Medical Properties Trust (MPW -1.10%) has taken a beating over the past several quarters. Shares of the healthcare real estate investment trust (REIT) currently sit about 80% below their all-time high from early last year. Several factors have weighed on its stock price, including tenant issues and higher interest rates.
These headwinds caused a significant deterioration in the healthcare REIT's financial metrics. That forced the REIT to make several moves geared toward improving those numbers. They are finally paying off. While the company still has more work to do, its metrics are heading in the right direction.
Springing into action
Medical Properties Trust has faced two notable challenges. Several of its tenants have struggled financially in the aftermath of the pandemic. Surging costs and other issues weighed on their earnings. That impacted the ability of one key tenant to pay rent (Prospect Medical), while causing serious concerns about another leading tenant's ability to meet its financial obligations (Steward Health Care).
Meanwhile, surging interest rates have increased Medical Properties' borrowing costs. The company also has significant debt maturing in the next few years. Given its headwinds, it can't refinance that debt at attractive terms.
These issues have forced the REIT to take other actions to improve its ability to navigate its current challenges. It has sold several hospital properties to repay debt. Unfortunately, that reduced its income, causing its dividend-payout ratio to rise. That led the company to make the prudent move to cut its payout by nearly 50% earlier this year. Despite that cut, its dividend yield is currently in the double digits, suggesting the market fears another reduction could be forthcoming.
Starting to get healthier
Despite the market's pessimism, Medical Properties Trust's actions are starting to pay off. Its leverage ratio improved from 6.9 times in the second quarter to 6.8 times in the recently completed third quarter. While that's still high, there's more improvement on the way. The REIT recently closed the sale of its remaining Australian properties for $305 million. Meanwhile, it's working to close the sale of its Connecticut hospitals currently leased to Prospect, which will bring in another $355 million. It also bought back some debt on the open market at a discount in October. It currently has enough liquidity to address all its maturing debt through next year.
Meanwhile, the company's dividend reduction has improved its payout ratio. CEO Ed Aldag noted on the REIT's Q3 conference call: "At our previous dividend level...asset dispositions alone would have increased our AFFO payout ratio to the mid-80% range after considering cash interest savings." However, after completing a deal to help Prospect, its payout ratio would have approached 100% during the current quarter. That's no longer the case. By right-sizing the dividend, its payout ratio is currently below 60% (it was 50% in Q3). That gives it more cushion to absorb additional asset sales. Furthermore, thanks to its lower payout ratio, the company is currently on track to generate $335 million in annual post-dividend free cash flow. That gives it meaningful excess free cash to help reduce debt.
More improvements should be forthcoming. Prospect started making partial rent payments on hospitals it leases from Medical Properties Trust in California in September. This payment level should continue until March when it will resume making full rent payments. That will increase the REIT's cash flow, which will help reduce its dividend payout and leverage ratios.
Medical Properties Trust is also working on additional transactions to accelerate its ability to repay debt. CFO Steve Hamner stated on the Q3 call that "we are targeting approximately $2 billion of liquidity transactions over the next three to four quarters." That could come from asset sales or secured financing transactions. There's upside to that number because it doesn't include the company's sizable stake in Prospect's managed care business, which it hopes to monetize in the coming year. These monetization transactions would allow the REIT to build up additional liquidity so it can begin addressing debt maturities beyond next year.
It's starting to get really enticing
Medical Properties Trust has had a rough couple of years battling tenant issues and higher interest rates. However, it's starting to make some progress. Leverage is beginning to come down. That improvement should accelerate in the coming quarters as the REIT uses retained cash and asset sales to chip away at more debt. While it has more work to do, it's clearly starting to get healthier. That's beginning to make it look like an enticing option for those willing to take on more risk for a high-yield stock with big-time upside potential.
