Shares of Medical Properties Trust (MPW -0.22%) have lost nearly 60% of their value over the past year. That has pushed the healthcare real estate investment trust's (REIT's) dividend yield into the double digits. A big factor weighing on the hospital owner is the financial issues facing its two largest tenants: Steward Health Care and Prospect Medical.

Medical Properties Trust recently revealed that Prospect Medical completed new financing from third-party lenders and recapitalized its investment in that company. In addition, the REIT closed the first phase of its Australian hospital sale. Here's a look at whether those transactions will put its dividend back on solid ground.

Digging into the deals

Medical Properties announced that Prospect Medical had completed $375 million of new financing with third-party lenders to fund its hospital operations and capitalize its managed-care business for continued growth. The funding will enable Prospect to repay its $250 million asset-backed revolving credit facility in full. This will simplify the company's capital structure by freeing it of debt and lease obligations outside of what it owes Medical Properties Trust and this new third-party financing.

Meanwhile, the healthcare REIT reconstituted its investment in the company to: 

  • A $75 million delayed-draw term loan secured by government and commercial insurance accounts receivable.
  • A $513 million investment in six leased California hospitals. Prospect will resume partial rent payments on these properties in September and begin making full rental payments next March.
  • A $457 million investment in Connecticut real estate. The REIT previously agreed to sell these properties to Yale New Haven Health, which will close during the third quarter. It will receive $355 million at closing and a $103 million equity interest in Prospect's managed-care business.
  • A first-lien mortgage loan of $150 million and $100 million equity investment in the managed-care business in exchange for transferring its Pennsylvania real estate to Prospect.
  • Loans of $264 million, accrued rent and interest of $56 million, and a $50 million convertible loan to the managed-care business. It expects to recover this investment through additional equity interests in the managed-care business.

This recapitalization reshuffles Medical Properties Trust's $1.6 billion investment in properties leased to Prospect Medical. The loans between Prospect, Medical Properties Trust, and third-party lenders have a three-year term. That will give the company time to build the value of its managed-care business and improve its hospital operations.

Exiting Australia

Medical Properties Trust also announced that it closed the sale of seven hospital properties in Australia for 730 million Australian dollars ($477 million). It used the proceeds to reduce its Australian term loan.

The REIT also settled an interest-rate swap for a gain of AU$20 million ($13 million). The company expects to close the other AU$470 million ($307 million) in property sales this quarter, which it will use to retire the remaining balance on the term loan.

What do these deals mean for the company?

Medical Properties Trust is making a big shift in its relationship with Prospect. It will go from owning hospitals leased to the company in three states (California, Connecticut, and Pennsylvania) to one (California), which will resume paying rent in two phases. In addition, the company will have loans backed by and equity interests in Prospect's highly valued managed-care business (third parties have valued it at around $1 billion).

Essentially, these deals exchange rental income from hospital real estate for upside potential in the managed-care business. Ideally, that business's value will grow, enabling Medical Properties Trust to eventually sell its equity interests at a profit.

It could then redeploy that cash into income-producing real estate investments. While the resumption of rental payments by the California hospital properties will help support dividend payments later this year, investors will have to wait to see if the managed-care investment pays off.

Meanwhile, the upcoming sale of the Prospect's Connecticut properties and the two-phased closing of its Australian portfolio will give it funds to reduce debt. While that will save it some interest expense and reduce its leverage ratio, it will also reduce its rental income. 

The dividend remains on shaky ground

The recapitalization transactions with Prospect Medical will help this tenant shore up its financials while giving Medical Properties Trust some long-term upside potential. Meanwhile, the recently closed and upcoming hospital sales will help shore up the REIT's balance sheet.

The net effect is that while these deals will preserve shareholder value (and offer upside potential), they don't necessarily support the dividend. Because of that, investors should remain cautious since there's still a high probability that Medical Properties Trust will need to reduce its payout while it continues repositioning its portfolio and balance sheet.