Medical Properties Trust (MPW -1.10%) is a real estate investment trust (REIT) that pays a dividend that, at its current share price, yields close to 13%. That high payout could be incredibly attractive to investors. But the danger with such yields is that they are usually high for a reason, and are typically a sign that investors lack trust in the company's ability to maintain the payouts. Is Medical Properties's dividend too good to be true, or are investors overlooking a potential steal of a deal?
What Medical Properties' latest earnings numbers show
A big risk with Medical Properties Trust relates to its tenants (which are predominantly hospitals) and their ability to pay rent. The pandemic created many problems for hospitals, disrupting their normal operations and causing a surge in staffing costs. And at least one of the REIT's tenants, Prospect Medical, has struggled to pay its full rent in the wake of the crisis. As a result, investors have been uneasy about the prospects for the REIT's dividends.
For the third quarter, Medical Properties reported normalized funds from operations (FFO) of $0.38 per share, which was down from $0.45 per share in the prior-year period. FFO is a key metric for REITs, and it is viewed by the industry as a better gauge of profitability than net income, which can include non-cash costs such as depreciation. FFO is also a better indicator of a REIT's ability to pay dividends. And while Medical Properties's FFO declined on a year-over-year basis, it was still more than double the REIT's quarterly dividend payment of $0.15 per share.
Medical Properties slashed its dividend earlier this year. Previously, it was paying investors $0.29 per share. But due to the challenges it was facing, the REIT needed to adjust its dividend policy.
Medical Properties' guidance is encouraging
This year, Medical Properties is forecasting that its normalized FFO will fall within a range of $1.56 per share to $1.58 per share. Even at the low end of its estimate, that would suggest a 38% payout ratio, based on normalized FFO. That's encouraging for investors -- it suggests that even if the REIT faces some more challenges down the road, it could absorb higher costs and still afford to pay the current dividend.
As long as Medical Properties can sustain this level of profitability, the dividend will be in good shape. The risk, however, is that the company runs into further problems collecting rent from tenants.
The dividend looks safe -- for now
At its reduced payout, Medical Properties does appear to have a more sustainable dividend. Its earnings numbers are down, but based on its modest payout ratio, there don't appear to be immediate concerns surrounding the sustainability of the dividend.
Although the yield remains high, that has a lot to do with the degree to which the stock has been struggling. Investors have generally not been bullish on REITs this year amid rising interest rates. The Vanguard Real Estate ETF is down about 12% year to date. But that pales in comparison to the tumble taken by Medical Properties stock -- it has plunged by 57%. The healthcare stock wasn't doing that much worse than the ETF, but after the dividend cut in August, shares of Medical Properties went into a tailspin.
Is Medical Properties Trust a good stock to buy?
Medical Properties does appear to be an enticing contrarian investment right now. There's some risk here, but it's less than it was in the past. The dividend is more sustainable. The healthcare industry appears to be in better shape now that operations are returning to normal, and while COVID-19 remains an issue and a health hazard, it isn't threatening to disrupt hospital operations, which, in turn, should improve hospitals' prospects for profitability.
This is by no means a surefire investment, but if you're willing to take on some risk, Medical Properties could make for an underrated buy right now. The market has punished the stock severely, perhaps excessively, to the point that it's trading near its 52-week low. That has created a potential buying opportunity for investors. The shares may still fall given all the bearishness, but considering the REIT's recent performance and its encouraging outlook, this could be a good contrarian stock worth buying right now.
