Is Medical Properties Trust Finally a Buy?

Medical Properties Trust (NYSE:MPW) is a medical real estate investment trust that offers a 7.5% dividend yield. While this yield is very high, it hasn’t been enough to keep investors from losing money on the stock over the last few years.

MPW shares peaked in 2022 at about $18.25 per share. More recently, shares of the trust go for less than $5.00 per share.

Has Medical Properties Trust finally fallen far enough to be worth buying, or is this still one REIT to stay away from?

MPW’s Declining Revenues and Debt Problems

One of the core struggles MPW has experienced over the past two years is falling revenue. The company has reported declining revenue in each of the last nine quarters. Unfortunately, the rate of decline is only increasing at this point. In Q3, for instance, total revenues fell by over 26% compared to the year-ago quarter.

Much of this revenue decline has been the result of MPW liquidating properties, a practice that has caused the company’s total assets to decline substantially. Q3 alone saw total assets drop by nearly 20% on a year-over-year basis.

While selling off properties has allowed the company to free up cash, it has also reduced the size of its rental income.

Underlying the sale of MPW’s assets and the revenue decline that has gone along with it is an unsustainable debt load. Even with some significant repayments over the last year, the company’s long-term debt stands at $9.2 billion.

Considering that the company has had to sell properties to repay some of this debt and that revenues are still falling, MPW’s obligations could still represent a significant risk.

Worse yet is the fact that these trends have led MPW to slash its dividend. As recently as 2023, Medical Properties Trust paid $1.16 annually per share. That number was cut to $0.60 in mid-2023, then again to $0.32 earlier this year.

This trend has burned investors who bought MPW for its dividend as recently as a year and a half ago.

It’s also not entirely clear that Medical Properties Trust is done with its dividend cuts. In Q3, the company lost $1.34 per share on a net basis. This was the fourth straight quarter in which the company reported negative net income.

Given the company’s recent history, it seems likely that further dividend cuts could occur if MPW can’t return to positive earnings or at least reduce its losses soon.

MPW May Still Be Overvalued

Another issue for MPW is the fact that the stock could still be overvalued. At first glance, MPW’s valuation metrics actually look fairly positive, especially the price-to-earnings ratio of 5.3 and price-to-earnings-growth ratio of 0.7x.

These discounts, however, are likely fully justified by the company’s declining revenues and debt load. Unless Medical Properties Trust can successfully turn its business around, it makes all the sense in the world for its shares to trade at very low price multiples.

Moreover, the price-to-cash-flow ratio of 34x and the price-to-sales ratio of 1.9x are quite high for a company that is shrinking instead of growing. In spite of low ratios elsewhere, this leaves the door open to the possibility that MPW is actually trading above its fair value.

Is There a Chance for a Turnaround?

Despite its problems, Medical Properties Trust is making serious efforts to get itself back on firmer footing. The company has cut its relationship with a key tenant that had been a drag on its portfolio for multiple years.

Management is also rotating new tenants into its properties in an attempt to revitalize revenue growth. These efforts, combined with MPW’s work to pay off its debts, have at least the potential to bring the company back from its troubles and put it on a more positive trajectory.

It’s also important to recognize that the asset sales MPW has conducted over the last year have largely been undertaken in order to shore up the company’s finances.

While it’s far from ideal to see a REIT selling off properties, it was likely necessary in order for Medical Properties Trust to have chance of making a comeback. If management can execute well going forward, these sales could prove to be worthwhile.

Is Medical Properties Trust Finally a Buy?

Even with its very high dividend yield, there’s probably a stronger case for selling Medical Properties Trust than buying it right now.

With the dividend having already been cut and future cuts far from impossible, it’s uncertain whether or not this REIT’s income potential has much of a lifespan. Until MPW can get its debts under control and begin building its revenues again, the stock is likely too risky for investors to depend on for income.

There’s also a fairly strong case to be made against MPW when other REITs are brought in for comparison. Realty Income (NYSE:O), for instance, is delivering a 5.6% dividend yield with much less uncertainty and financial risk.

Though MPW’s dividend does outpace many REITs, there are other options for getting high dividend yields that don’t have the same difficulties as Medical Properties Trust.

With that said, it’s worth acknowledging that there are also still more bullish views out there on MPW. Analysts project a median target price of $5 for the stock over the coming year, an increase of almost 18%.

If MPW actually gained that much and continued to deliver a 7.5% dividend, shareholders would see excellent total returns in the next 12 months.

The bull case on MPW hinges on management being able to turn the company’s revenue trajectory around and return to profitability.

Ultimately, MPW is likely better to sell or hold now than it is to buy. Some investors who already own the stock may prefer to wait out the company’s troubles in hopes of a turnaround. For those who aren’t already in MPW, though, the risks seem to outweigh the rewards.

If management can get the company back on track, investors will likely still be able to get reasonably high dividend yields by buying the shares further down the road.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.