Last year was rough for Medical Properties Trust (MPW 3.00%). The real estate investment trust's (REIT) stock tumbled over 50%. Several factors weighed on the hospital owner, including rising interest rates, tenant issues, and a dividend reduction.
However, many of the healthcare REIT's headwinds could fade in the coming year. Three catalysts, in particular, could give its shares the power to soar in 2024.
NYSE: MPW
Key Data Points
The prospect of putting its tenant issues in the rearview mirror
One of the factors weighing on Medical Properties Trust last year was tenant-related issues. Its two top tenants (Steward Healthcare and Prospect Medical) are dealing with financial problems. The REIT has been working with them to help them get through this challenging period. For example, it participated in a new asset-backed credit facility with Steward. Meanwhile, it reorganized its relationship with Prospect, including exchanging assets and deferring rent.
The REIT has also taken steps to reduce its exposure to both tenants. Steward sold its Utah operations to CommonSpirit, which became a tenant of Medical Properties. Meanwhile, the hospital owner exchanged its interest in some properties leased to Prospect for a stake in its valuable managed care business, which it hopes to monetize in the coming year.
These moves have helped put its tenants in a better position to pay rent. Prospect has already resumed partial rental payments for hospitals in California and expects to begin making full rental payments in March. With its tenant issues starting to fade, that should help lift some of the weight off its stock price.
Fading interest rate headwinds
Another big issue facing Medical Properties Trust has been rising interest rates. The REIT took advantage of lower rates in prior years to buy hospitals. However, with rates rising, it can't refinance that debt at an attractive rate, especially given its tenant issues.
That has forced Medical Properties Trust to sell properties to repay debt as it matures. It has already secured enough sales to cover its maturities through the end of 2024.
However, the headwind of rising rates should fade this year, given the Federal Reserve's expectation that it will cut them at least three times. Falling rates could enable the REIT to refinance its post-2024 debt maturities at reasonable rates, instead of needing to sell additional assets to pay off that debt.
Getting back to growth mode
Tenant issues, rising rates, and property sales have weighed on the REIT's cash flow. Its adjusted funds from operations (FFO) fell from $1.08 per share through the first nine months of 2022 to $1.01 per share during the same period last year. That declining cash flow was one of the factors forcing the REIT to cut its dividend.
However, its adjusted FFO should bottom out in the coming quarters as those headwinds fade, Prospect resumes full rental payments, and lease rates across the rest of its portfolio escalate with inflation. Meanwhile, as the REIT gets its balance sheet back to a healthier position, it can start making growth-focused investments again. It's now retaining more cash after paying dividends, giving it additional no-cost funding to reinvest in income-producing properties.
On top of that, the company aims to monetize non-leased and non-real estate assets (including its stake in Prospect's managed care business). It can use the proceeds from those non-income-generating asset sales to invest in income-producing assets. Those new investments would help grow its adjusted FFO per share, which should push its stock price higher.
On the road to recovery
Last year was a brutal one for Medical Properties Trust. However, there are several reasons to be optimistic that 2024 could be much better. Many of the headwinds facing the REIT should fade, enabling it to get back to growing shareholder value. As it starts to recover, that should lift the weight on its stock, which could soar in 2024.
