2023-08-14 12:41:32 ET
Summary
- Medical Properties Trust's dividend is uncertain, causing shares to sell off and making its high-yield bonds attractive to investors.
- The company's second-quarter financial results were weaker than the previous year, with lower revenues and higher expenses.
- Medical Properties Trust has a growing reliance on credit, with a significant amount of debt coming due in the next few years.
Medical Properties Trust ( MPW ) is a global REIT that specializes in the ownership of hospitals and other specialized care facilities. The company reported its second quarter earnings last week and during the conference call, management took a less than certain stance regarding the future of its dividend. While the possibility of a dividend cut caused shares to selloff, the company’s high yield bonds also sold off. Now, with the prospect of the dividend being reduced, Medical Properties Trust’s 2029 maturing debt and its 10.15% yield should look attractive to high yield investors.
Earnings Call Transcript
FINRA
Medical Properties Trust’s second quarter financial results were noticeably weaker than the same quarter a year ago. Revenues were $63 million lower, led by a $95 million write off in straight-line rent. Expenses were significantly higher due to a $286 million write off intangible assets. If you strip out the intangible write-off, total expenses were still higher compared to the second quarter a year ago due to higher borrowing costs.
Medical Properties Trust has engaged in some asset sales during the 2023 calendar year, and this is indicated on the balance sheet. Total net real estate assets declined by nearly a billion dollars to $13.8 billion, but total debt barely inched down. The company has also been engaging in joint ventures and investments in unconsolidated operating entities, with about $3.3 billion worth of investments on the books in 2023. Overall, the reduction in physical assets with a slower reduction of debt is a leading driver behind the $280 million drop in equity to $8.3 billion.
A better way to cut through the intangible write-offs and rent forgiveness and get an apples to apples comparison is to look at the company’s operating cash flows. After all non-cash related expenses are removed and changes in working capital are accounted for, Medical Properties Trust saw a drop in operating cash flow by one third to $212 million for the first half of this year. After $150 million in capital expenditures, the remaining free cash flow of $62 million is far below last year’s $250 million and the company’s six-month dividend obligation of $350 million.
The company was able to pay off term loan debt to the tune of nearly $485 million, but that was due to the sale of assets, not the generation of cash from day to day operations. Furthermore, the company needed to draw $270 million from its revolving credit facility. The dependence of a credit line is okay, but not when making dividend payments at the size that Medical Properties Trust is making.
Medical Properties Trust has a growing reliance on credit at the worst possible time. Interest rates are continuing to rise, and the company has just under $2.5 billion in debt coming due between now and the end of 2025. More than $1 billion of this debt consists of low interest rate bonds, with over $1 billion more in 2.5% and below interest rate bonds coming due in 2026. The company’s interest expenses are about to explode when this debt gets refinanced, and this will create serious headwinds on earnings and cash flow.
Through the corrective measure of reducing its dividend, Medical Properties Trust should be able to generate the cash flow needed to support its existing debt levels for an extended period of time. Currently, the company has approximately $800 million in liquidity existing from cash on hand combined with revolving credit capacity that can aid its endeavors should refinancing become a problem.
In addition to being able to support its debt through a reasonable approach to distributions, Medical Properties Trust needs to manage its tenant’s financial problems. Fortunately, they have had some success here. During the second quarter, Medical Properties Trust assisted Prospect in its recapitalization by making an equity investment and convertible loan in Prospect in exchange for preservation of the existing master lease (no future rent reductions) and forgiveness of straight line rent (hence the write-off).
Pipeline Health, another Medical Properties Trust tenant, filed for Chapter 11 bankruptcy protection last October. Despite the filing, the lease signed between the two parties remains in place and rent has been paid through the end of the first quarter, with a bankruptcy settlement handling the collection of deferred rents by 2024.
Following the end of the second quarter, Medical Properties Trust also flew to the aid of Steward, its largest tenant. The company underwrote a $140 million asset backed loan to help the struggling hospital operator. The loan is secured by accounts receivable, which is a very safe form of collateral.
These examples are why Medical Properties Trust has boosted its investments in unconsolidated operating entities by nearly $400 million this year. This is also where investors need to keep an eye on the risks, as opposed to scrutinizing lease agreements and rent revenues.
Medical Properties Trust has a 49% equity ownership in Prospect along with $362 million in loans secured by the equity of Steward Health Care, and other equity investments in operators. Should bankruptcy be filed by these entities, the equity portion of their investments would undoubtedly take a hit, leading to large write-offs on the Medical Properties Trust balance sheet. Because of the risk associated with these investments, I doubt the company will be able to collateralize these assets against any new type of financing.
Another concern is debt covenants. During the conference call, a comment was made that the Board of Directors is examining different options to ensure that liquidity is higher than the minimum required. The mere mention of this has me thinking that the company is coming close to violating one or more of its debt covenants. The covenants are vaguely mentioned in the 10-Q filing, but they exist, and debt holders are likely becoming concerned with Medical Properties Trust’s willingness to finance dividends with new borrowings.
Earnings Call Transcript
Overall, I believe that Medical Properties Trust management has finally seen the light and a dividend reduction should be getting announced shortly. The tightening of the cash flow reigns will help the company’s bondholders, as they stand to benefit from the reduction of new financing. Therefore, a shift from Medical Properties Trust shares to their debt is the most sensible decision for income investors to make.
For further details see:
Medical Properties Trust: Possible Dividend Cut Makes 10% Yielding Debt Attractive