Some people buy real estate investment trust (REIT) stocks for just one reason: hefty dividend yields. This raises the question of whether some high-paying REIT stocks, such as Medical Properties Trust (NYSE:MPW), might be yield traps.
In other words, prudent investors must apply the know-what-you-own principle even more carefully than usual when a company like Medical Properties Trust offers an ultra-high annual dividend yield. The last thing anyone needs is to fall for what I call “dividend bribery,” only to end up losing money if the share price plunges rapidly.
With that in mind, today’s a great day to learn more about Medical Properties Trust and try to determine whether the company is a viable business instead of just a generous dividend distributor. Then, after considering your risk tolerance, you’ll be better equipped to decide whether MPW stock is appropriate for your portfolio.
A Friday surprise (or two) for MPW stock
Just when you think the trading day and week are finished, there’s always room for unexpected after-market events. In the case of Medical Properties Trust stock, it jumped 12% after the close of the market on April 12 after having declined 2.4% during the regular-hours trading session.
Let’s not get ahead of ourselves. First and foremost, Medical Properties Trust specializes in hospitals. At the end of last year, the REIT owned 439 hospital facilities throughout nine countries, comprising around 43,000 licensed beds.
In other words, Medical Properties Trust is a sizable company, and if you ever wanted to add a hospital REIT stock to your income-focused portfolio, MPW stock is an obvious choice. Speaking of income, a few minutes after the market closed on Friday, the REIT declared a regular quarterly dividend of 15 cents per share.
If that’s annualized to 60 cents per year and MPW stock is around $4.48 per share, then (assuming no dividend cuts) it would translate to a forward annual dividend yield of 13.4%. That’s a hefty yield, especially compared to the real-estate sector’s average forward annual dividend yield of 3.91%.
It’s possible then that after-hours stock traders were relieved that Medical Properties Trust didn’t cut its dividend. After all, the yield one of the main reasons people invest in the company.
However, Medical Properties Trust published another press release at around the same time as the dividend announcement. Specifically, the company disclosed that it had sold its interests in five Utah-based hospitals.
Medical Properties Trust expects to generate roughly $1.1 billion worth of proceeds “before costs and reserves” from divesting its interests in these five hospitals. This development comes just a few days after the REIT finalized the $350 million sale of five other facilities in California and New Jersey to Prime Healthcare.
A weighty debt load
From those two announcements, one can conclude that Medical Properties Trust will generate proceeds totaling $1.45 billion. In the press release announcing the divestment of the Utah-based hospitals, the company stated that it expects to use those proceeds to “reduce outstanding debt – including payment in full of the approximate $300 million Australian term loan due in 2024 and repayment of borrowings under its revolving credit facility,” as well as for the classic vague stand-by, “general corporate purposes.”
Bear in mind though that Medical Properties Trust certainly has more than $300 million worth of debt. Indeed, at the end of last year, the company had slightly more than $10 billion in net debt.
Thus, even if Medical Properties Trust committed the entire $1.45 billion in recent property-sale proceeds to paying off its debt load, it would still have a long way to go. Furthermore, the REIT reported a $556 million net earnings loss in 2023, which suggests it might have a clear or easy path toward full debt repayment.
Perhaps the market was willing to overlook Medical Properties Trust’s substantial debt burden on Friday afternoon. Between the dividend announcement and the disclosure of a $1.1 billion capital infusion, short-term MPW stock traders may have enjoyed an evening of jubilation.
However, the big-picture outlook isn’t necessarily so optimistic. Unless Medical Properties Trust steers itself toward profitability soon and makes major strides in repaying its debts — certainly easier said than done — then dividend cuts may be imminent. In that light, even with the share-price jump and the enticing yield, it should be difficult for cautious investors to place their trust in Medical Properties Trust.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
