Medical Properties Trust (NYSE: MPW), a real estate investment trust (REIT) specializing in hospitals and medical facilities, caught the attention of several big-name hedge fund managers in late 2023 with its eye-popping 11.71% dividend yield. But behind that tempting payout lies a concerning dependence on troubled hospital operator Steward Health Care.
Smart Money Bets Big on Medical REIT
In the third quarter of 2023, Philippe Laffont’s Coatue Management bought 5.7 million shares of Medical Properties Trust, while Israel Englander’s Millennium Management snapped up 3.3 million shares. These prominent investors were likely attracted to the stock’s double-digit dividend yield, which seemed too good to pass up.
Medical Properties Trust’s portfolio consists of 441 medical buildings across the United States and 9 other countries. The REIT typically utilizes long-term net leases that shift variable ownership costs like taxes and maintenance to tenants. Given the essential role hospitals play in communities, Medical Properties’ cash flows should be highly reliable under normal circumstances.
Steward Health Problems Lead to Dividend Cut
The perceived stability of Medical Properties’ business model was upended in September 2023 when the company made the shocking decision to slash its dividend by 48%. This dramatic reduction was triggered by financial troubles at Steward Health Care, one of Medical Properties’ largest tenants.
Steward leases around 20% of Medical Properties’ assets. But in November 2023, it emerged that Steward failed to pay its rent to the REIT for September and October. This late payment was an ominous sign of Steward’s deteriorating finances.
The hospital operator’s prospects look even more concerning as we head into 2024. In late 2023, the U.S. Department of Justice filed a complaint alleging Steward submitted false medical claims, the latest in a string of similar violations.
Medical Properties has Some Cushion, But Risks Remain
While Steward’s situation appears dire, Medical Properties likely has enough wiggle room to maintain its newly reduced dividend rate. In Q3 2023, the REIT’s adjusted funds from operations (FFO) came in at $0.30 per share, double the $0.15 per share needed to cover the post-cut dividend.
However, if more tenants beyond just Steward run into financial hardship, it could threaten Medical Properties’ ability to meet its dividend commitment without additional cuts. The concentration risk posed by Steward is a huge red flag that has only grown more worrying over time.
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What Should Investors Do?
Medical Properties Trust’s tempting 1.71% dividend yield is precarious at best given its reliance on troubled hospital operator Steward Health Care. While the REIT will probably squeak by at the new lower dividend level, the payout doesn’t seem sustainable if business conditions deteriorate.
More risk-averse income investors may want to avoid Medical Properties stock until the overhang from Steward clears up. The smart money bought in 2023 when the yield was astronomical, but now that the payout has been halved, the risk/reward profile is far less compelling.
Medical Properties Trust provides a cautionary tale on the dangers of reaching for unsustainably high yields. While the big dividend is alluring, prudent investors should be wary of situations where outsized payouts could signal underlying financial strain.
The road ahead remains uncertain for Medical Properties given its tenant concentrations, making the stock too risky for most dividend portfolios.