Feel the yield, but know what you own

Some people buy real estate investment trust (REIT) stocks for one reason: high dividend yields. This raises the question of whether some high-value REIT stocks, like Medical Properties Trust (NYSE:MPW), could be yield traps.

That said, prudent investors should apply their ownership principles even more carefully than usual when companies like Medical Properties Trust offer very high annual dividend yields. The last thing anyone needs is to be fooled by what I call a “dividend bribe” and end up losing money when the stock price plummets.

With that in mind, today is a good day to learn more about Medical Properties Trust and determine whether the company is a viable business and not just a generous dividend distributor. Then, after considering your risk tolerance, you’ll be better equipped to decide whether MPW stock is a good fit for your portfolio.

A Friday Surprise (Or Two) for MPW Stock

Just when you think the trading day and week is over, there is always room for unexpected off-market events to occur. Medical Properties Trust shares fell 2.4% during regular trading hours and are up 12% since the close on April 12.

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 comprising approximately 43,000 licensed beds across nine countries.

That said, Medical Properties Trust is a large company, and if you’re looking to add hospital REIT stocks to your income-focused portfolio, MPW stock is a solid choice. Speaking of earnings, minutes after the market closed on Friday, the REIT announced its regular quarterly dividend of 15 cents per share.

At 60 cents per year, if MPW stock is worth about $4.48 per share (assuming no dividend cut), that translates to an annual dividend yield of 13.4%. This is a huge return, especially when compared to the real estate sector’s average 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, one of the main reasons people invest in companies is the rate of return.

However, Medical Properties Trust issued another press release almost simultaneously with its dividend announcement. Specifically, the company said it sold stakes in five Utah-based hospitals.

Medical Properties Trust expects the sale of its stake in these five hospitals to generate approximately $1.1 billion worth of proceeds “before expenses and provisions.” This development comes just days after the REIT finalized the sale of five other facilities in California and New Jersey to Prime Healthcare for $350 million.

heavy debt burden

From these two announcements, we can conclude that Medical Properties Trust will generate a total of $1.45 billion in revenue. In a press release announcing the sale of the Utah-based hospital, the company said the proceeds “will be used to reduce outstanding debt, including fully repaying approximately $300 million in Australian term loans due in 2024 and repaying borrowings.” It applies not only to ‘revolving credit facilities’ but also to the classic and vague standby ‘general corporate purposes’.

Keep in mind that Medical Properties Trust certainly has liabilities of over $300 million. In fact, the company’s net debt at the end of last year was just over $10 billion.

So even if Medical Properties Trust puts $1.45 billion of the proceeds from its recent property sales toward debt repayment, it still has a long way to go. The REIT also reported a net income loss of $556 million in 2023, suggesting there may be a clear or easy path toward full debt repayment.

Perhaps the market was trying to overlook Medical Properties Trust’s significant debt load Friday afternoon. Between the dividend announcement and the disclosure of $1.1 billion in capital injection, short-term MPW stock traders may have enjoyed an evening of jubilation.

But the big picture outlook isn’t necessarily that optimistic. Unless Medical Properties Trust moves toward profitability soon and makes significant progress in paying down its debt (easier said than done), a dividend cut could be imminent. In that regard, it would be difficult for cautious investors to trust Medical Properties Trust, despite the stock’s surge and attractive returns.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.