Investors have been speculating over the possibility of Medical Properties (NYSE:MPW) cutting its dividend for nearly half a year. Indeed, the bears were proven right. Those predictions materialized, as the hospital REIT cut its dividend by almost 50% just recently. The reason? Its cash flows just couldn’t keep up with the massive payouts. While this event might be a cause of shorter-term pain, I see it as a strong catalyst for future gains, especially at the current stock price. Therefore, I am bullish on MPW stock.
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Why Did Medical Properties Cut Its Dividend?
Medical Properties management’s choice to cut the dividend can primarily be attributed to its strategic decision to accumulate sufficient cash reserves in order to alleviate debt and enhance its overall financial position. The driving force behind this decision lies predominantly in the company’s significant debt burden, compounded by tenant-related challenges (to a lesser extent).
Specifically, the recent upward trajectory in interest rates led to a notable 19% surge in interest expenses, totaling $104.5 million during Q2. An alarming aspect is the company’s staggering total debt, which stood at a remarkable $10.5 billion.
The combination of escalating interest costs juxtaposed with relatively stable revenues has resulted in a notable struggle for funds from operations per share (FFO/share, a cash-flow metric used by REITs) to adequately cover the dividend. This becomes evident upon examining the company’s most recent guidance, which projects an FFO/share range spanning from $1.53 to $1.57.
Given that Q1 and Q2 numbers are known, it becomes apparent that this range implies an FFO/share of approximately $0.28 in both Q3 and Q4 at the midpoint, excluding non-cash items. Thus, the $0.29 quarterly dividend was no longer covered.
Cash Savings & Deleveraging Can Enhance the Stock’s Prospects
By slashing the dividend from a quarterly rate of $0.29 to $0.15, Medical Properties will be able to save cash and use it to deleverage, which will, in turn, allow management to strengthen the company’s balance sheet and grow shareholders’ equity. Management’s urgency regarding deleveraging is also illustrated in the ongoing asset sales, whose proceeds will be utilized to reduce debt even faster.
In particular, during Q2, Medical Properties completed the sale of seven hospitals in Australia and the related repayment of approximately A$730 million in debt. Further, during Q3 or early Q4, the company expects to complete the sale of the remainder of its Australian hospitals for approximately A$470 million, proceeds of which are going straight to repaying creditors. Finally, following the quarter’s end, Medical Properties completed the previously announced sale of three hospitals to Prime for roughly $100 million.
The Bull Case Looks Appealing From Here
With Medical Properties’ dividend cut and ongoing asset sales set to improve shareholders’ value from here, the stock’s bull case actually looks quite attractive at the stock’s current price. Don’t forget that at just around $7.00 today (which, for context, is the price MPW stock used to trade in 2009), even with the quarterly dividend at $0.15, shares still yield a substantial 8.5%.
Furthermore, while the $0.28 projected FFO/share in Q3 and Q4 (approximately, at the midpoint) may not cover the previous dividend of $0.29, it still suggests that following a successful deleveraging, Medical Properties will have the opportunity to hike its dividend toward its prior levels.
For instance, assuming a $0.25 quarterly dividend in the future, which should be covered given the company’s FFO/share prospects, the stock could yield over 14% at its current level of about $7. Of course, by that time, it’s likely that sentiment will likely transform into a bullish one, signaling possible stock price gains as well.
At the end of the day, while the ongoing increase in interest rates may have resulted in short-term setbacks for Medical Properties, the company’s properties remain highly essential, while its lease profile should ensure a predictable performance and overall deleveraging journey ahead.
Specifically, there is no scenario where a world exists without hospitals. Even as healthcare delivery has changed over the years with technological advances, the importance of hospitals to the delivery system remains critical and has grown in importance. Hence, the REIT’s hospitals should continue attracting strong demand in the future, further bolstering its bullish case.
Is MPW Stock a Buy, According to Analysts?
On TipRanks, MPW comes in as a Hold based on three Buys, two Holds, and three Sells assigned by analysts in the past three months. The average MPW stock price target is $9.00, implying 26.9% upside potential.
Final Thoughts
By trimming its dividend, Medical Properties has taken a pragmatic stride towards financial resilience. The decision to accumulate cash for debt relief signals a commitment to long-term stability. While investors might experience short-term adjustments, the move sets the stage for future growth. Asset sales further bolster the recovery plan.
In the meantime, with a focus on essential healthcare infrastructure, and the possibility for the dividend to approach its past levels after a successful deleveraging journey, the stock’s outlook remains optimistic. The lesson here? A well-calibrated approach today can lead to a healthier tomorrow for Medical Properties.
