Medical Properties Trust (MPW -2.01%) has battled a seemingly never-ending barrage of headwinds in recent years. Tenant troubles and balance sheet issues have weighed heavily on the real estate investment trust’s (REIT) stock price. Shares currently sit more than 80% below their peak in 2020, when the pandemic started causing trouble for its hospital tenants.
The healthcare REIT has battled back against its issues. It has replaced troubled tenants with financially stronger ones and sold several assets to shore up its financial position. Because of that, it’s getting healthier.
That’s why I recently bought more shares of the high-yielding REIT. I believe it’s about to start recovering, which will put its high-yielding dividend on a more sustainable foundation.
Putting its problems in the past
The bulk of Medical Properties Trust’s issues stem from its overexposure to two tenants: Steward Health Care and Prospect Medical Holdings. At the end of 2022, more than 35% of its revenue came from these two tenants. That became highly problematic when they couldn’t pay their rent.
At first, Medical Properties Trust tried to work with those troubled tenants by providing additional financial assistance and restructuring its investment. However, their financial problems only grew worse, with Steward ultimately filing for bankruptcy.
The REIT was able to sever its relationship with Steward earlier this year, which allowed it to lease many of the properties tied to that tenant to new operators. It has also been working to reduce its exposure to Prospect. The company recently agreed to sell its interest in its managed care business in a deal that will bring in $200 million in cash. It also recently made a move to take back control of three healthcare entities in Southern California by seeking to replace board members with those designated by the REIT after Prospect defaulted on its debt and stopped paying rent on its properties again.
Its lingering issues with Prospect aside, Medical Properties Trust has significantly enhanced its portfolio and balance sheet over the past couple of years. It has raised roughly $3 billion of liquidity this year via asset sales and debt refinancing (and has repaid $2.2 billion in debt since the start of 2023). Meanwhile, it has diversified and enhanced its tenant base by re-tenanting 17 former Steward facilities with five financially stronger operators.
As a result, the company expects that its “portfolio is well-positioned to generate robust cash flows for MPT and our shareholders over both the near and long term,” stated senior vice president of operations Rosa Hooper on the REIT’s third-quarter conference call. It also has the liquidity and other options at its disposal to manage its debt maturities in 2025 ($1.2 billion) and beyond. Because of that, the REIT believes better days lie ahead.
On the road to recovery
Medical Properties Trust still generated $0.16 per share of normalized funds from operations (FFO) during the third quarter, despite all its issues. That was double its current dividend payment ($0.08 per share each quarter after two deep cuts in recent years), which gives its stock a more than 8% yield at the recent price. Given its much-improved liquidity and tenant situation, the company should have no trouble maintaining its current dividend level.
Dividend sustainability should improve significantly over the next two years. That’s because the tenants that replaced Steward aren’t currently paying rent (and neither is Prospect). However, that will change starting next year. Prospect recently sold its managed care business and should receive $100 million of quality assurance fund payments in early 2025, which should put it in a stronger financial position so that it can resume making rental payments to Medical Properties Trust.
Meanwhile, the REIT agreed to forgo rent on the former Steward properties until the end of 2024 to give the new tenants time to ramp up their operations. Partial rental payments will commence next year and slowly escalate. They’ll reach 50% of the stabilized rate by the end of next year and hit the fully stabilized rate at the end of 2026. In addition, the REIT has a few other former Steward properties it’s working to resolve over the next few quarters by selling them or securing new tenants to operate the facilities.
As a result, the REIT’s cash flow should steadily rise over the next two years. It can use that additional cash to further enhance its balance sheet, make new investments, or return more cash to investors via a higher dividend or share repurchases. Any of those options should help grow shareholder value by boosting the company’s beleaguered stock price.
Banking on a recovery
Medical Properties Trust seems to have finally sorted out most of its issues. Because of that, it should begin its recovery next year as new and existing tenants start paying rent. That should enhance the sustainability of its high-yielding dividend. I think the REIT could produce strong total returns from here, which is why I recently bought more shares, something I expect to continue doing as its recovery takes hold.
Matt DiLallo has positions in Medical Properties Trust and has the following options: short March 2025 $4 puts on Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
