Medical Properties Trust: The Right Dividend Call and a Really Awful Look

Medical Properties Trust (MPW -1.34%) cut its dividend about two weeks after it announced second-quarter 2023 results. This was not an unexpected development — the real estate investment trust (REIT) had a dividend yield that was as high as 16% prior to the Aug. 21 announcement. It was the right move for the company, but the way it transpired should leave a bad taste in investors’ mouths.

Medical Properties Trust faces lingering problems 

The story behind the dividend cut isn’t really all that shocking. The REIT’s leverage rose as it expanded via debt-funded acquisitions. As long as everything went smoothly, its high debt level was manageable.

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However, everything didn’t go smoothly. At least partly due to the lingering impacts of the coronavirus pandemic, two of the REIT’s large tenants ran into trouble. That put downward pressure on Medical Properties’ rent roll and made supporting its dividend more difficult. The company ended up selling some large portfolios of properties to raise funds it could put toward reducing its debt, including an Australian portfolio and a collection of properties in Massachusetts.

While these transactions have helped to ease the strain on the balance sheet, they also reduced the size of the company’s rent roll. And thus, the dividend had to be trimmed by a painful 48%. The big takeaway is that companies with a lot of leverage often end up having to make difficult decisions when times get tough. But there’s more to this story.

How you do things can be as important as what you do

As recently as the first quarter of 2023, Medical Properties Trust’s management made fairly supportive comments about the dividend during its earnings conference call. At one point, President and CEO Ed Aldag said, “We’ve got good cash flow that well covers the dividend on a growing basis. And so, again, [we’re] just not going to make knee-jerk reactions.”

That added on to earlier comments from CFO Steven Hamner that “…our model is designed to anticipate normal course volatility in interest rates and other macroeconomic conditions.”

During the second-quarter earnings call on Aug. 8, the company’s position seemed to shift when the CFO replied to an analyst’s question regarding the dividend that “everything is on the table, and that’s at the board level.” Since the board of directors makes the final call on the dividend, that was a clear statement that the payout perhaps wasn’t as safe as earlier calls might have suggested. 

MPW Chart

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And then, just a couple of weeks after the earnings call, the company issued a press release titled “Medical Properties Trust Updates Capital Allocation Strategy to Further Enhance Long-Term Value Creation.” Cutting the dividend because the company dismantled the portfolio to strengthen the balance sheet seems like an odd way to enhance long-term shareholder value. Note that the stock has plunged over the past year, and the risk of a dividend cut was a big part of the story.

To be fair, the company’s asset sales pretty much required a payout cut, so it was the right move for the REIT. But it would be completely fair for investors watching this process to have come away with a bad taste in their mouths.

Wall Street pegged it, but management flubbed

Investors, as a group, tend to be forward looking. And given the concern about the dividend on Wall Street, it is pretty clear that shareholders had a good idea of what was going to happen to Medical Properties Trust’s quarterly payment. Bad things happen, and sometimes dividends have to be cut because of extraordinary events. (The pandemic probably falls into that category.) The problem is that management and the board didn’t act sooner, and that the company took so long to openly address the real risk of a payout cut being necessary. If you own this stock, you should probably be reconsidering how much trust you can place in management.

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