2023-09-21 03:03:21 ET
Summary
- Medical Properties Trust (MPW) is expected to face liquidity issues in the coming quarters and has worrisome refinancing needs in the next three years.
- Despite cutting its dividend in half, MPW's dividend is still unsustainable, and a liquidity crunch is expected if management doesn't take action.
- MPW has been financing its dividend through asset sales and borrowings, but its cash position will change dramatically in December when a bond matures.
Medical Properties Trust ( MPW ) is expected to have a tough liquidity position in the coming quarters, plus its refinancing needs in the next three years are quite worrisome.
As I've covered previously , I have been bearish on MPW over the past few months as the dividend was not sustainable and the company has several fundamental issues that it needs to address. Since my last article , when I lowered my recommendation to 'Strong Sell', its shares are down by more than 15%, clearly underperforming the market during this period.
Article performance (Seeking Alpha)
While MPW has recently cut in half its dividend, I still see its dividend as unsustainable and expect a liquidity crunch in the near future, if management don't take actions to improve its cash position. Regarding this last issue I've received some pushback, thus in this article I analyze in more detail MPW's liquidity issues and potential actions it may take to address it over the next few months.
Liquidity Profile
As I've discussed previously , I see MPW's investment case highly geared to its high-dividend yield, but this represents a cash burn that the company does not have capacity to sustain over the long term. In 2022 , its cash outflow related to dividend payments amounted to nearly $700 million, and after its dividend cut its annual outflow is around $360 million.
While this represents a lower cash burn for MPW, its organic cash flow over the past six months was rather weak, given that its cash flow from operations was only $212 million and capital expenditures amounted to some $180 million. Therefore, free cash flow was only $32 million in the first half of 2023, clearly not enough to cover its historical dividend payments ($350 million in H1 2023) and outflows expected in the coming quarters (some $75 million per quarter).
Looking at the company's cash flow statement, MPW has financed its dividend in the past few quarters through asset sales and borrowings, an unsustainable situation over the long term. While its cash position at the end of last June enables it to pay the reduced quarterly dividend from cash on hand, this situation will change dramatically next December.
Indeed, MPW's cash balance was $329 million at the end of June , while its quarterly dividend payment amount to some $75 million. Therefore, its next quarterly dividend expected to be paid next October is not an issue, but MPW has a significant cash outflow next December related to a sterling bond.
Its £400 million bond matures on December 5, 2023, which at current exchange rate leads to an outflow of nearly $500 million. While MPW does not have enough cash to pay this debt, this doesn't mean it will go bankrupt next December, given that it can continue to borrow from its revolving credit facility with JPMorgan ( JPM ).
According to Bloomberg data, this revolving credit facility has a total approved amount of $1.8 billion, of which MPW already has used more than $1.2 billion. Therefore, MPW will need to borrow an additional amount during Q4 to pay down its sterling bond and maintain some cash on hand, more likely will borrow the remaining amount of $589 million available.
I think this is the most likely outcome to refinance this bond because MPW's current bonds are trading with very high credit spreads, leading to current yields between 12-14% depending on the maturity date. Even for more short-dated bonds, with maturities in 2026 and 2027, current yields are around these levels, which make it practically impossible to refinance in the capital markets due to prohibitive costs and likely low appetite of credit investors for new bonds.
Taking into account that MPW's organic cash flow generation after dividend payments has been negative in recent quarters, I expect MPW's cash position at the end of the year to be around $300 million, assuming that it will use its revolving credit facility in full to refinance the upcoming bond maturity.
In 2024, MPW had a significant loan reaching maturity in Australian dollars, but it has reached a few months ago a deal to sell some assets, enabling it to repay in full the related AUD loans. Therefore, during 2024, the company now only has a sterling term loan to pay, amounting to some $130 million.
Assuming a cash position of $300 million by end-2023, this means MPW will run out of cash during 2024, if management does not take action to improve its liquidity profile. Moreover, while during 2024 debt maturities are not really concerning, during 2025 it has more than $1.4 billion in loan and bond maturities, being a big issue to address. In 2026, it has loans and bonds maturing with a total amount of about $2.8 billion, being even more worrisome.
This means that MPW can handle its short-term liquidity issues by doing asset sales, plus raising some borrowings even if at a high cost, but in the next three years it has some $4.2 billion to refinance, which is a considerable amount, representing some 41% of its total debt.
Therefore, while its liquidity position is not great and I expect it to face some issues in the coming quarters, if it does not find alternative financing sources, this does not necessarily means it will enter bankruptcy in the near term.
For instance, if MPW uses in full its revolving credit facility, JPMorgan will have an exposure at default of some $1.8 billion, which is relevant even for a large bank like JPMorgan. To give some context, JPMorgan's provisions for loan losses amounted to nearly $6.4 billion in 2022, thus having a single exposure defaulting by $1.8 billion is a significant hit for the bank. Therefore, if MPW gets into a tight liquidity position, JPMorgan may have some incentive to continue financing MPW instead of letting it fail.
Nevertheless, at this point, MPW much likely will only be able to get secured loans from the bank, for which it will use its properties as collateral. This should not be a problem given that MPW has about 440 properties valued at more than $19 billion, more than enough to use as collateral for new loans.
Taking into account MPW's expected cash outflows over the next few quarters related to dividends and loan maturities, plus the fact that is operations are generating enough cash flow to finance this outflows, raising new loans or selling assets will be key for MPW to show that it will not face a liquidity crunch over the next six to nine months. Until the company does that, I think investors should stay away of its shares, as further decline is possible when the market starts to really worry about MPW's liquidity issues.
Conclusion
Medical Properties Trust's organic cash flow generation after dividend payments is quite limited and its available financing sources are running out, putting the company in a potential difficult liquidity position over the next six to nine months. While MPW's share price has declined significantly over the past eighteen months and its current valuation is low compared to its peers, this seems to be justified by the company's fundamental issues and remains a stock to avoid.
For further details see:
Should You Be Worried About Medical Properties Trust's Liquidity Profile?