Medical Property Trust (NYSE:MPW) has had a turbulent 2023. The hospital REIT has already cut its dividend in the face of high leverage and rising interest rates. The share was traded with unstable fluctuations after the announcement for the third quarter earnings. On Friday, the stock sold off further after Stifel sat down company shares. Amid all the drama, the company’s bonds have also sold off, and notes due 2027 are now yielding over 12%. Based on recent earnings and management actions, I believe the 2027 notes are providing a good entry point for fixed income investors.
On a year-to-date basis, Medical Properties Trust is facing lower revenue and higher expenses compared to the same period last year. Fortunately, these results were impacted by a jump in depreciation (a non-cash expense) and the one-time write-off of straight-line rent earlier this year. The company is generating positive net income this year, thanks to the income tax benefit. Third-quarter data, which is more indicative of the operation without various write-offs, showed net income of $117 million.
Perhaps the most important report for bondholders and shareholders is the cash flow statement. It shows the company’s ability to pay debt and/or fund dividends with operating cash flow. For Medical Properties Trust, year-to-date operating cash flow is down about $190 million. After capital expenditures, there is only $153 million in free cash flow, which is insufficient to cover the $500 million dividend obligation. The company has cut its dividend in half to help with that, but operating cash flow still needs to grow. Medical Properties Trust was able to generate $1.1 billion in cash from selling assets and making loan repayments, but asset sales can only take you so far, and the company was only able to reinvest $220 million in lending new, so it won’t be long. – short-term source of cash.
Just a few quarters ago, Medical Properties Trust’s management was confident that the company’s dividend was adequately supported, and now, after third-quarter earnings, they say the company needs an additional $2 billion in liquidity. In the earnings call, management disclosed that it is taking steps to increase liquidity by selling assets and seeking secured financing, although the former is largely preferred.
Investors will look at Medical Properties Trust and see over $8 billion in shareholder equity and think there is plenty of collateral for additional financing, but there are limits. Approximately $3.3 billion of the company’s assets are related to unconsolidated real estate joint ventures and unconsolidated operating entities. These investments include operators that currently have major financial challenges, such as Steward and Prospect. These investments are also difficult to collateralize.
Not all hope is lost. Medical Properties Trust still has just under $1 billion in liquidity. Available liquidity, combined with asset sales and more prudent cash flow management should see them cover their debt maturities through 2025. Depending on the success of their attempted transactions, management may to be able to address some of the 2026/2027 debt walls.
None of these moves is a slam dunk, so I believe common stocks face further volatility and the possibility of additional dividend cuts. Medical Properties Trust has existing debt covenants that it must honor in order to remain in compliance with its current loans. While the exact ratios have not been disclosed, the deals include leverage and unencumbered assets, so there are limits placed on what the company can borrow. Additionally, if Medical Properties get secured financing, the fees will not be as low as some may think. This is evidenced by the interest rates of 6.9% and 7.1% for their existing revolver and term loan, respectively.
The prospect of additional leverage combined with the lack of financial results to prove dividend stability make common stocks unattractive to me. The notes due 2027 are yielding 12%, comparable to the existing dividend, and the probability of bankruptcy is much lower compared to the stock’s volatility. Therefore, income investors should find a better opportunity with Medical Properties Trust notes.
Yield to maturity: 12.84%
Maturity date: 15.10.2027
Credit rating (Moody’s/S&P): Ba1/BB+