Last August, Medical Properties Trust (MPW -1.10%) adjusted its quarterly dividend. It cut its payment from $0.29 to $0.15 per share each quarter to better align it with its cash flow profile. The hospital-focused real estate investment trust (REIT) needed to reset its dividend because of headwinds from tenant issues and higher interest rates, which put pressure on its balance sheet.
Despite that deep cut, the healthcare REIT currently offers a dividend yield above 15%. That suggests investors believe another one is forthcoming. The healthcare REIT's management team discussed that possibility on its recent fourth-quarter conference call.
Always evaluating
Medical Properties Trust's CEO, Ed Aldag, brought up the company's dividend on the call. He stated:
The board will meet later this quarter to discuss the dividend. The board's policy on the dividend remains unchanged. As has always been the case, the board will review all aspects of the company, including items such as FFO payout ratios, REIT requirements, and liquidity.
The company's board routinely meets to discuss its dividend based on its current policy. While that policy hasn't changed, that doesn't mean the payout level won't change.
When Medical Properties Trust reset its dividend last year, it initially targeted a dividend payout ratio of less than 60% of its adjusted funds from operations (FFO). That lower payout ratio would enable the REIT to retain more cash flow to repay debt.
A lot has happened since that time. The biggest change is that its top tenant, Steward Health Care, doesn't have the money to make full rental payments. That's a big hit. The company estimates that the full removal of Steward's rent would have increased its dividend payout ratio from 50% in the third quarter to the high 70% range. On a positive note, Steward is paying partial rent (25% during the fourth quarter) and should return to 100% by June. In addition to its issues with Steward, the company has also agreed to sell more assets, which will impact its cash flow.
What could cause another dividend cut?
These changes led an analyst on the call to ask where the dividend was going and whether a suspension would be beneficial. Aldag answered: "The dividend is not dependent on Steward's rent. It's more dependent on our ability to close some of these liquidity transactions."
The REIT is targeting to generate $2 billion in incremental liquidity this year by selling assets. It has gotten off to a strong start by securing over $480 million in liquidity. In January, it sold its syndicated term loan investment in MEDIAN for $115 million. It followed that up by agreeing to sell five hospitals to Prime Healthcare for $350 million in February. It also sold its remaining noncontrolling interest in a tenant and two under-leased hospitals in South Carolina for $17 million this month.
Aldag stated on the call, "We are actively working on several additional asset sale opportunities, as well as other transactions that we believe will validate underwritten asset values." It has already received strong interest in the properties it's looking to sell. Among the opportunities it's working on is selling or retenanting properties currently leased to Steward. These sales will boost the REIT's liquidity so it can "satisfy our debt maturities for several years into the future," stated Aldag on the call. It has two maturities this year ($300 million in May and $130 million in December). Meanwhile, it has about $900 million in bank debt and $550 million of unsecured notes maturing next year.
If the REIT can execute its asset sale strategy, it could maintain its current dividend level, assuming Steward doesn't stop paying rent. However, even though the REIT can maintain its dividend level, that doesn't mean it will or should. Suspending its payment would enable it to retain more cash to enhance liquidity and potentially invest in new properties leased to financially stronger tenants. Building back its balance sheet and portfolio would allow the REIT to pay a more sustainable and growing dividend in the future.
Another cut wouldn't be a surprise
Medical Properties Trust routinely evaluates its dividend level based on its cash flow and liquidity. While its cash flow has been under pressure because of issues with its top tenant, it has made good progress in boosting its liquidity. So it doesn't appear that the REIT will need to cut its dividend as long as it continues executing its liquidity strategy. However, given its high yield and need for liquidity, cutting the payout again would still make sense. That's why it wouldn't be surprising to see another reduction or even a suspension as the REIT works through its issues.
