Don't Even Think About Buying Medical Properties Trust Until You Read This

Medical Properties Trust (NYSE: MPT) has been in the headlines a lot over the past few years. Its two largest tenants went bankrupt, causing significant issues for the real estate investment trust (REIT). It has also battled short-sellers and balance sheet problems.

While most of those issues are now in the rearview mirror, it doesn't mean Medical Properties Trust is entirely in the clear. Here's one thing investors need to understand before investing in the healthcare REIT.

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Still way too high

Medical Properties Trust has had a dual focus over the past few years. It has had to address tenant-related issues while simultaneously shoring up its balance sheet. It has largely addressed the tenant bankruptcies by either selling or leasing the properties to new operators. The company noted in its recent fourth-quarter earnings report that it signed a new 15-year lease for six hospitals in California formerly leased to Prospect Medical Holdings, while selling two other properties. It now has only one more property tied to Prospect that's under contract to sell.

The REIT has also sold several other hospital properties over the past few years to help repay maturing debt. The company's tenant issues, along with higher interest rates, made it difficult to refinance debt on attractive terms.

However, while Medical Properties Trust has repaid significant debt over the years, it still has a very high leverage ratio. It was 8.5 times at the end of the fourth quarter, well above the 6.0 times or less of safe REITs.

Elevated for a while

One reason Medical Properties has such an elevated leverage level is that it's giving its new tenants time to ramp up their operations by allowing them to pay escalating rental rates. For example, rents from new tenants formerly leased to another bankrupt operator totaled $22 million in the fourth quarter, up from $16 million in the third quarter. These tenants will continue to pay more rent each quarter until they reach the fully stabilized rate at the end of this year. Likewise, rents for those six California hospitals will fully stabilize at an annualized rate of $45 million this December.

By the end of this year, Medical Properties Trust expects the annualized rent of its current portfolio to reach $1 billion. As its rental income grows, its leverage ratio should fall. However, it will take time.

That will restrict its ability to grow in the near term. While the REIT did capitalize on two small acquisition opportunities in the fourth quarter, it must remain highly selective in making new investments. Further, Medical Properties Trust could continue to capitalize on opportunities to selectively sell properties to repay additional debt or fund new investments.

A higher-risk REIT

Medical Properties Trust has made significant progress in improving its portfolio and financial profile over the past few years. However, the REIT still has an elevated leverage ratio, which makes it a riskier investment. While its leverage ratio should steadily decline as new tenants pay rising rental rates, it could hinder the REIT's growth in the interim. As a result, it's not a good option for those seeking a safe REIT investment right now.

Matt DiLallo has positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.