Key Points

Medical Properties Trust encountered severe problems in recent years. However, the REIT has made significant progress in putting those issues behind it. Its stock's juicy yield looks pretty safe.

The past three years have been a roller-coaster ride for Medical Properties Trust(NYSE: MPW), a healthcare-focused real estate investment trust (REIT). The company encountered significant headwinds that negatively affected its financial results and stock price.

However, MPT has made considerable headway in putting those issues behind it. As things stand, the stock's 6% yield looks relatively safe, at least for investors willing to stay the course. Here's why.

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No more dividend cuts on the horizon

Income-focused investors often view REITs as stable options because of the regular, predictable rental income they receive from tenant companies. However, REITs are only as safe as the businesses they lease to. When some of their tenants suffer financially, they do too.

That's what happened to MPT. Over the past three years, two of its tenants -- including its (now) former largest -- filed for bankruptcy. MPT's rentals and funds from operations (FFO) dropped. The company had no choice but to cut its dividend. MPW Revenue (Quarterly) data by YCharts.

Income seekers don't like to see a payout cut, but it was a necessary evil for MPT to improve its business. Facing the loss of its largest tenant and substantial financial troubles, the company managed to craft a comeback plan. It sold some properties to raise money while finding new tenants for others that were previously occupied by its former tenants, who had declared bankruptcy.

MPT also strengthened its balance sheet and improved its financial flexibility. It used the proceeds from the sale of various facilities and other sources to pay down significant amounts of debt, totaling $2.2 billion since the beginning of 2023. The company addressed all debt maturities through 2026, and also refinanced existing debt.

All these transactions give MPT a much stronger financial foundation. That's not to mention the fact that, by putting several new tenants in old facilities, it has significantly diversified its operations; it's now far less susceptible to serious financial trouble because of the shortcomings of just one or two tenants.

MPT still isn't getting the full rental revenue from its newest tenants. They'll gradually increase the amount they pay until they match 100% of the agreed terms by the fourth quarter of next year. In other words, it will still take some time for revenue and FFO to improve significantly. But I don't foresee the company encountering more serious issues and having to cut its dividend again.

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There might be plenty of upside left

MPT's shares have crushed the market this year; they're up by 45% year to date. There are several reasons for that.

First, the stock was so beaten down that it had become undervalued, and opportunistic investors pounced despite the broader issues affecting equities. Second, dividend payers are exactly what investors look for in a challenging economic environment. Third, MPT is a REIT focusing on healthcare, a sector that will remain in high demand even if inflation or a recession hits because of the impact of tariffs.

MPT has encountered severe issues in recent years. However, it has taken steps to get back on track, and investors now have a much improved outlook on the company. That said, its shares are still down over the past three years. Even after the recent rally, the stock has lost a whopping 70% of its value: MPW data by YCharts.

True, MPT's turnaround isn't exactly complete, and there's still some risk involved. Unforeseen company-specific troubles could disrupt its plan -- recovering companies have very little margin for error. Also, the current economic situation could evolve in completely unpredictable ways.

Even so, MPT's work to get past its issues over the past three years, and the fact that its share price is still down significantly, make it a stock worth considering. I wouldn't bet the farm on the stock, but it might be worth it for income seekers to initiate a small position and progressively add more shares if the company continues to improve.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

1 Dividend Stock Yielding 6% to Buy and Hold was originally published by The Motley Fool

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