Some time ago, I wrote an article about Medical Properties Trust (NYSE:MPW) In which I expressed my suspicion that Healthcare Real Estate Investment Trust is on its way to cut its dividend.
Indeed, just days after publication of my article Medical Properties Trust: Dividend Cut Coming (Downgrade), management announced it had cut its dividend to $0.15 per share, compared to a previous dividend of $0.29 per share. Denotes a reduction of %.
However, given that the market didn’t react very negatively to the dividend announcement, I think the market may be ready to reward Healthcare Trust with an increase in stock price as the REIT continues to prioritize restructuring its balance sheet. is ready.
My Prior Medical Properties Trust Recommendation
The strategy of buying trusts suited for income can backfire even in cases with good underlying dividend coverage, as I learned the hard way with MPW. I aggressively doubled Medical Properties Trust during the first quarter and have repeatedly recommended the trust to passive income investors (see Why I’m Aggressively Earning This 13.2% Yield) , mainly because I considered the dividend scare to be exaggerated in light of a dividend payout ratio in the neighborhood of 80-85%. Since my opposite recommendation in February, the stock price has declined more than 30%, and in my personal portfolio, I am down 38% from my cost basis on MPW. In short, unlike my buy calls in 1Q-23 were unsuccessful. However, that doesn’t mean that investing in MPW is a lost cause or that the stock has no value for passive income investors.
What I underestimated and thus misunderstood about Medical Properties Trust was its need for balance sheet repair. Medical Properties Trust, as I’ll explain in more detail below, has accumulated a lot of debt over time, which will eventually require a change in capital allocation strategy and could result in ongoing asset sales going forward.
Although I was wrong about my buy call on 2023 and mistimed my purchase of MPW, I believe that Medical Properties Trust can still provide an attractive (and well-covered) dividend to passive income investors. Provides yield.
After the dividend cut, the margin of safety has actually increased, as the implied AFFO payout ratio is only 37%. Keeping in mind that investor sentiment could also change as the trust announces new asset sales and restructures its balance sheet, I think the dividend cut will be negative on the value proposition in the long term. Haven’t had any effect.
Dividend reset, shrinking portfolio, deleveraging balance sheet
I warned of an impending dividend cut for Medical Properties Trust and wrote the following:
However, the easiest way to raise cash would be to cut dividends, which costs the REIT about $175 million per quarter. To ease cash flow pressure on Medical Properties Trust, the trust may decide to reduce its dividend by up to 50%, which would save the company $88 million each quarter.”
In an announcement dated August 21, 2023, Medical Properties Trust said it was slashing its dividend from $0.29 per share per quarter to $0.15 per share per quarter, effectively halving the healthcare REIT’s dividend yield to 8.6%. % It is done. The strategic action was taken to reduce the Trust’s liquidity and focus on reducing the Medical Properties Trust’s balance sheet.
A few words about Medical Properties Trust’s balance sheet and debt position. The healthcare REIT had significant financial obligations at the end of the second quarter, totaling $10.24 billion, and the trust, as I explained in my previous article, had a significant amount of debt owed over the next 2 years.
However, it said the trust may have to sell more properties to make meaningful progress on its accelerated loan repayments.
Thus, I expect Medical Properties Trust’s real estate portfolio to continue shrinking in the near future as the trust uses excess liquidity to reduce its financial obligations. As of August 4, 2023, Medical Properties Trust had 598.4 million shares of common stock outstanding, meaning the dividend reset saves the Trust $84 million per quarter, or $336 million per year in cash flow.
That’s a small amount relative to $10.24 billion in debt, so I imagine management will eventually decide to sell more hospital assets. The trust has already sold its Australian hospitals and is expected to close the sale of its Connecticut hospitals to Yale New Haven Health for $355 million.
Going forward, I can see Medical Properties Trust either selling off many of its underperforming general acute care hospitals or following a blueprint to exit regional markets like Australia altogether.
Potential markets that Medical Properties Trust may want to leave could include Spain, Switzerland and Germany, where the Trust has only a very limited presence (assets representing less than 3% of the total portfolio). The block sale could be an opportunity for the healthcare REIT to quickly sell unwanted, non-core assets and raise a substantial amount of cash that could be used to reduce the trust’s balance sheet.
37% New Dividend Payout Ratio, Implied 24% AFFO Yield
Medical Properties Trust’s decisions have hurt passive income investors up to this point, and the increase in debt is clearly management’s fault. But that doesn’t mean Medical Properties Trust can’t be an attractive restructuring or recovery investment whose business can recover based on a reconstructed balance sheet.
At its core, Medical Properties Trust’s AFFO is rising: They rose 17% annually to $0.41 per share in 2Q-23. Annualized, this is $1.64 per share, meaning the $0.15 per share new dividend represents an estimated new payout ratio of 37%, down from 71% based on its old dividend payout ratio.
With $1.64 per share in estimated AFFO, Medical Properties Trust’s AFFO multiple is 4.1x which equates to an AFFO yield of 24%. So even if asset sales result in a decline in AFFO, passive income investors benefit from a large margin of safety here.
Why Medical Properties Trust’s Valuation Could Be Even Lower?
Passive income investors have taken a hit from Medical Properties Trust in the recent past and the management will now have to deliver results or risk further damage to MPW’s valuation.
With that said, however, I think things are about to get better for healthcare REITs.
Passive income investors who feared a dividend cut have likely already sold and rebalanced their portfolios, and the remaining investors still get an 8.6% dividend yield. This, of course, isn’t the best outcome for passive income investors, many of whom have bought into REITs at significantly higher valuations, but I don’t see why passive income investors would want to sell near the latest low.
With portfolio restructuring already announced and the Trust now focusing on repairing the balance sheet (and saving cash), I think the stage is set for stock price correction in the short and medium term.
In my view, this is an opportunity to change ratings and everything.
My recommendation at this point, keeping in mind that the market didn’t react particularly negatively following the dividend reset announcement (meaning the market expected it), is to buy greedily and do so.
My earlier recommendation was to hold off, but given that the dividend reset has cleared up, I think this may be a good time to take an aggressive contrarian position regarding healthcare REITs.
The safest dividend is always the one that just got cut, and I believe the stock upgrade will translate into attractive total return potential over the next 1 or 2 years.