What happened
Shares of Medical Properties Trust (MPW -1.10%) tumbled 16.9% during the first half of 2023, according to data provided by S&P Global Market Intelligence. This real estate investment trust (REIT) significantly underperformed the S&P 500, which rallied 15.9% during the period. The decline pushed the REIT's dividend yield up near 12%.
The healthcare REIT has been under a lot of pressure over the past year and a half. It has faced multiple headwinds, including rising interest rates, tenant issues, and questions about its financial practices.
So what
Several of Medical Properties Trust's tenants are facing financial troubles following the pandemic. The REIT has been supporting them through this rough patch. For example, to help Pipeline Health successfully emerge from bankruptcy in January, Medical Properties Trust agreed to defer $5.6 million of this year's rent (about 30% of the total) into 2024.
Meanwhile, its largest tenant, Steward Health Care System, agreed to sell its Utah operations to a subsidiary of CommonSpirit Health. That deal will give Steward the funds to repay debt, including a loan extended by Medical Properties Trust last year. The REIT will also benefit by getting a new, financially stronger tenant at these hospitals.
Medical Properties Trust also agreed to a recapitalization transaction with another leading tenant, Prospect Medical. Third-party lenders agreed to provide that company with $375 million. In addition, Medical Properties Trust restructured its relationship, including transferring hospitals in Pennsylvania back to Prospect in exchange for equity in its valuable managed care business. The REIT is also deferring rent on its California properties, with partial repayments scheduled to start in September and full payments commencing next March.
Rent collection issues and higher interest rates forced Medical Properties to take steps to shore up its financial situation. It has agreed to sell several properties over the past year, including its Australian portfolio. It's using these sales to repay debt. Once all its pending sales close, it won't have any debt maturing until 2025.
The company's issues led to lots of criticism and scrutiny of its finances and business practices. It responded by providing more details on its financial disclosures. It has also sued short-sellers that it believes published false and misleading claims about its financials to drive down the stock price for financial gain.
Now what
Medical Properties Trust has been under a lot of pressure due to a barrage of headwinds. To its credit, the company addressed its challenges head-on by working with tenants and selling properties to shore up its finances.
However, uncertainties remain. It still has balance sheet issues to sort out. Meanwhile, many tenants still aren't back on solid ground, so they might not make their scheduled rent payments. Because of that, the company might still need to cut its large dividend and use that cash to shore up its balance sheet and accelerate the diversification of its portfolio. The possibility of a dividend reduction is why income-focused investors might want to wait for more clarity before buying shares.
