Is MPW's Dividend Safe? For Now, but Tenant Health Remains a Concern
Medical Properties Trust (MPW) announced a $500 million share repurchase plan this morning, providing a sliver of good news for investors after watching the stock slide 35% since MPW reported earnings on August 3, trailing the 20% drop in the broader REIT sector.
In its press release, MPW said any stock repurchases are expected to be neutral to the hospital REIT's leverage ratio and will be funded with "cash on hand, operating cash flow, loan repayments, dispositions, and/or joint venture transactions."
While MPW is not obligated to buy back any shares with this announcement, initiating the program suggests management feels comfortable with the company's liquidity and rental income stream despite the market's concerns about potential tenant defaults and rising interest rates.
MPW's dividend thus appears safe for now, but the REIT's next earnings report, expected out on October 27, will be heavily scrutinized for any signs of tenant weakness.
As discussed in our June note, should rent coverage ratios decline at any of MPW's major tenants or management need to provide additional capital to stressed operators, we would likely downgrade the stock's Dividend Safety Score from Safe to Borderline Safe.
Steward Health Care, a private hospital chain that accounts for 28% of MPW's revenue, represents the biggest risk.
We estimate that a 20% to 25% reduction in rent from Steward would increase MPW's payout ratio from around 80% to 95%, the maximum level allowed under the BB+ rated REIT's debt covenants.
In its press release, MPW said any stock repurchases are expected to be neutral to the hospital REIT's leverage ratio and will be funded with "cash on hand, operating cash flow, loan repayments, dispositions, and/or joint venture transactions."
While MPW is not obligated to buy back any shares with this announcement, initiating the program suggests management feels comfortable with the company's liquidity and rental income stream despite the market's concerns about potential tenant defaults and rising interest rates.
MPW's dividend thus appears safe for now, but the REIT's next earnings report, expected out on October 27, will be heavily scrutinized for any signs of tenant weakness.
As discussed in our June note, should rent coverage ratios decline at any of MPW's major tenants or management need to provide additional capital to stressed operators, we would likely downgrade the stock's Dividend Safety Score from Safe to Borderline Safe.
Steward Health Care, a private hospital chain that accounts for 28% of MPW's revenue, represents the biggest risk.
We estimate that a 20% to 25% reduction in rent from Steward would increase MPW's payout ratio from around 80% to 95%, the maximum level allowed under the BB+ rated REIT's debt covenants.
MPW in August loaned Steward another $150 million to help ease the company's recent cash pressures, with expectations that Steward would generate "very strong free cash flow coverage" in the fourth quarter.
Since MPW's August update, we have not seen any news on Steward outside of a September 30 press release stating that the firm extended its current credit agreement with lenders.
Steward's CFO remarked that the "business continues to strengthen quarter by quarter," so hopefully persistent wage inflation and rising interest rates have not further dented the hospital's credit profile since MPW's August update.
Outside of Steward, MPW on October 6 announced plans to sell three hospitals leased to Prospect for $457 million, the amount MPW paid for the facilities in 2019.
These properties represented less than 3% of MPW's revenue and gross real estate assets. We do not expect the sale to have a material impact on the REIT's dividend coverage, assuming the proceeds go towards debt reduction, share repurchases, or acquisitions.
As of the latest data available through March 31, 2022, Prospect had the lowest EBITDARM rent coverage of any major tenant and represented about 4.4% of MPW's gross real estate assets. This sale should reduce Prospect to less than 2% of MPW's investments.
Since MPW's August update, we have not seen any news on Steward outside of a September 30 press release stating that the firm extended its current credit agreement with lenders.
Steward's CFO remarked that the "business continues to strengthen quarter by quarter," so hopefully persistent wage inflation and rising interest rates have not further dented the hospital's credit profile since MPW's August update.
Outside of Steward, MPW on October 6 announced plans to sell three hospitals leased to Prospect for $457 million, the amount MPW paid for the facilities in 2019.
These properties represented less than 3% of MPW's revenue and gross real estate assets. We do not expect the sale to have a material impact on the REIT's dividend coverage, assuming the proceeds go towards debt reduction, share repurchases, or acquisitions.
As of the latest data available through March 31, 2022, Prospect had the lowest EBITDARM rent coverage of any major tenant and represented about 4.4% of MPW's gross real estate assets. This sale should reduce Prospect to less than 2% of MPW's investments.
MPW is also rumored to be shopping its hospitals in Australia, which accounted for 4% of revenue last year and were acquired for around $900 million in June 2019.
Losing this source of cash flow would put more upward pressure on MPW's payout ratio, but the proceeds could offset much of that dilution depending on their use.
We will listen for any updated capital allocation plans on MPW's earnings call later this month.
For now, we believe MPW has flexibility (debt reduction, buybacks, acquisitions) to maintain reasonable dividend coverage and liquidity as long as Steward continues meeting its rent obligations.
The final tenant-related update came from Pipeline Health (1.4% of gross real estate assets), which filed for bankruptcy on October 2.
In July 2021, when Pipeline's financial struggles were already known, MPW acquired four acute care facilities in California that were then leased back to Pipeline.
The bankruptcy filing indicates that Pipeline's distressed Illinois hospitals were being "effectively subsidized" by the firm's California and Texas locations, suggesting MPW's properties may still have reasonable economics despite the headline news.
Pipeline and its hospitals remain open and "will continue to pay salaries and fees, and purchase supplies and equipment during this process" as management shops the firm's two Chicago hospitals.
Pipeline on its own will not have a material impact on MPW's cash flow outlook, and MPW has historically done a good job continuing to collect rent in the event of bankruptcies.
That said, this news does little to alleviate concerns about industry-wide profitability struggles and the bear case that argues MPW charges unsustainable rents.
The final notable event weighing on MPW is the spike in bond yields. The yield on the 10-year Treasury note, the global benchmark for borrowing, soared from 2.6% at the start of August to as high as 4% last month, its highest level since 2010.
Surging interest rates increase borrowing costs and can delay asset sales as price discovery between buyers and sellers continues.
REITs are particularly sensitive to rates since their capital-intensive business models require a lot of debt financing.
MPW's 6.3x net debt to EBITDA leverage ratio sits slightly above management's 5x to 6x target but remains at a level the REIT has said it is "comfortable" with.
Nearly 90% of MPW's debt carries fixed rates, helping insulate the REIT's cash flow from higher interest costs in the near term.
MPW's debt maturities over the next couple of years look manageable as well, with non-core asset sales and internally generated cash flow likely providing sufficient funds if refinancing is unattractive.
Losing this source of cash flow would put more upward pressure on MPW's payout ratio, but the proceeds could offset much of that dilution depending on their use.
We will listen for any updated capital allocation plans on MPW's earnings call later this month.
For now, we believe MPW has flexibility (debt reduction, buybacks, acquisitions) to maintain reasonable dividend coverage and liquidity as long as Steward continues meeting its rent obligations.
The final tenant-related update came from Pipeline Health (1.4% of gross real estate assets), which filed for bankruptcy on October 2.
In July 2021, when Pipeline's financial struggles were already known, MPW acquired four acute care facilities in California that were then leased back to Pipeline.
The bankruptcy filing indicates that Pipeline's distressed Illinois hospitals were being "effectively subsidized" by the firm's California and Texas locations, suggesting MPW's properties may still have reasonable economics despite the headline news.
Pipeline and its hospitals remain open and "will continue to pay salaries and fees, and purchase supplies and equipment during this process" as management shops the firm's two Chicago hospitals.
Pipeline on its own will not have a material impact on MPW's cash flow outlook, and MPW has historically done a good job continuing to collect rent in the event of bankruptcies.
That said, this news does little to alleviate concerns about industry-wide profitability struggles and the bear case that argues MPW charges unsustainable rents.
The final notable event weighing on MPW is the spike in bond yields. The yield on the 10-year Treasury note, the global benchmark for borrowing, soared from 2.6% at the start of August to as high as 4% last month, its highest level since 2010.
Surging interest rates increase borrowing costs and can delay asset sales as price discovery between buyers and sellers continues.
REITs are particularly sensitive to rates since their capital-intensive business models require a lot of debt financing.
MPW's 6.3x net debt to EBITDA leverage ratio sits slightly above management's 5x to 6x target but remains at a level the REIT has said it is "comfortable" with.
Nearly 90% of MPW's debt carries fixed rates, helping insulate the REIT's cash flow from higher interest costs in the near term.
MPW's debt maturities over the next couple of years look manageable as well, with non-core asset sales and internally generated cash flow likely providing sufficient funds if refinancing is unattractive.
It's also worth noting that around half of MPW's debt is held outside the U.S. This provides some protection from the soaring U.S. dollar since MPW can use internationally generated cash flow to pay down foreign debt.
Overall, MPW's investment appeal continues to hinge on whether its tenants, particularly Steward, can continue paying their rent in a difficult environment for hospitals.
Visibility remains limited since most of MPW's tenants are privately owned and operated with no financial statements available for MPW investors to review.
While today's share repurchase announcement is a positive sign, MPW continues to have some smoke around it given the loan issued to Steward in August and industry-wide profitability pressures.
As conservative income investors, we would not feel inclined to load up on the stock until these issues show clear signs of stabilization.
We will continue monitoring MPW and plan to provide another update following the REIT's earnings report later this month.
Overall, MPW's investment appeal continues to hinge on whether its tenants, particularly Steward, can continue paying their rent in a difficult environment for hospitals.
Visibility remains limited since most of MPW's tenants are privately owned and operated with no financial statements available for MPW investors to review.
While today's share repurchase announcement is a positive sign, MPW continues to have some smoke around it given the loan issued to Steward in August and industry-wide profitability pressures.
As conservative income investors, we would not feel inclined to load up on the stock until these issues show clear signs of stabilization.
We will continue monitoring MPW and plan to provide another update following the REIT's earnings report later this month.