I've been a Medical Properties Trust (MPW -1.10%) shareholder since 2007. Until last year, the healthcare real estate investment trust (REIT) had been a great investment, with a solid track record of delivering market-beating total returns and dividend growth.
That all came crashing down in early 2022 as headwinds from higher interest rates and tenant issues started weighing heavily on the stock. The REIT now sits nearly 80% below its all-time high -- a plunge that pushed the yield on its reset dividend up past 12%. While I don't know if it will recover all its lost ground, I believe the hospital owner can turn things around. That's why I recently boosted my stake by $800. Here's why I believe that bet will pay off in the long run.
Getting healthier
Medical Properties Trust has faced two stiff headwinds over the past two years: tenant issues and financial concerns. The company has made progress in dealing with both over the past year.
It has worked closely with its two largest tenants (Steward Health Care and Prospect Medical) to assist them during their financial challenges. The REIT helped provide both with loans while deferring some of Prospect's rent. It also reorganized its investment in Prospect by exchanging hospitals for an interest in the company's valuable managed care business. The company has also reduced its exposure to those troubled tenants by selling properties leased to Prospect. Meanwhile, Steward sold its Utah operations to CommonSpirit, which is now one of the REIT's tenants.
Medical Properties Trust has also taken several steps to strengthen its financial foundations. It has sold several hospital properties and used the proceeds to pay down debt. It has addressed all its debt maturities through the end of next year. The REIT also cut its dividend by nearly 50%, enabling it to put more cash toward debt reduction. The company plans to sell more assets, including its stake in Prospect's managed care business. The overall goal is to strengthen its balance sheet further so that it can eventually start acquiring healthcare properties again.
Abating headwind
The recent surge in interest rates was a major reason Medical Properties Trust had to sell hospitals and reduce its debt load. The company borrowed a lot of money to fund acquisitions when rates were lower. Those debts have started to mature. While in the past, it typically has been able to refinance its maturing debts at comparable rates, its tenant issues and rising interest rates have made it too expensive to roll over those debts.
However, after almost two years during which the Federal Reserve rapidly boosted benchmark interest rates in its fight against high inflation, it appears that the central bank will start bringing them back down somewhat next year. The Federal Reserve recently suggested that it could cut rates three times in 2024. It now anticipates that the federal funds rate will end 2024 at around 4.6%, down from its current range of 5.25% to 5.5%. That should lower borrowing costs for companies, making it less painful to refinance lower-rate debt. In addition, interest rate cuts should boost the valuations of income-generating investments like REITs. Because of that, this headwind on the company's stock price could soon become a tailwind.
Valuable real estate
Medical Properties' stock price slump has weighed on its enterprise value, which has fallen to $12.8 billion. That's down from a peak of $24 billion in 2022.
The company's market valuation is now well below the value of the real estate assets on its balance sheet, which stood at $19 billion at the end of the third quarter. While rising interest rates have put some downward pressure on commercial real estate values, hospital values have held up relatively well. Medical Properties Trust has demonstrated that over the past couple of years by selling properties at or above the prices it paid for them, despite all its headwinds. Future sales could help further confirm the underlying value of its hospital portfolio.
Growing confidence in the turnaround
Medical Properties Trust has hit a rough patch over the past two years. However, I believe the company can turn things around. It has strategies in place to manage its balance sheet and tenant issues. Meanwhile, one of its biggest headwinds should start to ease next year. On top of that, it holds a valuable real estate portfolio. These factors give me the confidence that the share price should bounce back, which is why I recently added to my position.
