Last year was a brutal period for Medical Properties Trust (MPW 0.65%). Shares of the healthcare REIT lost more than half their value due to rising interest rates and concerns about some of its tenants' ability to pay rent. That sinking stock price pushed its dividend yield well above 8%.

The REIT recently got some great news. Its top tenant, Steward Health Care System, agreed to sell its Utah care sites. That deal will give Steward a cash infusion to repay debt, including money owed to Medical Properties Trust. Meanwhile, the REIT will get a healthier tenant for its properties in that state. Those factors put its big-time dividend on a much firmer foundation.

A healthier tenant base

Steward Health Care has agreed to sell its Utah care sites to CommonSpirit Health, which includes five hospitals in the state. As part of that agreement, a subsidiary of CommonSpirit has agreed to lease the hospitals from Medical Properties Trust. The initial 15-year lease will begin at a rental rate of 7.8% of Medical Properties Trust's $1.2 billion gross investment in the properties and increase by 3% per year.

In the press release announcing the lease, Medical Properties Trust noted that the "overall cash flow profile of the lease is particularly attractive given the tenant's strong investment grade credit." That's important to note since its issues over the past year have been because it leased properties to some tenants with weak credit profiles, causing concerns about their ability to pay rent. That won't be a problem with the new tenant.

The REIT also noted that the new tenant would have the option to buy the facilities back in the future. The purchase price would be at the higher of either fair market value or Medical Properties Trust's gross investment. It can execute that option at 5, 10, and 15 years.

In addition to getting a healthier tenant for its Utah hospital portfolio, the deal has several other advantages for Medical Properties Trust, including:

  • Reducing tenant concentration: The Utah portfolio represents 6% of Medical Properties Trust's gross investment value. As such, Steward's tenant concentration declines by that amount.
  • Steward gets healthier: Steward will receive an undisclosed amount for its Utah operations, which it will use to repay debt, including debt owed to Medical Properties Trust. That will enhance its ability to pay rent on the remaining properties it leases from Medical Properties Trust.
  • Additional liquidity: Steward will make an early prepayment on loans issued by Medical Properties Trust last year, providing the REIT with additional liquidity to strengthen its financial profile and make accretive acquisitions.

The dividend is getting healthier

Shares of Medical Properties Trust had been under tremendous pressure over the past year on concerns that Steward and some other tenants wouldn't be able to continue making their rental payments due to financial issues. If they couldn't pay, Medical Properties Trust might have had to reduce or suspend its dividend.

However, those problems have steadily resolved in recent months. Steward has come a long way. In addition to selling its Utah portfolio, the company extended a key loan, accelerated the repayment of $450 million in COVID-related advances, collected $70 million of past-due reimbursements from Texas' Medicaid program, and made several operational changes to reduce costs. As a result, the company expects to generate positive and sustainable free cash flow, putting it in a better position to continue paying rent.

Meanwhile, Medical Properties Trust successfully released its Watsonville Community Hospital following the prior tenant's bankruptcy. In addition, another tenant exited bankruptcy with the existing lease terms remaining intact.

With most of its tenant issues now in the rearview mirror, Medical Properties' cash flow has grown much more secure. Meanwhile, the company has sold several assets over the past 18 months to strengthen its financial foundation. It generated $1.8 billion of cash from capital recycling last year and had deals in the pipeline to bring in another $650 million this year. Add in the additional liquidity from Steward, and the company has a lot more financial flexibility to manage its upcoming debt maturities, fund accretive acquisitions, and continue paying dividends.

The big dividend is getting back on a healthy foundation

Medical Properties Trust faced its share of headwinds last year. However, they're starting to fade as its tenants repair their financial situations. That's putting the REIT's big dividend on a firmer footing. While some risks remain, the company offers an attractive payout for investors willing to take on a bit more risk.