Medical Properties Trust (MPW +2.17%) is one of the world's largest hospital owners. The real estate investment trust (REIT) owns 436 facilities in nine countries and has leased or mortgaged its properties to 53 hospital operating companies.
While the healthcare REIT has a fairly well-diversified portfolio, it has become a tale of two portfolios. It's the best of times for its international portfolio and those in the U.S. not leased to Steward Health Care or Prospect Medical Holdings.
Unfortunately, it remains the worst of times for properties leased to those two tenants (which are among its largest). Those issues have weighed heavily on the REIT, driving down its stock price and pushing up its dividend yield (recently over 13%). They've also overshadowed the underlying strength of the rest of its portfolio.
NYSE: MPW
Key Data Points
The healthy portfolio
Medical Properties Trust owned about $17.4 billion of assets at the end of the first quarter. More than $11 billion of its assets were hospitals and behavioral health facilities leased to tenants current on their rent or mortgages. This stabilized portfolio generates steady cash flow that the company uses to pay dividends and repay debt.
It has leased those properties to operators benefiting from solid market conditions. The REIT noted in its first-quarter earnings press release that its "operations in the U.K. and in Continental Europe continue to benefit from strong growth in reimbursement rates, overall volumes, and high acuity admissions." That's helping offset expense headwinds, enabling most operators to report rising profits.
Meanwhile, its U.S. portfolio, excluding hospitals leased to Steward and Prospect, is seeing increased admissions. While reimbursement rates in the U.S. aren't growing as fast as those in Europe, they're accelerating. On top of that, its operators are seeing reduced labor costs, as well as success limiting overall cost inflation.
Given these dynamics, Medical Properties Trust's hospital properties leased to these operators are holding their value. That has enabled the REIT to sell healthy properties to boost its liquidity.
It recently sold five California and New Jersey properties to Prime Healthcare for $350 million. It also sold a 75% interest in five Utah hospitals leased to an affiliate of CommonSpirit Health to an institutional asset manager for $1.1 billion. CommonSpirit acquired those hospital operations from Steward last year.
The unhealthy portfolio
The rest of the company's portfolio is properties leased to Steward ($3.2 billion) and Prospect ($1.1 billion). It also has nearly $2 billion in other assets, such as investments in operating companies (including Prospect's managed care businesses).
These assets aren't generating much income for the REIT. Prospect only paid $7 million in cash rent and interest during the first quarter. Meanwhile, Steward paid $9 million in rent and $2 million on various working capital and other loans. That was only a small fraction of the $271 million of total revenue the REIT booked in the period.
Unfortunately, the news from Steward has gone from bad to worse. The hospital operator recently filed for bankruptcy, backstopped by $75 million in debtor-in-possession financing by Medical Properties Trust. The REIT hopes this move will help Steward transition some of its operations to new operators.
That strategy has proven successful in the past, as Steward sold its Utah operations to CommonSpirit, which signed a new lease with Medical Properties Trust. That deal ultimately allowed Medical Properties Trust to monetize 75% of its interest in that real estate to raise cash this year.
If Steward can sell additional hospital operations to financially stronger tenants, it would turn those properties from a liability to an asset for the REIT. Medical Properties Trust would be able to start collecting full rental income on those properties. It could also sell those properties (either back to the new operator or a financial buyer) to raise additional cash for debt reduction.
The company also potentially received some disappointing news regarding Prospect. Third-party appraisers reduced the estimated market value of that company's managed care business by about $60 million. The REIT is counting on the eventual monetization of that business to recoup the value of its investment with Prospect, including deferred rent.
Waiting on a recovery
Most of Medical Property Trust's properties are performing well. However, the REIT continues to battle headwinds from two troubled tenants. It's working with those companies to help them work through their issues, which will hopefully bring its entire portfolio back to full health eventually.
While that will take some time, the underlying stability of the REIT's healthy portfolio showcases that it could be a solid investment once it gets through this rough patch.
