Shares of Medical Properties Trust (MPW +4.17%) lost more than 50% of their value last year. That sell-off pushed the real estate investment trust's (REIT) dividend yield to nearly 9%. The company faced two severe headwinds: surging interest rates and concerns about some of its tenants' ability to pay rent.
While interest rates could keep rising this year, the increase should be much more moderate. Meanwhile, the company has gotten good news on some of its ailing tenants. It's growing increasingly likely that the healthcare REIT will be able to maintain its monster dividend.
Surviving the proceedings
Medical Properties Trust recently revealed that a bankruptcy court approved Pipeline Health's assumption of the master lease of four hospitals and two medical office buildings in the Los Angles area. The pre-bankruptcy lease rate, annual escalator, the remaining term of about 18 years, and other lease provisions remain unchanged. This outcome showcases the strength of the company's leases, which the court confirmed as a true operating lease instead of a financing arrangement.
NYSE: MPW
Key Data Points
As a result of the court's approval, Medical Properties Trust will receive all the rent accrued through the first half of January 2023. It has agreed to defer $5.6 million, or 30% of this year's cash rent, into 2024, which it will collect with interest. That's a relatively immaterial amount, considering that the REIT generated $272 million of normalized funds from operations (FFO) in the third quarter of last year.
Medical Properties Trust will also fund the addition of a behavioral facility within the Coast Plaza Hospital. It will join the master lease and earn rent at the lease rate once completed. That supports Pipeline's plan to focus its efforts on opportunities in the Los Angeles area following the sale of its Illinois hospitals and its exit from bankruptcy.
Medical Properties Trust CEO Edward Aldag commented on the result in the press release. He stated: "This outcome with Pipeline demonstrates that well-underwritten hospital real estate subject to carefully crafted master lease agreements offers strong protection from operator financial challenges. We have long invested in hospitals with true infrastructure characteristics that provide an inherently favorable local setup for operator profitability, and it is no accident that our expected long-term cash rent trajectory will not be impacted by Pipeline's bankruptcy process."
The company achieved a comparable outcome following the bankruptcy of Watsonville Community Hospital last year. A recently created not-for-profit organization, Pajaro Valley Health Care District Corporation, bought the operations of that hospital following a short bankruptcy process. As part of the deal, Medical Properties Trust received repayment on $30 million of financing it provided to keep that facility operating. Medical Properties Trust also released the property to Pajaro. That outcome validated the company's view that it owns essential infrastructure properties that appeal to multiple potential operators.
Its top tenant is getting healthier
The Pipeline outcome follows news of the improving health of its top tenant, Steward Health Care System. The company accelerated the repayment of $450 million of COVID-related advanced and collected $70 million of past-due reimbursements from Texas' Medicaid program during the third quarter. Along with other operational improvements, they positioned the company to start producing positive and sustainable free cash flow.
Meanwhile, in late December, Steward was able to extend its asset-backed loan with lenders through the end of this year. That gives it the flexibility to implement its operational improvements. Analysts saw this loan extension as a catalyst for Medical Properties Trust since it removes the uncertainty about whether Steward could complete the key financing.
Heath concerns are fading
With its leases surviving multiple tenant bankruptcies and the financial health of its top tenant improving, some of the weight holding down Medical Properties Trust is starting to lift. Shares rallied more than 25% from their bottom in early October. With more good news recently, the stock could continue its recovery since it's increasingly likely that Medical Properties Trust will be able to maintain its massive dividend.
