Medical Properties Trust (MPW +0.22%) is under pressure from all sides these days. The real estate investment trust (REIT) is facing headwinds from struggling tenants and higher interest rates, which are affecting its cash flow and weighing on its balance sheet. These issues have pushed down its stock price, driving its dividend yield up over 14%.
The high-yielding dividend might not last long. That's a clear takeaway from comments by the company's management team on its recent second-quarter conference call.
NYSE: MPW
Key Data Points
Everything is on the table
Medical Properties Trust makes quarterly dividend payments of $0.29 per share. The healthcare REIT currently generates enough cash to cover that payment. It produced $0.41 per share of adjusted funds from operations (FFO) during the second quarter and $0.70 per share through the first half of the year. That gives it an 83% dividend payout ratio. That's only slightly higher than during the same period of last year when its adjusted FFO was $0.72 per share.
However, the company's guidance for the third quarter would put its adjusted FFO at around $0.28 per share, partly due to asset sales used to repay debt following a significant surge in interest rates. That would put cash flow below its current dividend payment. While adjusted FFO should improve in the next year, an analyst asked whether the company had thought more about reducing its dividend and reallocating that cash toward debt reduction.
CFO Steven Hamner responded: "[W]e're not satisfied with our cost of capital as implied by the share price. We're not getting the credit that we think we should." Because of that, he reiterated something the company stated earlier this year: "[E]verything is on the table." Those comments imply that a dividend cut is one of the items on the table.
What could save the dividend?
Medical Properties Trust has sold several properties over the past year to help repay debt. It's selling its Australian hospital portfolio, allowing it to repay a term loan maturing next year. In addition, it has several other property sales in the pipeline, which will give it the cash to address all its debt maturities through next year. That gives it some breathing room.
Meanwhile, its rental income should start recovering in the coming quarters. It recently started collecting rent on a $50 million post-acute facility in California that it developed for Ernest Health. On top of that, Prospect Medical will resume paying partial rent on hospitals leased in California next month, with full rental repayment scheduled to commence next March. Add in inflation-linked rental rate increases across its existing portfolio, and it expects cash rent collection to improve by $50 million next year.
However, the company still has a debt problem even with the borrowings it plans to repay with upcoming asset sales. Its current leverage ratio is approaching seven times, which is high for a REIT.
One potential solution is the eventual monetization of its investment in Prospect Medical's managed care business. After reorganizing their relationship earlier this year, Medical Properties Trust holds a 49% interest in that business, currently valued at $654.5 million. This investment isn't generating any income for the company. However, CEO Ed Aldag stated on the call that "the hope is that they can monetize that sometime in 2024." It could use those proceeds to repay debt or invest in income-producing real estate.
Another option it continues to pursue is additional asset sales, including with joint venture partners. Management noted on the call that it's getting calls from potential partners all the time. It doesn't have to act right now because it has already addressed its upcoming debt maturities through next year. However, its CEO noted on the call that "there may be opportunities to do things earlier" if the right partnership opportunity came along.
A cut seems likely
Medical Properties Trust's management team has made it clear that a dividend cut is among the many options it's considering. Given its success in selling assets and the expectations that rental collection should improve next year, it does have some breathing room.
However, it must still find ways to shore up its balance sheet. Reducing the dividend and using that cash to repay debt is one option it's considering. Because of that, it's not a great option for income-seeking investors to consider buying right now, since there's a very high risk that it will eventually reduce the dividend.
