Medical Properties Trust (MPW +0.00%) has one primary goal these days: It wants to get back to full financial health. The real estate investment trust (REIT) has undertaken a series of moves to improve its finances and help its tenants return to a healthy financial footing.
The company recently took another step toward improving the health of its balance sheet. Here's a look at what it needs to do to ensure its reset dividend, which still yields an enticing 11% following its cut, remains sustainable.
NYSE: MPW
Key Data Points
Phase two complete
Medical Properties Trust recently revealed it closed the sale of its remaining four properties in Australia to HMC Capital. The healthcare REIT sold the properties for $305 million (470 million Australian dollars), netting a solid 5.7% real estate cap rate. That completed its two-phased closing, which began in May, when it sold the first seven properties.
The company initially plans to use the cash to reduce the balance on its revolving credit facility and boost its cash position. That will push its total liquidity to about $950 million. That's enough money to address all its remaining 2023 and 2024 debt maturities, which included the following at the end of the second quarter:
- 2.55% 400 million Great British Pound Notes due in 2023 ($508.1 million remaining balance at the end of the second quarter).
- 2.85% 470 million Australian Dollar Term Loan due in 2024 ($313.2 million remaining balance at the end of the second quarter).
- 5.25% 105 million Great British Pound Term Loan due in 2024 ($133.2 million remaining balance at the end of the second quarter).
Medical Properties Trust has since chipped away at some of the remaining balance on its 2023 note maturity. It bought back 50 million Great British Pounds worth of those notes at a big discount, securing a repurchase yield of almost 13%. Meanwhile, the Australian hospital sale will give it the cash to repay the associated Australian dollar term loan before it matures next year.
The healthcare REIT expects to generate additional liquidity from dividend savings following its recent reduction and another asset sale it's working to close. The company will save over $80 million a quarter by cutting its dividend from $0.29 to $0.15 per share. Meanwhile, it has a deal in place to sell three hospitals in Connecticut for $355 million that should close soon.
That additional liquidity will give the REIT a head start addressing its 2025 debt maturities. It had a remaining balance of $545.5 million on a 3.325% euro note and a $889.2 million balance on a Great British Pound term loan.
What's left for the REIT to do
Medical Properties Trust needs to continue to take steps to shore up its balance sheet. It has to get its leverage ratio to a more comfortable level, ideally below 5.5 times (it was 6.9 times at the end of the second quarter).
It has several ways to improve leverage. Medical Properties Trust can continue to sell assets to repay debt. When it cut its dividend in August, the REIT stated that it planned to pursue additional asset sales, including leased real estate and nonleased and non-real estate assets.
About 9% of its assets (over $1.8 billion) are investments in operating entities. These investments don't currently generate income for the REIT. If the company sells these nonearning assets and reinvests the proceeds into income-producing real estate, it would help boost its earnings and reduce its leverage ratio.
The biggest nonearning investment is its stake in Prospect Medical's managed healthcare business (currently valued at over $654 million), which Medical Properties Trust hopes to monetize within the next year. If the REIT can sell that asset at full value and invest the proceeds into new income-producing real estate, it would help put the company in a much healthier financial position.
Lots more work to do
Medical Properties Trust continues to make progress on its strategic plan to improve its finances. While it has now more than fully addressed its upcoming debt maturities through the end of next year, it has additional debt to deal with in 2025 and beyond. That leaves more work ahead for the REIT, which will likely need to sell more assets to repay debt and recycle capital into income-generating investments.
Given the work still required, income-focused investors might want to continue waiting on the sidelines until they see more progress from the REIT.
