Medical Properties Trust (MPW 5.10%) has fallen on hard times over the past few years. Shares of the hospital-focused real estate investment trust (REIT) have lost more than 80% of their value from the peak in early 2022. That decline has pushed its dividend yield into the double digits. A big factor has been the financial issues of its top two tenants, who haven't been able to make their full rental payments.
The healthcare REIT might be about to get some relief from one of its tenants. Top tenant Steward Health Care agreed to sell its managed care business to an affiliate of UnitedHealth (UNH -1.17%). Here's a look at the proposed transaction and what else needs to happen to put the REIT on the road to recovery.
A potential catalyst for repayment
According to several media reports, Steward Health Care has agreed to sell its managed care business, Stewardship Health, to Collaborative Care Holdings, a subsidiary of UnitedHealth's Optum unit. That business employs primary care physicians and other clinicians in nine states, including Massachusetts. The sale, for an undisclosed sum, would enable the company to shore up its financial position so that it can repay some of what it owes Medical Properties Trust and other creditors. The reports also indicated that the company wants to sell some of its hospital operations in Massachusetts.
A sale of Stewardship would benefit Medical Properties Trust. The REIT's management team noted on its fourth-quarter call that the monetization of Stewardship was one of two catalysts that would enable Steward to resume paying full rent by the middle of this year. While the REIT doesn't have a direct financial stake in that entity, it funded a $60 million bridge loan to Steward last year, which provided it with a second lien on Stewardship's business. That gives it a claim on the proceeds Steward will receive from the sale of this business. Medical Properties Trust's management team believed the sale could enable Steward to repay all its outstanding obligations (including deferred rent) it currently owes the company.
However, there's no guarantee that the deal will close or be at a sufficient value to cover what Steward owns Medical Properties Trust. The proposed transaction has already received pushback from Massachusetts Senators Elizabeth Warren and Ed Markey, who don't believe the sale will benefit patients or healthcare workers. Furthermore, it would give Optum an even larger market share, considering it already employs 10% of the doctors in the country. If Steward can't sell the business to the UnitedHealth unit, it might have to take a lower price to sell to another buyer, which might not be enough to cover its obligations to Medical Properties Trust.
Pursuing multiple options
The sale of Stewardship is one of many avenues Medical Properties and its top tenants are pursuing to jointly improve their financial profiles. The REIT announced earlier this year that it had accelerated its divestiture strategy, signing deals to bring in more than $480 million of liquidity. That was part of a plan to raise at least $2 billion of incremental liquidity this year. The sales will give the company the cash to repay debt as it matures over the next couple of years.
That number doesn't include the sale of three hospitals in Connecticut currently leased to Prospect Medical Holdings that it agreed to sell to Yale New Haven in 2022. The sale, which would include Yale acquiring Prospect's hospital operations, has yet to receive regulatory approval. The REIT would receive $457 million from that sale, which includes $355 million in cash and $103 million of equity in Prospect's managed care business. Prospect is also working to monetize its managed care business, which would enable Medical Properties Trust to recoup the value of some of its properties and deferred rent.
In addition, the REIT is working with Steward on selling or re-tenanting some of the hospitals it leases. Facility sales would provide Medical Properties Trust with additional liquidity while changing tenants would enable the properties to resume their contributions to the REIT's earnings.
Trying to get on the road to recovery
Selling Stewardship would enable Steward to shore up its financial situation so that it can get caught up on its bills, including what it owes Medical Properties Trust. That's why the potential deal with UnitedHealth could be a game-changer for both companies. However, it's not the only option the REIT is pursuing as it nurses its portfolio and financial profile back to health. While it still has a long road ahead, the REIT appears to be heading in the right direction.
