MPW's Dividend Pressure Rises as Third-Largest Tenant May Not Pay Rent This Year
Medical Properties Trust (MPW) reported earnings Thursday morning and issued 2023 cash flow guidance that missed consensus estimates by about 10%.
Prospect, MPW's third-largest tenant accounting for 11.5% of revenue last quarter, drove the miss as the healthcare services provider pursues "aggressive cost-cutting measures."
Prospect leases 14 hospitals from MPW. About half of these facilities are located in California and narrowly cover their obligations with an EBITDARM rent coverage ratio near 1.2x. Another three hospitals, located in Connecticut, are on track to be sold by midyear.
The trouble is with Prospect's four Pennsylvania hospitals, which drag the company's overall EBITDARM rent coverage into the red (MPW's only major operator in this position). Prospect's management team is working to return these facilities to profitability in 12 to 18 months.Source MPW Supplemental Presentation
As part of Prospect's turnaround process, MPW expects "to provide Prospect some alternatives to manage its cash flow across the quarters," likely in the form of rent concessions.
While nothing has been finalized yet, management revealed on MPW's earnings call that Prospect paid "very little" of its rent due in January and February.
The low end of MPW's 2023 cash flow guidance assumes a worst-case scenario in which no rent or interest is collected from Prospect. This would result in a payout ratio of 90%, up from about 80% in 2022. (Steward's Utah sale is accounted for in this guidance, too.)Source: Simply Safe Dividends
Leverage, as measured by MPW, also ticked up to 6.4x compared to 5.8x in the prior quarter due to the effect of Prospect assumptions. Management targets a leverage range of 5x to 6x.
This puts MPW in a tighter position to maintain its dividend. Asset divestitures would help reduce debt but likely put more pressure on dividend coverage. And the firm can't take on higher leverage or issue equity at its depressed share price to grow cash flow through acquisitions.
Capital recycling could eventually help, though. MPW intends to exit its Prospect investments outside of California and reallocate that capital to new investments.
Whenever buyers can be found, management expects to have recovered and have available for reinvestment most or all of MPW's original investment plus any rent deferrals. This would improve cash flow from 2023's trough and potentially return MPW's payout ratio closer to 80-85%.
But today's volatile interest rate environment could delay deal activity, leaving MPW with assets that aren't generating much rent in the meantime. The value of Prospect's managed care business and underperforming hospitals in Pennsylvania remain uncertain, too.
In recognition of these challenges and MPW's reduced financial flexibility, we are downgrading MPW's Dividend Safety Score within our Borderline Safe bucket from 60 to 50.
If management wanted to deleverage MPW's balance sheet with more urgency, a dividend reduction (perhaps by around 30%) can't be ruled out as an easy way to retain more cash flow. A major asset divestiture with proceeds used for debt reduction could also trigger a cut to realign the payout with ongoing cash flow.
These scenarios may be unlikely if the rest of MPW's operators continue honoring their leases and Prospect's assets are monetized or resume paying rent soon. But visibility remains low.
For now, MPW noted its other operators are generally seeing low- to mid-single-digit revenue growth, with improving procedure volumes and expanding reimbursement programs. Contract labor costs have fallen 33% since peaking last March, too.
Management also reaffirmed guidance for Steward, MPW's largest tenant, to deliver over $350 million of EBITDA in 2023 (up from about $80 million last year) and expects the controversial operator's rent coverage to improve follow the sale of its Utah facilities.
Finally, outside of Prospect, MPW continues to see no need to offer its operators any rent deferrals, loans, or equity stakes.
Overall, MPW's latest earnings report did little to help soothe investors' nerves about the REIT's portfolio and general transparency. If any additional tenant weakness materializes, we would consider downgrading MPW's Dividend Safety Score again.
