Medicinal properties (WKN: A0ETK5) is a really interesting dividend stock that stands out for its high yield. At currently around 8%, we really see a favorable valuation situation. The price-to-FFO ratio is also relatively cheap with a value of around 10 or rather lower.
But foolish investors know that this always represents a risk as well as an opportunity. In the REIT’s case, it is the debt in particular that can endanger the operating business. With that in mind, today let’s look at two key factors that you really need to know about real estate investment trusts. Medical Properties is a mixture of high opportunities and high risks.
Medicinal properties: yield cuts in the past
First, everyone should know about Medical Properties that management has a history of cutting dividends. If we dig into the past, we see a drop from $0.27 to $0.20 in 2008, which is not insignificant. The bottom line is that Real Estate Investment Trust only got back to the level we saw a few years ago.
Another relevant point is the performance afterwards. Medical Properties then only kept the dividend constant until 2013. So until now there has been no growth, no increases. In tough times, we see this as a somewhat vulnerable REIT that is quite willing to cut its payouts.
A risk that we should also have on our radar now. Rising interest rates can lead to bigger decisions. Depending on how much interest rates rise, sooner or later Medicinske Ejdomme will have to start thinking along these lines.
Higher debt than market value
However, the fact that there is such an option now seems to be a bit overpriced. Looking at the company’s total debt of $10.13 billion last quarter, we see that it is indeed a suffocating mountain. Which also shrank only slightly by US$70 million in a direct quarterly comparison. It’s not really a fast pace. In addition, the options are more limited if management has to prioritize repaying the liabilities in the future, and that should certainly be better.
What’s also important to me is that, at $8.6 billion, Medical Properties is valued at less than its total debt. Again, we see some market skepticism about the general picture.
Whether or not the market is right in this assessment is a question that can certainly be questioned critically. The dividend is still constant and the debt has not yet led to an operating problem. But interest rates continue to rise. Keeping an eye on the risk-reward ratio with a long-term perspective is very, very important at the moment.
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Vincent owns shares in Medical Properties. The Motley Fool does not own any of the stocks listed.