What happened
Shares of Medical Properties Trust (MPW 1.68%) tumbled 20.5% in February, according to data provided by S&P Global Market Intelligence. Weighing on the real estate investment trust (REIT) were its fourth-quarter results and outlook for the coming year.
So what
Last month started positively for Medical Properties Trust. One of the healthcare REIT's top tenants, Steward Health Care System, agreed to sell its Utah operations to CommonSpirit Health for $1.2 billion. That deal gave Steward a cash infusion, increasing its ability to pay rent on other properties leased from Medical Properties Trust. Meanwhile, the deal helps further diversify the healthcare REIT's tenant base by adding the high-quality CommonSpirit Health to its rent roll.
While Steward's financial foundation has strengthened recently, Prospect Medical's, another major tenant, has worsened. That led Medical Properties Trust to record a real estate impairment of roughly $171 million in the fourth quarter related to four properties leased to that company in Pennsylvania. The REIT also wrote off about $112 million of unbilled rent.
This tenant issue will impact the company's financial results this year. Medical Properties Trust guided that its normalized funds from operations (FFO) will range between $1.50 and $1.65 per share this year. That's down significantly from $1.82 per share last year and below the analyst consensus estimate that normalized FFO would be $1.74 per share. That could impact the company's ability to maintain its high-yielding dividend this year.
At the high end, the forecast represents the company's base case that it will start recognizing revenue from Prospect during the second half of the year. Meanwhile, the low end assumes it won't collect rent from those facilities this year. However, the company expects to recover the rent and all the value of the real estate over the next 12 to 18 months as Prospect monetizes its managed care business and Medical Properties sells the Pennsylvania facilities.
The company plans to reallocate the proceeds from the eventual sale of Prospect's Pennsylvania hospitals into new investments. Medical Properties Trust had already agreed to sell three hospitals leased to Prospect in Connecticut for $457 million. It expects that deal to close later this year, giving it the capital to recycle into new opportunities as they arise.
Now what
Medical Properties Trust continues to be plagued by tenant issues. While Steward's finances have improved, Prospect's Pennsylvania business has deteriorated. Because of that, the company might be unable to pay rent this year. That could impact Medical Properties' ability to maintain its high-yielding dividend. The REIT might need to reduce its payment, enabling it to retain additional cash to bolster its liquidity until Prospect resolves its issues.
