Medical Properties Trust (MPW -1.24%) made it clear in its first-quarter earnings report that the dividend is safe for now. The REIT declared its next payment that will go out to shareholders in July.
However, with a dividend yield in the double digits, the market seems certain a cut is forthcoming. While that's currently not something the company is considering, management didn't completely take it off the table when discussing the payout's future. Here's what they had to say about the big-time dividend.
NYSE: MPW
Key Data Points
Producing enough cash to pay the dividend
CEO Edward Aldag mentioned the dividend when commenting on the company's first-quarter results in the earnings press release. The CEO stated: "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."
The company generated enough cash during the first quarter to cover its payout. It reported $0.30 per share of adjusted funds from operations (FFO), giving it a razor-thin margin on its $0.29 per share dividend payment.
Looking at all the options on the table
While the company is producing enough cash to cover its payout, analysts on the first-quarter conference call wondered whether paying dividends was the best use of these funds.
Raymond James analyst Jonathan Hughes questioned the company's capital allocation strategy. The analyst noted that the company continued to pay dividends and made $400 million in acquisitions since the start of the fourth quarter. Hughes pointed out, "Yet the stock has traded well above an 8% cash cap rate and your debt yielded double digits that entire time." He then asked:
So my question is, why not buy back some of your long-term debt. It would be accretive, help with deleveraging and also send a message of confidence in MPW's outlook beyond your comments...to the market versus going out there and investing externally.
CFO Steve Hamner responded that this made sense from a "mathematical perspective, and it's not off the table." However, when further pressed by Hughes about cutting the dividend to repurchase debt, Hamner stated that the company is "satisfied with where we are for the foreseeable future."
He noted that the company has many levers to pull if needed, including cutting the dividend, selling more assets, repurchasing shares, and buying back debt. But "thankfully, we're in a very, very strong position, liquidity wise, the value of our assets, the growth in the NOI (net operating income) of our assets."
CEO Edward Aldag followed that up by stating the company had regular and detailed conversations with the board. It "makes decisions based on the long-term health of this company, not short term, and we're very comfortable with the decisions that we've made."
These comments suggest that the company has no plans to cut its dividend. However, it's also not off the table. The REIT could go that route if its long-term health were at risk, which currently isn't the case. Medical Properties Trust's recent property sales will eliminate all its debt maturities until 2025. That buys it time until interest rates normalize and its troubled tenant Prospect Medical can get its financial house in order.
The dividend is safe for now
Medical Properties Trust believes it can maintain its dividend during the current challenging period for its business. However, a cut isn't completely off the table. If its longer-term health is at risk, the company would cut the payout and use that cash to shore up its foundation. That leaves the door open for the company to potentially cut its dividend. The stock remains too risky for investors seeking a sustainable income stream.
