Medical Properties Trust (MPW -1.10%) can't seem to catch a break. The real estate investment trust (REIT) focused on hospitals has battled a barrage of headwinds over the past couple of years, with rising interest rates and tenant issues weighing on its balance sheet and cash flow. The company has worked hard to address those issues, including selling assets to shore up its financial foundation and assisting tenants while they work to improve their finances.
Unfortunately, the steps the healthcare REIT has taken to help top tenant Steward Health Care aren't working as well as hoped. As a result, Steward hasn't been paying all the rent it owes the REIT. That's leading Medical Properties Trust to take more actions to help its tenants while also aiming to reduce its exposure to that company in the future.
The tenant troubles continue
Medical Properties Trust spent much of last year working with Prospect Medical Holdings to help that tenant through a rough patch so it could resume paying rent. In September, Prospect finally started making partial rental payments on hospitals in California that it leases from the REIT. It's on track to resume full rental payments on those facilities in March.
However, while Prospect has started paying rent again, Steward is facing liquidity issues preventing it from making full rent payments. The company delayed a portion of its September and October rents. Despite obtaining additional funding last quarter (which Medical Properties Trust helped provide) and selling its non-core lab business, Steward continues to face a liquidity crunch after vendors significantly altered their payment terms. Because of that, Steward has continued to make only partial rent payments. It's now about $50 million behind in its rent (on top of the $50 million in rent the REIT had previously deferred).
Taking actions to protect its assets
Steward's continued issues led Medical Properties Trust to engage the services of financial and legal advisors to help craft options to allow the REIT to recover its uncollected rent and outstanding loans. The company intends to develop a plan to strengthen Steward's liquidity and restore its balance sheet while optimizing its ability to recover unpaid rents and reduce its exposure to this troubled tenant.
Steward is working on several strategic transactions, including potentially selling or retenanting some of its hospitals and selling other non-core operations. It will also seek a capital partner for its managed care business, with plans to use the proceeds from that transaction to repay Medical Properties Trust.
Steward has had success in finding a buyer for hospital operations in the past. Last year, it sold its Utah operations to CommonSpirit, which agreed to lease the related hospitals from Medical Properties Trust. That transaction replaced the financially challenged Steward with an investment-grade tenant with the strength to meet its financial obligations, including paying rent on those facilities.
Medical Properties Trust is providing additional support to Steward while it works on this strategy. It has agreed to fund a new $60 million bridge loan. It has also agreed to defer $55 million in rents due in the first half of the year. Partial rental payment should resume next month and total $9 million in the first quarter and $44 million next quarter.
Despite these efforts, there's no guarantee that Steward will be successful in its strategy to improve its liquidity and repay Medical Properties Trust. However, even if Steward doesn't make any rental, lease, or interest payments to the REIT, it would still produce enough income to cover its current dividend level (it would have a dividend payout ratio in the high 70% range).
While that suggests the REIT can maintain its dividend (which yields a gigantic 17% due to the massive drop in its stock price), there remains a risk that it could cut it again (or temporarily suspend payments). A further reduction would allow it to retain more cash to repay debt and fund new investments to accelerate its shift away from Steward and Prospect.
Sky-high risk with similar upside potential
Medical Properties Trust continues to battle tenant issues. That will likely weigh on its stock while it works toward reducing its exposure to Steward and Prospect over the coming months. While there's still meaningful downside risk if those tenants can't execute their plans to repay the REIT, there's also tremendous upside potential if they are successful. So, while Medical Properties Trust isn't for the faint of heart, its shares could soar once it finally puts its tenant issues in the rearview mirror.
