With an ultra-high dividend yield in excess of 18%, it's no surprise that many investors are buying Medical Properties Trust (MPW -1.10%) stock over the last few weeks. But where there are high dividend yields, there's usually plenty of risk to go around, so it's key to understand how likely it is that the company will be able to sustain itself moving forward.
Let's dive in and analyze what this real estate investment trust (REIT) needs to do over the next five years to shed some light on the issue.
The big scale-down is already underway
Medical Properties Trust buys hospitals and rents them out, and then passes on the excess rental income to investors via its dividend.
However, based on what the company has been experiencing since the onset of a high interest rate macroeconomic environment a couple of years back, there's a significant likelihood that MPT will be a much smaller company by the end of 2028. There are several reasons for that.
Between now and then, it'll need to repay more than $6 billion in debt. Its trailing 12-month (TTM) cash from operations (CFO) is only $551 million. Even if it devoted 100% of its CFO toward paying down its debt -- which would mean cutting its dividend to zero -- it would still take more than 11 years to fully repay its loans. While that probably is just theoretical, as hardly any company would go down to zero debt, it does help investors understand how much Medical Properties' balance sheet is weighed down by debt, before it can think of spending for future growth.
To avoid default, the business has been selling off its properties for more than a year now. With $19 billion in assets, it can generate quite a bit of money that way. It recently sold three facilities for $100 million, and in October it completed its exit from the Australian market selling four facilities. The plan now is for MPT to sell another seven properties to one of its tenants in the first half of 2024.
The trouble with selling off assets is fewer assets means collecting far less rent. In the last three years, its quarterly revenue fell by 8%, reaching $307 million in Q3. And the decline is just getting started. There's little indication that the business has enough free capital to invest in purchasing additional properties to reverse the trend. Furthermore, management's freedom of action is going to get more and more constrained as the larger debt payments come due over the next five years.
It already cut the dividend once this year. As described by the calculation earlier, cutting the payout to zero still won't be enough to deal with its financial problems. Issuing a tremendous amount of new shares to raise capital could potentially help, but it'd inflict massive losses on shareholders in the process, and it wouldn't be enough on its own.
There isn't much chance of Medical Properties Trust benefiting from favorable changes in its operating environment either. Demand for hospital floorspace is not going to explode anytime soon, so tenants won't sign up for pricey rents. Nor is it likely that the cost of borrowing money will drop so much that it'll have the option of taking out new cheap debt to pay off its liabilities with higher interest rates. An economic boom, while possible, might not even benefit it very much unless it led to tenants needing a lot more space than before.
Here's what it'd take for a turnaround
Don't bet on MPT ending up in a better place by 2028. Its share value and dividend may well be devastated further, and its total asset base will almost certainly be much smaller.
But there may be a very bumpy and very narrow path that leads toward recovery. A new management team is a necessary precondition for any hope of the company's long-term survival. With new leaders at the helm, the brutal work of right-sizing could charge forward. Billions in assets would need to be sold with the goal of reaching total de-leveraging and resetting its fortunes. Refinancing higher-interest-rate debt would be a necessity. The dividend would also need to be slashed to zero, with the goal of reinstating it at a much later date, once new and sustainable operations were proceeding. Then would come the rebuilding, which might start by purchasing a few favorably located hospital facilities.
But such a sequence of events is either quite unlikely to happen, or at best, speculative. And it'd be devastating for shareholders either way. Therefore, in five years, expect Medical Properties Trust to be a ghost of its former self.
