Medical Properties Trust: Invest In 12% Yielding Debt Over Shares (NYSE:MPW)

Medical Properties Trust (NYSE:MPW) has had a tumultuous 2023. The hospital REIT has already cut its dividend in the face of high leverage and rising interest rates. The stock has traded in volatile swings after the announcement of third quarter earnings. On Friday, the stock sold off further after Stifel downgraded the company’s shares. Throughout all the drama, the company’s bonds have also sold off and 2027 maturity notes are now yielding over 12%. Based on recent earnings and management actions, I believe the 2027 notes are offering 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 influenced by a jump in depreciation (a noncash expense) and the one-time write-down of straight-line rent earlier this year. The company is generating a positive net income this year, thanks to an income tax benefit. The third quarter data, which is more indicative of the operation without the various write-offs, showed a net income of $117 million.

Perhaps the most important report for bondholders and shareholders alike is the cash flow statement. It shows the company’s ability to pay down debt and/or fund dividends with operating cash flow. For Medical Properties Trust, year-to-date operating cash flow is down nearly $190 million. After capital expenditures, there’s 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 this, but operating cash flow still needs to rise. Medical Properties Trust was able to generate $1.1 billion in cash from asset sales and receiving loan repayments, but asset sales can only get you so far and the company was only able to reinvest $220 million into new lending, so it’s not going to be a long-term source of cash.

Just a few quarters ago, Medical Properties Trust management was confident that the company’s dividend was adequately supported, and now, after the third quarter earnings, they are saying the company needs an additional $2 billion in liquidity. In the earnings call, management disclosed it is taking steps to enhance 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 that there is plenty of collateral for additional financing, but there are limitations. Approximately $3.3 billion of the company’s assets are tied into unconsolidated real estate joint ventures and unconsolidated operating entities. These investments involve operators that are currently having 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 carry them to cover their debt maturities through 2025. Depending on the success of their attempted transactions, management may be able to address some of the 2026/2027 debt wall as well.

None of these moves are a “slam dunk,” which is why I believe the common shares face further volatility and the possibility of additional dividend cuts. Medical Properties Trust has existing debt covenants that it must abide by to stay compliant with its current loans. While exact ratios are not disclosed, the covenants do involve leverage and unencumbered assets, therefore there are imposed limits to what the company can borrow. Additionally, should Medical Properties receive secured financing, the rates are not going to be as low as some may think. This is evidenced by the 6.9% and 7.1% interest rates on their existing credit facility revolver and term loan, respectively.

The prospects of additional leverage combined with no financial results proving dividend stability make the common shares unappealing for me. The 2027 maturing notes are yielding 12%, comparable to the existing dividend, and the probability of bankruptcy is much lower compared to share volatility. Therefore, income investors should find a better opportunity with Medical Properties Trust notes.

CUSIP: 55342UAH7

Price: $76.92

Coupon: 5.000%

Yield to Maturity: 12.84%

Maturity Date: 10/15/2027

Credit Rating (Moody’s/S&P): Ba1/BB+