Why Medical Properties Trust Stock Is Tanking Today

What happened

Shares of Medical Properties Trust (MPW -1.10%) tumbled by more than 12% by 11:45 a.m. ET on Friday. Weighing on the healthcare real estate investment trust's (REIT's) stock price was a report that a California regulator put its deal to help Prospect Medical Holdings on hold.

So what

Medical Properties Trust unveiled a comprehensive recapitalization transaction with Prospect Medical in May. The deal restructured their relationship, giving the company a meaningful equity interest in Prospect's managed care business in exchange for accrued rent and its ownership of some hospital properties in Pennsylvania.

The agreement would enable Medical Properties to eventually recoup this value by selling its stake in the managed care business. The REIT would also start collecting some rental income from hospitals leased to Prospect in September, with full rental payments scheduled for next March.

However, according to a Wall Street Journal report, a regulator in California put this deal on hold about a month ago, which Medical Properties Trust didn't disclose when it reported its second-quarter results. The regulator reportedly has an issue with Medical Properties Trust owning a significant stake in an entity with a large health insurance operation in the state.

Medical Properties Trust believes the deal will eventually go through because it won't be a controlling owner or active investor in the managed care business. However, if regulators block the deal, the REIT's plan to help save its third-largest tenant would unravel.

Now what

Medical Properties Trust has a lot riding on its proposed recapitalization transaction with Prospect. The deal would give that company more financial breathing room while allowing the REIT to eventually recoup its investment and lost rent.

With the deal in limbo, it's now even more likely that Medical Properties Trust will need to reduce its dividend. That would enable the REIT to retain cash to shore up its own financial situation, which is deteriorating due to issues facing Prospect and another major tenant. Given the likelihood of a payout reduction and the company's other headwinds, income-focused investors should avoid this REIT until Medical Properties Trust and its tenants are back on a firmer financial foundation.