Medical Properties Trust (MPW 2.65%) stock has been under tremendous pressure over the past year. Several headwinds have weighed on shares, including higher interest rates and financially challenged tenants. These issues have put pressure on its financial profile.
The company has been working to improve its financial health by selling hospitals to bolster its financial flexibility. It recently took another big step toward alleviating some of its financial pressure by agreeing to sell its Australian hospitals. Here's a closer look at that deal and what it might mean for the real estate investment trust's (REIT)'s 14.5%-yielding dividend.
Another step toward improving its financial health
After months of speculation, Medical Properties Trust revealed that it has agreed to unload its Australian real estate investments. It's selling the 11 hospital properties leased to Healthscope to affiliates of HMC Capital, including HeathCo Healthcare & Wellness REIT. It will receive about 1.2 billion Australian dollars ($800 million) in cash from the sale, which it expects will close in the second half of this year.
The company intends to use the entire proceeds to repay a AU$1.2 billion term loan that matures next year, which it used to fund the initial acquisition in 2019. That loan is one of three scheduled debt maturities over the next two years. The company also has $483.3 million of euro notes that mature this year and a British pound sterling (GBP) term loan with a roughly $127 million balance due next year.
Medical Properties Trust has been working feverishly to get ahead of these debt maturities, given the significant rise in interest rates and the tightening of the credit markets. It likely would not have been able to extend or refinance this debt at an attractive rate (it had fixed rates of 2.55% on the euro notes, 2.45% on the AU loan, and 5.25% on the GPB loan). That's led it to sell several assets recently, including the Connecticut hospitals currently leased to Prospect Medical for $457 million. The company also recently received a $205 million loan-balance payoff. Those proceeds and its cash on hand ($236 million at the end of 2022) will be enough to address its debt maturities for the next two years.
What the sale might mean for the massive dividend
Cash flow is under pressure
While Medical Properties Trust has taken several steps to shore up its balance sheet, the REIT is doing so at the expense of rental income. Asset sales and higher interest rates reduced its normalized funds from operations (FFO) to an annual run rate of $1.71 per share at the end of last year, down from its full-year total of $1.82 per share. Meanwhile, issues with Prospect Medical's Pennsylvania operations will push normalized FFO down to $1.50 to $1.65 per share this year. On a positive note, even at the low end, the company expected to produce enough cash to cover its current dividend level after adjusting for cash rent received versus billed rent. However, its dividend payout ratio would be very high at 90% of its adjusted FFO.
The sale of the Australian properties will lop another $54 million from its annualized rent at current exchange rates. That's about 4.6% of the total rent it billed last year. Because of that, the sale will put additional downward pressure on the REIT's cash flows and thus, its ability to maintain the dividend.
On a more positive note, Medical Properties Trust does eventually expect to receive all the rent owned by Prospect Medical. It also plans to sell those properties and reinvest the proceeds into new investments that generate steadier rental income. However, it could take 12 to 18 months for that to happen.
A dividend cut seems increasingly likely
Because of that, it seems increasingly likely that Medical Properties Trust will eventually reduce its dividend. While the company could generate enough cash to cover the payout, it's getting tougher to justify the high payout in the current environment. The REIT could make better use of that cash by reallocating it toward repaying additional debt, repurchasing its beaten-down shares or making accretive new investments.
Analysts increasingly see a dividend cut as likely. For example, Truist analyst Michael Lewis recently slashed their price target on the stock from $14 to $8. Lewis noted that the REIT would likely cut the dividend by 31%.
Another positive step but more progress needed
Medical Properties Trust continues to take steps to shore up its financial situation as it works to get out ahead of upcoming debt maturities. While these moves are bolstering its balance sheet, they're having an impact on rental income. Given Prospect's turnaround timeline, it will be a while before cash flow bottoms out and starts recovering. Because of that, the risk of a dividend reduction remains high in the coming quarters.
