Medical Properties Trust (MPW +2.17%) continues to battle seemingly unrelenting headwinds. The real estate investment trust (REIT) has had to navigate tenant-related issues and surging interest rates. These issues have weighed heavily on its stock price, driving its dividend yield into the double digits.
It seems like every time the healthcare REIT takes one step forward in its recovery plan, it soon faces another setback. The latest complication comes in the form of a bankruptcy filing by top tenant Steward Health Care. Here's how this could impact the hospital owner and its big-time dividend.
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Key Data Points
A series of setbacks
Steward Health Care has been facing significant financial pressures since the pandemic. The hospital operator has seen costs surge even as reimbursement rates have fallen. These issues have impacted its ability to fund its business, including paying rent to Medical Properties Trust.
The REIT has been working with Steward to get through this rough patch. Last year, it elected to invest up to $140 million into an asset-backed credit facility Steward obtained to help enhance its liquidity. The company also elected to defer a portion of the rent Steward owes and provide additional funding through a new $60 million bridge loan. The REIT has also been working to re-tenant or sell some of the hospitals Steward currently leases.
Both companies pinned their recovery hopes on Steward's ability to sell its managed care business. While the company agreed to sell that business to a unit of UnitedHealth, it's facing regulatory delays in closing that transaction. That left Steward with no choice but to file for bankruptcy.
Medical Properties Trust is stepping up again to deliver additional assistance. It has agreed to provide $75 million of initial debtor-in-possession financing. It could provide up to an additional $225 million in funding if Steward meets certain conditions. This funding will allow Steward to keep its hospitals open, supplied, and operating.
How the bankruptcy impacts Medical Properties Trust
Medical Properties Trust is leading Steward's bankruptcy by providing debtor-in-possession financing. It gives the REIT priority over other creditors on Steward's assets. That should increase its eventual recovery.
The REIT has been working with Steward and advisors to develop an action plan to strengthen its tenant's balance sheet, accelerate the recovery of unpaid rent, and eventually cut its exposure to Steward. They have reviewed many alternatives, including transitioning some of Steward's hospitals to new tenants.
Medical Properties Trust noted earlier this year that it has received encouraging interest from other hospital operators in Steward's facilities. Because of that, the REIT believes it will either be able to sell or re-tenant several of Steward's hospitals this year. Selling facilities would boost its liquidity, while securing new tenants would enable these properties to resume contributing to its rental income.
However, while Steward hopes to resolve its bankruptcy process as soon as possible, closing the transactions needed to shore up its financial situation will take time. It's unclear if this process will impact its ability to pay rent in the near term or the future rental rates Medical Properties Trust will be able to collect on facilities currently leased to Steward.
On a more positive note, Medical Properties Trust has taken several steps to shore up its liquidity this year. It recently agreed to sell a majority stake in five Utah hospitals formerly leased to Steward for $1.1 billion in total cash proceeds. It had also secured $480 million in liquidity by selling several other hospitals and assets.
As a result, Medical Properties Trust has already achieved 80% of its goal of raising $2 billion of liquidity this year, which it now expects to exceed. That will enable it to repay debt as it matures, pay down its credit facility, and provide additional funding to Steward throughout its bankruptcy process.
The company's success in raising liquidity suggests it can continue paying its current dividend rate. However, it might ultimately need to reset its dividend rate again to align the payout with what will likely be a much smaller hospital portfolio.
A long and winding road to recovery
Medical Properties Trust continues to face setbacks in its recovery plan. While Steward's bankruptcy filing is a notable negative development, the REIT is the leading creditor, which could ultimately enhance its recoveries. It has the liquidity to get through this process, which, once complete, could finally enable Medical Properties Trust to start recovering the value it has lost over the past few years.
While there's still a lot of uncertainty about the future of its dividend, the REIT holds very valuable hospital real estate that's not fully reflected in its stock price. That recovery will take some time and likely won't be a smooth ride. Because of that, the REIT remains a high-risk stock, though one with high reward potential.
