After months of speculation, Medical Properties Trust (MPW +0.58%) has slashed its dividend. The embattled healthcare real estate investment trust (REIT) is cutting its payout by nearly 50% to retain more cash to strengthen its balance sheet. The company also plans to sell additional assets to improve its financial situation.
These moves will enable the REIT to repay debt faster to strengthen its financial foundation, which has eroded due to higher interest rates and financial issues facing a couple of its top tenants. Here's a look at what the move means for investors.
NYSE: MPW
Key Data Points
Slashing the payout to strengthen its balance sheet
Medical Properties Trust has reduced its quarterly dividend payment from $0.29 to $0.15 per share, a 48.3% reduction. The move will enable the healthcare REIT to retain additional cash to repay debt. It expects the reset payout level will initially be less than 60% of its projected adjusted funds from operations (FFO). That's down from a dividend payout ratio that would have been above 100% in the current quarter.
The REIT hinted that a dividend cut was one of the many things on the table as it worked to reduce its leverage ratio, which was an elevated 6.9 times at the end of the second quarter. The company has been selling off hospital properties to repay upcoming debt maturities, because it can't refinance this debt at a reasonable rate following the surge in interest rates and the issues facing some of its other tenants. It has signed transactions to sell about $2.5 billion of assets over the last 18 months, including about $655 million of deals that will close in the second half of this year. While these deals gave the REIT funds to repay debt, they've also reduced its cash flow.
With cash flows falling, the REIT needed to realign its payout. It cut the dividend a bit more than some analysts expected to retain additional cash for debt reduction. While the REIT's asset sales will allow it to repay all its debt maturities through 2024, it has more debt coming due in 2025 and beyond. It can now start chipping away at this debt early to strengthen its financial foundation more quickly.
More asset sales are on the way
Medical Properties Trust also plans to continue exploring additional opportunities to shore up its financial profile. The REIT intends to pursue more asset sales and joint venture opportunities that can bring in cash for debt reduction. It also anticipates reviewing options to refinance debt.
It has identified some non-leased and non-real estate assets it can sell. The company noted in its second-quarter supplemental report that it currently has over $1.8 billion of investments in operating entities, 9% of its total assets. It also has equity investments in several of its tenants, including a loan in Prospect Medical's managed care business convertible to equity.
Additional asset sales will help the REIT address an upcoming debt maturity wall. While Medical Properties Trust has the liquidity from recent asset sales to pay off the roughly $1.4 billion of debt maturing through the end of next year, it has another $1.4 billion of debt coming due in 2025 and almost $2.7 billion maturing in 2026 that it will need to address. Given its high leverage ratio and the current market conditions, it likely wouldn't be able to refinance this debt at an acceptable rate.
The writing was on the wall for a while
Medical Properties Trust's dividend yield had soared into the mid-teens this year, suggesting the market didn't believe the payout would last much longer. That's why it's no surprise to see the REIT slash its dividend. It really had no choice. It needs to strengthen its financial foundation, which it can do more quickly by retaining additional cash flow.
For some investors, a dividend cut is reason enough to sell. However, I'm not planning to unload my shares yet, because the reduction is the right move. There's also a lot of value in its hospital assets. I believe the stock's valuation will recover steadily as the REIT gets its balance sheet back on solid ground. That's why I plan to hold my position. I'd even consider adding if the stock remains under pressure after it makes meaningful progress on shoring up its financial foundation.
