Medical Properties Trust (MPW -1.10%) offers an eye-popping dividend yield approaching 15%. That's due to the significant slump in the stock price as the healthcare REIT battled a barrage of headwinds, which put substantial downward pressure on its stock price. The company's many issues have investors worried that it might need to slash its massive dividend.
The REIT has been working hard to shore up its financial situation. While its metrics deteriorated in the first quarter, Medical Properties Trust believes these moves will allow it to continue supporting the dividend. Here's what drives that view.
A tightening financial picture
Medical Properties Trust recently reported its first-quarter results, and they showcased the challenges the REIT is facing. The hospital owner reported $0.37 per share of normalized funds from operations (FFO), down from $0.47 in the year-ago period.
A barrage of problems weighed on FFO, including higher interest rates, rental collection issues with a financially challenged tenant, and the negative impact of asset sales.
Meanwhile, its adjusted FFO was even lower at $0.30 per share, down from $0.37 in the year-ago period. Adjusted FFO is a better metric for measuring a REIT's available funds for paying dividends. It was barely enough to cover Medical Properties Trust's first-quarter dividend payment of $0.29 per share, which it declared in conjunction with its quarterly results. That put its dividend payout ratio at a sky-high 97%, up significantly from a much more comfy 78% in the year-ago period.
Its leverage ratio also grew. Medical Properties' adjusted net debt to adjusted EBITDA ended the quarter at 7.2 times. That's up from 6.4 times at the end of last year.
Why the REIT believes it can continue paying the dividend
While Medical Properties' financial metrics worsened in the first quarter, the REIT believes they will improve later this year. It has agreed to sell several hospital properties, including its Australian portfolio, and those sales should close in the coming quarters. The company expects to use the proceeds to pay down debt and shore up its balance sheet. Because of that, it sees leverage coming back down to 6.5 times as it closes these sales.
Meanwhile, the financial troubles facing key tenant Prospect Medical Holdings are a big weight on rental income and FFO. That company currently isn't paying rent on hospitals in Pennsylvania leased from Medical Properties Trust.
However, the REIT expects to recover this rent and the value of those properties in an eventual sale. During the first quarter, Medical Properties provided Prospect with $50 million of additional funding that can convert into equity in that company's valuable managed-care business.
More recently, a third-party lender committed to providing Prospect with significant liquidity. It will allow Medical Properties Trust to convert certain existing and future real estate obligations into additional equity in Prospect's managed-care business. That positions the company to receive substantial proceeds upon the eventual sale or monetization of the managed-care business.
These factors led CEO Edward Aldag to draw the following conclusions on the quarter and what's ahead for the REIT: "We are pleased to report a first quarter that saw our core portfolio, as it has for nearly two decades, realize attractive and predictable growth driven by strong original underwriting and inflation-based cash rent escalators. This performance establishes a baseline level of profitability that supports our dividend payments and sets the table for continued growth."
He added that its recent transactions serve as a "confirmation of our underwritten asset values by sophisticated market participants, as well as our existing liquidity and prudently planned debt structure, position us to have no debt maturities until 2025."
It's not in the clear yet
Medical Properties Trust believes it can maintain its big-time dividend based on the underlying strength of its portfolio and the steps it has taken to bolster its balance sheet.
However, the issues facing Prospect Medical remain a big headwind. While the REIT is working with that tenant to address the situation, there's a lot of uncertainty about when it will be repaid.
Because of that, there's still a risk that the company will eventually need to reduce the dividend. Given that possibility, investors might want to hold off on buying shares until there's more clarity on that situation.
