MPW's Dividend Safe for Now as Management Strikes Optimistic Tone on Tenant Rent Coverage
Shares of Medical Properties Trust (MPW) were up nearly 8% on Thursday afternoon after the hospital REIT reported earnings that at least temporarily soothed investors' nerves about the financial health of top tenant Steward.
As we discussed earlier this month, Steward plays a key role in the safety of MPW's dividend because the private hospital chain accounts for 28% of the REIT's rent.
Some analysts have worried that Steward's rent payments to MPW are unsustainable given the hospital's cash flow pressures.
MPW's latest update showed Steward has now addressed a handful of one-off cash drains, including the repayment of $450 million in Covid-related advances, the collection of $70 million of past due Medicaid reimbursements, and $300 million of investments to support five hospitals acquired around a year ago.
Coupled with positive revenue trends, significantly less use of higher-priced contract labor, and cost savings actions, Steward expects to be "strongly cash flow positive" starting with the fourth quarter of 2022.
Steward also shared expectations with MPW to generate $350 million of EBITDA in 2023, up from a projected $50 million to $80 million this year.
Steward's cash rent to MPW totals around $375 million per year, implying a reasonable rent coverage ratio of 1.9x in 2023.
Put another way, Steward next year expects to generate $1.90 of earnings before interest, taxes, depreciation, amortization, and rent expenses (EBITDAR) for every $1 of rent owed to MPW.
Across the REIT sector, we can't recall a time when a tenant had this level of coverage and needed to materially renegotiate their rent lower. If Steward's forecast is realized next year, it would go a long way in helping investors gain more confidence in MPW.
With hospital reimbursement rates catching up to inflation and efforts to reduce costs underway, MPW expects that all of its operators will see better rent coverage going forward. Management also does not anticipate needing to loan any additional money to help any of its tenants.
A final piece of encouraging news was MPW's statement that other parties have expressed interest in Steward's Utah hospitals after their sale to HCA Healthcare was blocked this summer by the Federal Trade Commission.
Should a sale materialize, Steward would receive an infusion of cash, and MPW would further diversify its tenant base as we estimate the facilities for sale represent 7% of MPW's rent and would be used by a new, stronger operator.
Looking ahead, MPW seems unlikely to make any large acquisitions given the firm's weak stock price and rising cost of debt. (MPW estimated that a 10-year unsecured bond issued today would yield 8%-plus versus 3.5% three years ago.)
However, MPW's inflation-linked lease revenue is expected to result in rent growth of 4% to 5% next year, about in line with the increase in reimbursement rates most hospitals look set to receive.
As long as MPW continues collecting its rent, the firm's payout ratio seems likely to sit near 80% and remain supportive of the dividend. MPW's balance sheet also poses little risk with mostly fixed-rate debt, well-laddered maturities, and leverage about in line with management's target level.
We are therefore reaffirming MPW's Safe Dividend Safety Score but will continue to closely monitor the financial health of the REIT's tenants as they work to move past industry-wide profitability pressures.
As we discussed earlier this month, Steward plays a key role in the safety of MPW's dividend because the private hospital chain accounts for 28% of the REIT's rent.
Some analysts have worried that Steward's rent payments to MPW are unsustainable given the hospital's cash flow pressures.
MPW's latest update showed Steward has now addressed a handful of one-off cash drains, including the repayment of $450 million in Covid-related advances, the collection of $70 million of past due Medicaid reimbursements, and $300 million of investments to support five hospitals acquired around a year ago.
Coupled with positive revenue trends, significantly less use of higher-priced contract labor, and cost savings actions, Steward expects to be "strongly cash flow positive" starting with the fourth quarter of 2022.
Steward also shared expectations with MPW to generate $350 million of EBITDA in 2023, up from a projected $50 million to $80 million this year.
Steward's cash rent to MPW totals around $375 million per year, implying a reasonable rent coverage ratio of 1.9x in 2023.
Put another way, Steward next year expects to generate $1.90 of earnings before interest, taxes, depreciation, amortization, and rent expenses (EBITDAR) for every $1 of rent owed to MPW.
Across the REIT sector, we can't recall a time when a tenant had this level of coverage and needed to materially renegotiate their rent lower. If Steward's forecast is realized next year, it would go a long way in helping investors gain more confidence in MPW.
With hospital reimbursement rates catching up to inflation and efforts to reduce costs underway, MPW expects that all of its operators will see better rent coverage going forward. Management also does not anticipate needing to loan any additional money to help any of its tenants.
A final piece of encouraging news was MPW's statement that other parties have expressed interest in Steward's Utah hospitals after their sale to HCA Healthcare was blocked this summer by the Federal Trade Commission.
Should a sale materialize, Steward would receive an infusion of cash, and MPW would further diversify its tenant base as we estimate the facilities for sale represent 7% of MPW's rent and would be used by a new, stronger operator.
Looking ahead, MPW seems unlikely to make any large acquisitions given the firm's weak stock price and rising cost of debt. (MPW estimated that a 10-year unsecured bond issued today would yield 8%-plus versus 3.5% three years ago.)
However, MPW's inflation-linked lease revenue is expected to result in rent growth of 4% to 5% next year, about in line with the increase in reimbursement rates most hospitals look set to receive.
As long as MPW continues collecting its rent, the firm's payout ratio seems likely to sit near 80% and remain supportive of the dividend. MPW's balance sheet also poses little risk with mostly fixed-rate debt, well-laddered maturities, and leverage about in line with management's target level.
We are therefore reaffirming MPW's Safe Dividend Safety Score but will continue to closely monitor the financial health of the REIT's tenants as they work to move past industry-wide profitability pressures.
