Few stocks offer as juicy of a dividend as Medical Properties Trust (MPW -1.10%). The company's dividend yield has been in the double digits throughout most of 2023 and currently tops 13%.
However, the healthcare REIT provided its second-quarter update on Tuesday. Investors were clearly rattled, with the stock plunging 14%. Is Medical Properties Trust's dividend in jeopardy?
Behind the worries
Some investors were concerned that Medical Properties Trust didn't declare a dividend in its Q2 update. The REIT did declare a dividend when it reported first-quarter results in April.
Other investors were more anxious about the fact that the company's executives didn't utter the word "dividend" in the Q2 conference call. They're perhaps apprehensive that management is adhering to the old adage, "If you don't have anything nice to say, don't say anything at all."
However, Raymond James analyst Jonathan Hughes did mention the REIT's dividend. And when he asked if the company would consider a dividend cut, Medical Properties Trust CFO Steven Hamner replied (without specifically referencing a potential dividend cut) that "everything is on the table."
A dividend cut on the way?
Is a dividend cut on the way? Let's address those concerns head-on.
I don't think investors should be overly worried that Medical Properties Trust didn't declare a dividend in its Q2 update. Historically, the REIT hasn't declared dividends payable in October until mid-to-late August. If we get to the end of the month without a dividend declaration, then it will be time to worry.
What about management not mentioning the dividend at all in the Q2 conference call? That's not all that unusual. In October 2022, executives went through the entire Q3 call without saying the word "dividend." And investors were anxious about a dividend cut then, too, with Pipeline Health recently filing for Chapter 11 bankruptcy.
As for Hamner's comments that "everything was on the table," it's important to understand the context. He noted that going back to the quarterly conference call in February 2023, Medical Properties Trust's board of directors was evaluating all liquidity alternatives. The REIT has paid a dividend twice without any cuts since then.
However, I do think there are two objective reasons to be on the lookout for a potential dividend reduction. For one thing, Medical Properties Trust narrowed its full-year guidance. It now projects normalized funds from operations (FFO) of between $1.53 and $1.57 per share. That translates to an average FFO of roughly $0.35 per share in each remaining quarter of 2023. When you back out non-cash income, the level falls to around $0.28 per share. That's slightly below the current dividend level.
Also, the healthcare REIT's leverage as measured by the adjusted net debt to transaction-adjusted annualized EBITDAre (earnings before interest, income taxes, and depreciation and amortization for real estate) increased in Q2. In the previous quarter, the ratio was 6.5; in Q2, it rose to 6.9x. This could put more pressure on the board to cut the dividend.
Good news
Despite some legitimate causes for concern about a potential dividend cut, I think there's some good news for Medical Properties Trust. Most importantly, even if the REIT reduces its dividend, it would almost certainly still pay out an attractive yield. Wall Street might actually cheer a dividend cut that enabled the company to lower its debt leverage.
But I won't be surprised if Medical Properties Trust keeps its dividend at current levels. The outlook for its hospital operator tenants continues to improve. The company expects to resume collecting 50% of rent on PHP's California facilities in September with the level increasing to 100% in March 2024.
Medical Properties Trust CEO Ed Aldag said in the Q2 call, "While our stock and bond prices have recovered some in the past couple of months, we're not satisfied that they reflect the true value and strength of our portfolio." If he's right (and I think he is), the stock should generate solid total returns over the long term.
