Medical Properties Trust (MPW +1.57%) stock has gotten hammered since reporting its second-quarter results in early August. The healthcare REIT's stock price has lost nearly a third of its value since that time. That has driven its dividend yield up over 15%.
The biggest weight is issues with the additional support it's providing two of its largest tenants (Steward Health Care and Prospect Medical Holdings), which are facing significant financial pressures following the pandemic. Their problems have impacted the REIT's financial profile, increasing the probability it will need to cut its big-time dividend. The REIT is facing criticism for how it's handling those issues, which it's quickly addressing.
NYSE: MPW
Key Data Points
Responding to a report
In late May, Medical Properties unveiled comprehensive recapitalization transactions with Prospect Medical. Third-party lenders provided that company with $375 million in financing. Meanwhile, the REIT restructured its relationship, exchanging the value of hospitals in Connecticut and Pennsylvania and accrued rent and interest for an equity interest in Prospect's valuable managed care business.
In mid-August, the Wall Street Journal reported that the healthcare REIT had yet to close the deal. It disclosed that a regulator in California reportedly ordered that the companies put the transaction on pause in late July. This news tanked the stock.
Medical Properties Trust immediately responded to the article, which it called "false and misleading." The REIT said it had discussed the transaction with the author, who it claims "wholly disregarded" the information it provided. The company then went on to clarify certain facts for investors, including:
- The California Department of Managed Health Care's hold is a "standard, expected, and non-controversial part of the approval process for this transaction."
- The company fully expects to obtain approval for the transaction.
- Even if it's not approved, the REIT will retain a convertible note in Prospect's managed care business, which would have identical economics to owning equity in that entity.
- The company deemed the hold request immaterial to its finances, which is why it didn't disclose it to investors.
- The recording of its $68 million equity investment in that entity as revenue during the second quarter was consistent with accounting requirements.
The company believes the approval hold is a non-issue. It will either receive approval or maintain an economically equivalent convertible note investment, so it doesn't see the transaction as causing any problems.
However, as a longtime investor in Medical Properties Trust, I was surprised to learn that the REIT didn't disclose the hold to investors when it reported its second-quarter results. Further, it's concerning that the REIT has chosen to be reactive instead of proactive. Rather than responding to the Wall Street Journal article after the fact, it could have gotten out in front of the report by issuing a press release once it knew the story was forthcoming. Given all the criticism it's facing, the company needs to be the source of information by fully disclosing all the facts instead of having to continually set the record straight.
Flipping its Steward loan
Medical Properties Trust has also faced criticism for recently providing additional support to Steward Health Care. It disclosed in its second-quarter report that Steward refinanced its asset-backed lending facility five months early. The lending group offered the REIT the opportunity to participate in the facility. It opted to invest up to $140 million, or less than 25% of the total.
Analysts didn't like the move. They noted that the investment increased its exposure to its top tenant, which continues to struggle. Further, they saw the ABL investment as high risk because private credit funds led the deal, implying it was too risky for banks. Those factors increased concerns about the company because it was making a high-risk investment when it needed to focus on shoring up its financial foundation.
The REIT moved quickly to address those concerns by selling $105 million of its interest in the Steward facility to a leading global asset manager. CEO Edward Aldag commented in the press release unveiling the transaction that "this prompt reduction in MPT's commitment to the facility reflects the Company's focus on reducing leverage as well as the continued strong level of participation interest from sophisticated third-party lenders."
Concerns remain
Medical Properties Trust continues to face a barrage of headwinds from higher interest rates, tenant issues, and the media. It's working hard to navigate this challenging period while preserving as much value for shareholders as possible. The company still has a lot of work to do, including improving shareholder communication.
Given its issues, there remains a lot of uncertainty about whether its big-time dividend will survive this tough time. While I hope it does, a payout cut would enable the company to retain more cash to shore up its balance sheet more quickly. The high likelihood of a dividend reduction makes this stock too risky for income-focused investors right now.
