What happened

Last year was brutal for investors. The S&P 500 peaked on Jan. 3, 2022, and never recovered, sliding 20% by year-end. 

Some companies plunged even deeper as the bear market wasn't the only headwind they faced. Shares of Medical Properties Trust (MPW 3.25%) plummeted 52.5% from the market peak to year-end, according to data provided by S&P Global Market Intelligence.

The dramatic change in interest rates and market conditions weighed heavily on the real estate investment trust (REIT). On top of that, the company faced additional pressure due to concerns about the financial health of its top tenant. 

Here's a look at what went wrong last year and whether the hospital owner can stage a healthy recovery in 2023. 

So what

REITs were under pressure last year because of rising interest rates, with the average one shedding a quarter of its value. Higher interest rates make it more expensive for REITs to borrow money to fund acquisitions and development projects.

On top of that, they make lower-risk yield-focused investments like government bonds and bank CDs more attractive to income-seeking investors. That weighs on REIT stock prices, pushing up their dividend yields to compensate investors for their higher risk profiles. 

Higher rates and more challenging market conditions forced Medical Properties Trust to shift from offense to defense. The REIT had expected to acquire $1 billion to $3 billion of properties during the year, but it had to cut back on that forecast because its capital costs were rising with interest rates and its falling stock price. Instead of making acquisitions, the company spent most of the year selling assets. 

The company's capital recycling activities generated $1.8 billion of cash last year. It also had deals to bring in another $650 million during the first half of 2023. These sales helped fund new investments while strengthening the company's balance sheet.

Medical Properties ended the third quarter with a leverage ratio of 5.8 times, which kept it at the border of having investment-grade metrics. Meanwhile, it shored up its liquidity. It only has a $446.8 million debt maturity to address in 2023, which it can easily cover with upcoming asset sales if it can't refinance that debt at an acceptable rate. 

The other big factor weighing on the healthcare REIT last year was the financial health of its top tenant, Steward. The company got some good news toward the end of the year when Steward completed the accelerated repayment of $450 million of COVID-related advancements and collected $70 million of past-due reimbursements from Texas' Medicaid program.

Steward also extended a key loan maturity for a year. These and other moves position the company to generate sustainable free cash flow, suggesting it should be able to cover its rental obligations. 

Now what

With its balance sheet and top tenant healthy again, Medical Properties Trust enters 2023 in a much stronger position. If interest rates stabilize, the company should be able to borrow to refinance debt as it matures and make accretive acquisitions. As those weights lift, the stock price should recover.