100%, which means that it is disbursing more cash in dividends than it is making in earnings. Per its Q2 earnings call, the business is currently considering whether it'll need to slash its payout to meet its financial obligations. That means buying the stock right now means taking on a major risk of getting less income from it than what's advertised by its dividend yield. What's more, there is a significant probability that its shares will fall whenever the dividend decrease is announced, assuming it happens. So don't fall for the dividend yield, and don't consider it as a main reason to invest.
2. Believing in vague plans for a turnaround
Medical Properties Trust has had a rough several years. In the last three years alone, its share prices are down by 49%. There are a few reasons for that decline, starting with the Federal Reserve's hiking of interest rates that use to set their own lending rates. As it gets more expensive to borrow, the market's expectations for this REIT's future growth decline, as it is largely obligated to borrow large amounts of capital to finance purchases of more hospital real estate. Furthermore, it already has $10.2 billion in debt, with a weighted average interest rate of 3.9%.
In 2024, it has a gigantic payment of $1.4 billion due. Then the next year it has $2.9 billion due. But it only has around $324 million in cash and equivalents on hand, and trailing 12-month free cash flow (FCF) of $739 million. Something has to give, as there simply isn't enough money to satisfy its liabilities in the next few years.
But many companies are struggling. The trap with this one is believing that management's vague plans for a turnaround are going to be enough. Simply put, there does not appear to be a plan whatsoever, other than to continue selling off properties to make debt payments, as it has done over the last several quarters, thereby reducing its base of rental revenue in the process.
Repeated assurances that demand for hospitals will be around forever, while true, do little to address the company's financial problems. Likewise, management's pointing to the market for healthcare real estate improving does not fix the looming debt repayment problem. Nor is it probable that its debts can be refinanced, as interest rates are currently higher than most of its loans.
So don't fall for the narrative that things are going to improve soon. And especially don't fall for management's claims about how it's actually a cabal of devilish short sellers that are tanking the stock. Having a bearish outlook for this company doesn't require being part of any kind of conspiracy.
3. Buying Medical Properties Trust "on the dip"
In keeping with the prior trap, there is another trap, which is the temptation to buy this stock while its shares are down relative to their prior highs. In the near term, there is no mechanism by which the stock could be expected to recover. Its quarterly revenue is up by only 2.4% in the last three years, reaching $337 million, and its FCF is down 50% in the same period.
Both of those figures will worsen as it sells off more of its assets and more of its debts come due. It's so indebted that its financial flexibility to procure and rent out new properties is minimal, and dwindling. Soon the dividend might get cut. And with no plan for a reversal of fortunes, people who buy the dip will get hosed. Don't fall for this trap.
