If one of a company's core metrics for predicting its future returns worsened by around 0.1% from one quarter to the next, most of the time it wouldn't be worth following up on. Such an insignificant proportional change could easily be random noise rather than a concerning signal.
But for Medical Properties Trust (MPW -1.10%), that fraction of a percent is yet another piece of bad news. Here's why.
Debt servicing costs are climbing
Real estate investment trusts (REITs) like Medical Properties Trust operate by borrowing tons of money and then using that money to buy real estate, which in this company's case means hospital and clinical properties. Then, over the following years, the properties yield rental income that's used to pay for the REIT's overhead costs, while it also pays down its debts and gives excess capital to shareholders via the dividend. Once the company is deleveraged enough to borrow more money at an attractive interest rate, it can make additional acquisitions and grow its top and bottom lines.
But the more precarious its balance sheet is, the higher the interest rate lenders will demand for their money. And since those lenders need to borrow money themselves from major financial institutions, the rates they offer are linked directly to the Federal Reserve's prime rate. That rate has risen considerably as the Fed attempts to control inflation, thereby making it pricier to borrow. Those higher borrowing costs have trickled down to Medical Properties Trust just as its balance sheet is looking vulnerable.
In the second quarter of this year, MPT reported that it was paying a weighted average interest rate of 3.9% on its $10.2 billion in debt. A mere quarter before that, its weighted average interest rate was close to 3.8%. The quarter-to-quarter rise of around 0.1% doesn't seem like much at all until you consider that the weighted rate was 3.3% in the second quarter of 2022.
The trend is bad, and it will likely continue to worsen. Borrowing at a higher rate today than in the past means having less money left over every quarter, which will be a significant headwind.
There's little hope in the near term
It's true that MPT's weighted average interest rate has been higher in the past than it is right now. For instance, five years ago, in Q2 of 2018, it was 4.5%. But back then, it only had around $4.8 billion in total debt, with almost nothing due for payoff within a year.
This time around, it has a lot of debt due over the next few years, and far less financial flexibility to meet its obligations. In 2026 alone, it'll be on the hook for $2.9 billion, which is vastly greater than its cash and equivalents of $324 million, as well as its trailing-12-month cash from operations (CFO) of $607 million. To try to make those numbers square with its looming liabilities, it already announced a cut to its dividend on Aug. 21.
What's more, it's selling off seven Australian hospitals, as well as its holdings in Connecticut, so it won't have as much money coming in. But even that might not be enough, given that it has to pay nearly $2 billion in debt during 2024 and 2025. Remember, selling off more properties means that it'll have far less money coming in, even if it can pick up a few hundred million dollars as a result of the transactions. Most of those proceeds will need to go toward debt repayment rather than growth.
All of this means Medical Properties Trust is likely to continue losing value for the next few years. Further cuts to the dividend, while unthinkable at the moment, could be on the table once again soon enough. I'd stay away from this stock, and for those who still own it, to seriously think of other alternatives.
