2023-08-16 06:07:12 ET
Summary
- Medical Properties Trust is considering a dividend cut due to growing risks and the need to pay down debt.
- The trust may have to sell more assets or cut its dividend to make debt payments.
- Despite concerns, the trust's valuation is attractive and a dividend cut could be a buying opportunity.
After many quarters of enviable commitment to the healthcare real estate investment trust’s dividend, Medical Properties Trust, Inc ( MPW ) appears to be on the brink of announcing a dividend cut.
Even though Medical Properties Trust covered its dividend with funds from operations in the second quarter, I acknowledge growing risks to the dividend and lower my Buy rating illustrated in my article Compelling Value Proposition At 13.2% Dividend .
The trust is focusing on asset sales and needs to pay down debt, so I wouldn’t expect a sudden uptick in FFO in the short-term. While a dividend cut seems more likely, I don’t think selling now is a viable option for passive income investors that have stuck it out this far. In fact, I think a possible announcement of a dividend cut could be considered a call to buy the trust’s stock, as I will explain in this article. For now, MPW stock is a hold.
Portfolio Positioning And Asset Sales
Medical Properties Trust is a healthcare REIT with a preeminent focus on General Acute Care Hospitals and Inpatient Rehabilitation Facilities. At the end of the second quarter, Medical Properties Trust owned 444 real estate facilities (the same amount it owned at the end of 1Q-23) which produced annualized revenues of $1.35 billion. The majority (61%) of the fund’s asset were located in the United States which is the trust’s core market. Other facilities can be found in the United Kingdom, Spain, Germany, Switzerland and Australia.
Medical Properties Trust has two problems at the moment that could impact the trust’s ability to pay its dividend moving forward, namely, some of its tenants are struggling making rent payments and the REIT carries a formidable debt burden.
A substantial portion of the trust’s debt matures in the next couple of years and the REIT may have to sell more assets in order to make debt payments (the trust already announced the sale its Australian hospital assets in the second quarter). At the end of 2Q-23, Medical Properties Trust owed $10.3 billion in debt and the trust will have to refinance about 23% of this sum by the end of 2025.
To accomplish this, the trust may have to turn to more asset sales, or decide to cut its dividend. Medical Properties Trust sold 3 General Acute hospitals to Prime Healthcare in July for $100 million and more asset sales could follow.
The easiest way to raise cash, however, would be to cut the dividend which costs the REIT about $175 million a quarter. To take pressure off of Medical Properties Trust's cash flow, the trust could decide to lower its dividend by 50% which would save the company $88 million each quarter.
Medical Properties Trust’s CFO, Steven Hamner, said on the 2Q-23 earnings call that “everything is on the table”, which was widely understood to mean that the REIT could be considering a dividend cut to improve its liquidity/debt situation.
Medical Properties Trust’s Dividend Coverage In 2Q-23 Improved QoQ
Even though Medical Properties Trust covered its dividend with FFO in the second quarter, the market is now pricing in a dividend cut.
Medical Properties Trust earned its dividend with FFO as well as AFFO, but there are pressures from the debt side of the business that could force the REIT to slash its pay-out in spite of overall good dividend coverage: In the second quarter, Medical Properties Trust paid out just 71% of its AFFO.
Medical Properties Trust's FFO Multiple Remains Attractive, Downgrade Due To Growing Dividend Risks
Though uncertainty about the dividend lingers, investors can’t say that Medical Properties Trust’s valuation is expensive. The trust guided for $1.53-1.57 per share in (normalized) FFO for 2023 which translates into approximately $0.39 per share in FFO per quarter, so the dividend should remain covered in 2023.
From a valuation perspective, MPW is cheap: The trust’s stock sold last Friday for $8.08, implying an FFO multiple of 5.2x. In January, MPW sold for more than 10x FFO. While dividend jitters have some merit given the debt burden and announced asset sales, MPW is clearly selling at an attractive FFO multiple. Taking into account the REIT’s low valuation based on FFO, I would not recommend to sell the stock, even if the dividend gets a haircut.
Warning Signs And Stock Risks
Ironically, a dividend cut could potentially be a buy signal for the stock because the safest dividend is quite often the one that has just been slashed or completely axed.
An official announcement that the dividend will be cut could lead to a selloff as passive income investors re-balance their investment portfolios, but I would expect such an announcement to ultimately be a catalyst for the trust’s battered stock.
As investors gain visibility on the trust’s future balance sheet and cash flow, a reduced dividend could ultimately be a reason for passive income investors to buy MPW, even at a lower yield.
My Conclusion
Concerns over Medical Properties Trust’s ability to sustain its 14% dividend yield have lingered in the market for quite a while and I think we are nearing a point in which management will decide that it is in the best interest of investors to slash the dividend pay-out.
Medical Properties Trust is still focused on asset sales which is set to pressure the trust’s FFO in the coming quarters and the REIT needs to tackle its considerable debt. If management actually slashes its dividend, the selloff that would likely result, would, in my view, be a buying opportunity.
As things stand now, I have adopted a hold/neutral rating on MPW. I might raise my rating to buy in case Medical Properties Trust announces a dividend cut.
For further details see:
Medical Properties Trust: Dividend Cut Incoming (Downgrade)