Medical Properties Trust (MPW -1.10%) has been crushed over the past few years. The hospital-focused real estate investment trust (REIT) has lost nearly 85% of its value from its peak in early 2022.
That sell-off has pushed its dividend yield up to 17%, even after a nearly 50% cut last year. Tenant troubles and higher interest rates have weighed heavily on the company.
After a very rough patch, the healthcare REIT finally had some good news to share with investors. It accelerated its strategy to boost its liquidity. On top of that, the hospital owner believes it will be able to find solutions to its tenant issues this year.
Rebuilding its liquidity
Medical Properties Trust has spent much of the past year working on shoring up its balance sheet while assisting with two financially challenged tenants. In the company's fourth-quarter earnings press release, CEO Edward Aldag said the company's "primary focus is on accelerating our capital allocation strategy by pursuing transactions expected to generate at least $2 billion of incremental liquidity in 2024." It made significant progress toward that goal over the first few weeks of this year.
In February, the REIT agreed to sell five hospitals back to Prime Healthcare for $350 million. The implied 7.4% economic cap rate is "well above our historical cost and substantially better than estimates of our implied market capitalization rate," Aldag said. The company will record about a $50 million gain on these properties.
On top of that, Prime signed a new 20-year lease for four other properties that it currently leases from Medical Properties Trust (three of which had leases expiring early next year). The new lease features a strong double-digit cash rental yield with inflation-based annual rent escalators collared between 2% and 4%. Prime has the option to repurchase the four facilities at any time for at least $260 million, implying a gain of about $95 million.
Medical Properties Trust also agreed to sell its remaining noncontrolling interest in a tenant and two leased hospitals in South Carolina for $17 million this month. In addition, it sold its syndicated term-loan investment in Median for $115 million last month.
These transactions will raise $480 million of liquidity that the REIT can use to strengthen its balance sheet. Meanwhile, the new lease with Prime for the remaining properties will provide it with more visibility into the future cash flows of those hospitals.
Optimism about the outcome
Medical Properties Trust's improved liquidity will give it more breathing room as it works on action plans for Steward Healthcare. The REIT revealed last month that the hospital operator was having added liquidity challenges. As a result, Steward hasn't been able to make its full rental payments.
The REIT and certain lenders are working to provide Steward with a new bridge-loan facility where each party will fund an initial $37.5 million. Medical Properties Trust has already funded $20 million of that amount as it provides added assistance to Steward to strengthen its liquidity and restore its balance sheet so that the REIT can recoup its investment.
Medical Properties Trust is ultimately looking to reduce its exposure to Steward by selling or getting new tenants for some of the hospitals currently leased to that company. Aldag said that the company is "encouraged by the amount of interest received to date from other hospital operators for these mission-critical facilities, and we expect this real estate portfolio will either resume its contributions to earnings or become additional sources of liquidity as the year progresses."
Meanwhile, the company's other troubled tenant, Prospect Medical, is current on all rent and interest due through the end of 2023 on the California properties it leases from the REIT. The healthcare company's financial results are also starting to improve due to higher admissions, increased reimbursement rates, and lower costs.
Medical Properties Trust is also working to cut its exposure to Prospect by eventually cashing in on its stake in that company's managed care business. That eventual sale would allow it to recoup the value of its investment in Prospect.
Things might finally be looking up for this REIT
Medical Properties Trust has gone through a challenging period over the past few years, but things are starting to look up this year. It was able to sell several hospitals to boost its liquidity and signed a new lease to improve the long-term visibility of its cash flow.
On top of that, it's optimistic it can secure a positive outcome as it works to resolve issues with two troubled tenants. While it has lots of work left to do, it might be getting close to finally turning the corner.
