Dividend investors loathe payout cuts, but sometimes they are necessary for a corporation facing significant headwinds to get back on track. Take Medical Properties Trust (MPW +2.28%), a healthcare-focused real estate investment trust (REIT). The company has struggled over the past two years due to tenant-related issues. It had to cut its dividends twice as a result. However, MPT has made significant strides in the right direction, and the company may soon resume raising its dividends. Here's the rundown.
MPT has started righting the ship
The REIT business seems somewhat stable. These companies operate real estate properties that they rent out to businesses, collecting regular and consistent rental income. Easy enough. REITs in the healthcare sector can appear even more reliable, as medical care remains in high demand regardless of economic conditions. However, even health-focused businesses can encounter issues and go bankrupt. That's what happened to two of MPT's former tenants, including one that was, at some point, its largest. The company's financial results took a significant hit. It hasn't recovered yet. MPT's revenue is still moving in the wrong direction.
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But the comeback has already begun. MPT found multiple new tenants to occupy most of the facilities formerly rented out by its then-largest client that went bankrupt. Among other things, that means the company's portfolio is now more diversified. One or two tenants going out of business is unlikely to affect MPT as much as it did last time. The new contracts it signed with its new renters have an average lease of 18 years. Regular rental income for almost two decades provides MPT with some security, provided, of course, these new tenants don't go out of business, too. While that could certainly happen, these moves make the company far more stable than it was when its troubles first started.
Why the dividend could go up
MPT's quarterly dividend per share went from $0.29 to $0.15 to $0.08 in less than two years. Not only was it dealing with rapidly declining revenue, but it also had pressing financial obligations that needed to be addressed.
MPT has worked to solve both problems. The company's new tenants aren't paying the full rental amount due -- at least not yet. They began doing so only in the first quarter, and they are currently paying only a fraction of it.
They will gradually increase rent payments to 100% of the due amount by the fourth quarter of 2026. By the time MPT starts collecting the full amount, its revenue should move in the right direction since it expects about $160 million in rental revenue from these facilities.
NYSE: MPW
Key Data Points
In the first quarter, the company's revenue declined by 17.5% year over year to $223.8 million; $160 million represents more than half of its first-quarter revenue. Even assuming the $223.8 million included 50% of the full rental income it will receive from these new tenants by the fourth quarter of 2026 (it doesn't, the payments will reach 50% by the end of this year), it would still mean that MPT would be adding $80 million in revenue by the end of next year.
Adding that to its first-quarter revenue would have led to year-over-year top-line growth of 12% compared to the first quarter of 2024. Decent revenue growth awaits MPT, and that will allow it to improve its bottom-line numbers as well. Further, the company has improved its balance sheet. MPT sold some facilities to raise money and pay down debt, amounting to $2.2 billion between early 2023 and the end of 2024.
It's harder for a company to raise dividends when it has to worry about upcoming obligations. However, the recent moves MPT made, which also included refinancing existing debt, have granted it far more financial flexibility. The stage is set for MPT to start growing its dividend again. Don't expect a massive hike, but with a stable payout program that could start growing again next year and a 7.3% forward yield, the company is far more attractive as an income stock than it was just two years ago. Yet, the stock is still down by 51% over this period.
In my view, it's still time to buy the stock. MPT's shares should move in the right direction as its comeback continues.
