If the sky-high forward dividend yield of 8.6% is making you consider a purchase of Medical Properties Trust (MPW -4.06%) stock, you aren’t alone. The future of this hospital real estate business seems quite certain; it’ll keep doing what has worked in the past, namely buying and then renting out healthcare spaces. And because there’s little chance that the underlying demand for hospital real estate is going to drop much, the risks of an investment appear to be limited given the amazing yield.
But Medical Properties Trust has a bit of an obstacle course to navigate within the next five years, and the investments it makes in that period could potentially sow the seeds of trouble farther down the line. Let’s map out the obstacles and risks it’ll face between now and 2028 to see if its passive income-making potential is as good as it looks at first glance.
Debt looms large
At the start of 2028, Medical Properties will likely have a larger base of rental revenue than it does now; the only question is by how much. Wall Street analysts, on average, don’t expect the company to generate much more in 2023 than the approximately $1.5 billion it’s anticipated to bring in for 2022, and it’s possible that the top line will actually shrink slightly this year. But at least six of its ongoing development projects will start to yield rent in the next few years, with two hospital projects in Spain slated to commence this year. So even if the company doesn’t grow rapidly, we can reasonably expect a larger top line.
It’ll also almost certainly have more long-term debt, because it will need to procure additional properties to continue growing. Right now, it has almost $9.5 billion in debt, which isn’t an exceptionally high load in the context of its market cap of around $8.3 billion. More concerning is that its position in 2028 will be determined by how it pays off the large loans that are coming due in 2026 and 2027.
Based on its total liabilities as of Q3 2022, the company will see 22.9% of its total debt mature in 2026 and 16.8% mature in 2027. In 2026, it’ll be on the hook for more than $1.5 billion in its senior unsecured notes alone, and in 2027, it will have to cough up $1.4 billion to pay off the same type of debt. And that’s not even counting the money that will be needed to pay off its term loans and borrowing from its revolving credit facility, which will be nearly $638 million in 2026 and $200 million the year after.
Medical Properties’ ability to pay those loans in a timely fashion isn’t currently in question, since its trailing-12-month net income of more than $1.2 billion will be sufficient to do so even if earnings don’t grow at all, especially when paired with its current cash holdings of $299 million. Saving a little extra cash each quarter between now and the debt’s due dates should make the payoff even more manageable. The question is whether the company will be able to maintain its dividend and its pace of dividend increases.
Count on the dividend, but not a raise
At the moment, the business pays out just over 55% of its earnings to shareholders, and its dividend has only grown by a measly 16% in the last five years. For reference, Medical Properties also paid back more than $1.5 billion in debt over the last 12 months, leaving it with around $792 million in trailing free cash flow (FCF). Unless its revenue and earnings both crash, it’ll probably be able to maintain the status quo for its payout. And it could potentially afford to increase the pace of its dividend hikes, though there’s not much sign of that being a priority for management.
Still, it’s very unlikely that this stock will beat the market’s return over the next five years, and that makes it a poor choice for most investors. In short, its debt-driven business model is especially unfavorable at the moment due to the Federal Reserve’s crusade against inflation, which is making borrowing costs rise precipitously. The loans that Medical Properties takes out today will have less favorable terms than the loans it’ll be repaying soon, and that means the shareholders of the future will be owning shares of a company with a trickier debt burden and no real tailwinds for future returns.
After all, demand for hospital space isn’t going to be significantly higher in the future relative to today. Population growth is more or less the only long-term trend in Medical Properties Trust’s favor, and the U.S. population isn’t expected to boom anytime soon.
If you’re a passive income investor looking for an income stream that you don’t need to grow by very much over time, this stock could fit your bill. Otherwise, it would be better to look for a company that’s in a growing market, because that’s where your returns will be much better.