The 3 Things That Matter for Medical Properties Trust Now

Key Points

• Medical Properties Trust is a healthcare REIT focused on owning hospitals.

• Some income investors may be drawn to its huge 7.4% dividend yield.

• This is a turnaround story, but it probably won't be a quick one.

• 10 stocks we like better than Medical Properties Trust ›

Despite a lofty 7.4% or so dividend yield, Medical Properties Trust (NYSE: MPW) is not going to be an investment that will be interesting to every high-yield investor. In fact, this healthcare-focused landlord is really something of an acquired taste. If you are looking at this stock's huge yield and wondering if it is right for you, here are three things that matter (a lot) right now.

1. Don't ignore Medical Property Trust's history

Just because something happens once doesn't mean it will ever happen again. And if that thing happens twice, well, that doesn't mean it will ever happen again, either. But when things start to repeat, even if it's just two times, that thing starts to feel like a possible trend. For Medical Properties Trust, that thing was a pair of dividend cuts that took the dividend from $0.29 per share per quarter to $0.08.

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Yikes! That's a huge decline. What happened is that the real estate investment trust (REIT) had multiple large tenants that struggled to pay their rent. Medical Properties Trust had no choice but to reduce the dividend when the rent stopped being paid. What went wrong? The answer is what matters here, and the business model is partly responsible.

Medical Properties Trust owns hospitals, which are very large and specialized assets. While it owns 393 properties, it only has 53 tenants. It isn't easy to find a new tenant for a hospital property if the current tenant gets into trouble. If you are looking at the REIT right now, you'll want to understand the inherent risk of the business model here since history shows that tenant problems can quickly turn into problems for dividend investors.

2. Things are getting better for the REIT

To be fair, Medical Properties Trust's roster of tenants is showing improvement, with rent coverage improving across the portfolio in 2024. For investors who like turnaround stories, Medical Properties Trust could be an interesting story to look into now.

That said, you have to keep the basic business model in mind. Hospitals are large properties, and the fairly modest improvement in rent coverage isn't going to suddenly lead to huge profits for Medical Properties Trust. This is more of a stabilization of the business, which is clearly a vital step in the turnaround process, given the pair of dividend cuts that were made.

It matters a lot that Medical Properties Trust's tenants are doing better, and investors should keep watching to make sure the trends remain positive. But investors shouldn't buy this stock thinking that it will suddenly be a growth story.

3. A return to strong growth may take some time

One of the most important avenues of growth for a REIT is to buy new properties. The first step for Medical Properties Trust is to mend its core business, which, as noted above, it is doing. The next step will be to start buying new properties. That, however, is going to be a stretch for this REIT.

Basically, the hit from its tenants resulted in a worsening of the REIT's balance sheet. And the dividend cuts led to a dramatic fall in the stock price. Since REITs generally tap the capital markets for growth capital, Medical Properties Trust isn't exactly in a prime position to go on a buying spree.

So, the core operating performance matters a lot right now, but so does the company's financial position. You'll want to watch closely to see how management deals with leverage and its access to capital.

What matters if you are looking at Medical Properties Trust?

Every investment is unique, and every investment has its own list of complexities.

Right now, a key issue for Medical Properties Trust is a business model that seemingly failed dividend investors. The work that management has done to deal with its remaining tenants to stabilize its business is an effort that seems far from over. And the REIT is in a weakened financial state, which will likely make it harder to grow in the near term.

Yes, Medical Properties Trust has an attractive dividend yield. But given the facts that matter here, that probably won't make it a buy for most dividend investors.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.