Where Will Medical Properties Trust Be in 5 Years?

If the sky-high ahead dividend yield of 8.6% is making you take into account a purchase order of Medical Properties Trust (MPW -2.19%) inventory, you are not alone. The way forward for this hospital actual property enterprise appears fairly sure; it’s going to hold doing what has labored in the previous, particularly shopping for after which renting out healthcare areas. And as a result of there’s little likelihood that the underlying demand for hospital actual property goes to drop a lot, the dangers of an funding seem like restricted given the wonderful yield.
But Medical Properties Trust has a little bit of an impediment course to navigate inside the subsequent 5 years, and the investments it makes in that interval may probably sow the seeds of bother farther down the road. Let’s map out the obstacles and dangers it’s going to face between now and 2028 to see if its passive income-making potential is nearly as good because it appears at first look.

Debt looms massive
At the beginning of 2028, Medical Properties will doubtless have a bigger base of rental income than it does now; the one query is by how a lot. Wall Street analysts, on common, do not count on the corporate to generate way more in 2023 than the roughly $1.5 billion it is anticipated to carry in for 2022, and it is potential that the highest line will really shrink barely this 12 months. But no less than six of its ongoing growth initiatives will begin to yield lease in the subsequent few years, with two hospital initiatives in Spain slated to start this 12 months. So even when the corporate would not develop quickly, we will moderately count on a bigger high line.
It’ll additionally nearly definitely have extra long-term debt, as a result of it might want to procure extra properties to proceed rising. Right now, it has nearly $9.5 billion in debt, which is not an exceptionally excessive load in the context of its market cap of round $8.3 billion. More regarding is that its place in 2028 will probably be decided by the way it pays off the massive loans which are coming due in 2026 and 2027.
Based on its whole liabilities as of Q3 2022, the corporate will see 22.9% of its whole debt mature in 2026 and 16.8% mature in 2027. In 2026, it’s going to be on the hook for greater than $1.5 billion in its senior unsecured notes alone, and in 2027, it must cough up $1.4 billion to repay the identical sort of debt. And that is not even counting the cash that will probably be wanted to repay its time period loans and borrowing from its revolving credit score facility, which will probably be almost $638 million in 2026 and $200 million the 12 months after.
Medical Properties’ means to pay these loans in a well timed style is not at present in query, since its trailing-12-month web earnings of greater than $1.2 billion will probably be ample to take action even when earnings do not develop in any respect, particularly when paired with its present money holdings of $299 million. Saving a bit further money every quarter between now and the debt’s due dates ought to make the payoff much more manageable. The query is whether or not the corporate will be capable of preserve its dividend and its tempo of dividend will increase.
Count on the dividend, however not a elevate
At the second, the enterprise pays out simply over 55% of its earnings to shareholders, and its dividend has solely grown by a measly 16% in the final 5 years. For reference, Medical Properties additionally paid again greater than $1.5 billion in debt over the past 12 months, leaving it with round $792 million in trailing free money move (FCF). Unless its income and earnings each crash, it’s going to in all probability be capable of preserve the established order for its payout. And it may probably afford to extend the tempo of its dividend hikes, although there’s not a lot signal of that being a precedence for administration.
Still, it is most unlikely that this inventory will beat the market’s return over the subsequent 5 years, and that makes it a poor alternative for many traders. In quick, its debt-driven enterprise mannequin is very unfavorable in the meanwhile because of the Federal Reserve’s campaign towards inflation, which is making borrowing prices rise precipitously. The loans that Medical Properties takes out right now can have much less favorable phrases than the loans it’s going to be repaying quickly, and meaning the shareholders of the longer term will probably be proudly owning shares of an organization with a trickier debt burden and no actual tailwinds for future returns.
After all, demand for hospital house is not going to be considerably larger in the longer term relative to right now. Population progress is kind of the one long-term pattern in Medical Properties Trust’s favor, and the U.S. inhabitants is not anticipated to growth anytime quickly.
If you are a passive earnings investor searching for an earnings stream that you just needn’t develop by very a lot over time, this inventory may suit your invoice. (*5*), it will be higher to look for an organization that is in a rising market, as a result of that is the place your returns will probably be a lot better.

Alex Carchidi has no place in any of the shares talked about. The Motley Fool has no place in any of the shares talked about. The Motley Fool has a disclosure coverage.

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