The past few years have been rough for Medical Properties Trust (MPW 1.97%) and its investors. The hospital-focused real estate investment trust (REIT) has battled tenant issues and higher interest rates. These headwinds forced it to slash its dividend twice.
However, the company appears to have finally turned the page on its problems, and I predict that the REIT will start increasing its dividend by the end of this year. That would add to its already attractive 7% yield.
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On the road to recovery
Medical Properties Trust has had two top tenants declare bankruptcy in the past two years. Their financial issues affected their ability to pay rent, causing cash flow issues for the REIT. That came when interest rates surged, making it more difficult for the hospital landlord to refinance debt as it matured.
The healthcare REIT took several actions to help it get through this rough patch. In addition to cutting its dividend two times, it sold hospitals to repay debt. These steps helped take the pressure off its balance sheet. That has enabled the REIT to refinance some of its other debt, giving it more breathing room. Last May, it closed an $800 million 10-year loan secured by several of its U.K. hospital properties. Meanwhile, it completed a $2.5 billion senior secured notes offering this year, enabling it to repay all its maturing debt through 2026.
Medical Properties Trust has also worked through its largest tenant bankruptcy, which ultimately enabled it to regain control over many of the properties formerly leased to that tenant. It has since found new operators for most of those properties.
Hitting bottom and about to bounce back
Property sales and tenant bankruptcies have caused Medical Properties Trust's rental income to decline over the past few years. However, with its balance sheet repositioning complete and its largest tenant bankruptcy addressed, its rental income has stabilized and should begin to rise.
During the first quarter, rent commenced on most of the properties previously leased to its bankrupt former top tenant. The company collected $4 million in the period. The rental rates on these properties will slowly escalate before reaching the fully stabilized rate at the end of next year. By the fourth quarter of this year, it expects to receive $23 million, which is a $90 million annualized level. Rents should grow to the $160 million stabilized annualized rate in October 2026.
On top of that, rents at the REIT's other properties should steadily rise because of contractual escalation clauses. During the first quarter, rents rose at a 2.3% weighted average year-over-year inflation-based rate.
The company estimates its annualized rental rate will reach more than $1 billion when its new tenants fully ramp up toward the end of next year. There's upside to that number if it's successful in working out its other tenant bankruptcy and starts receiving mortgage payments due to it from hospitals in Colombia.
As a result, Medical Properties Trust "is well positioned to grow earnings from our existing in-place real estate portfolio," commented CEO Edward Aldag in the first-quarter earnings press release. Aldag also noted that the company is in a solid position to "access capital for accretive growth in a uniquely attractive market and deliver growing dividends and other returns to our shareholders."
The CEO's comments drive my view that Medical Properties Trust will start growing its dividend in the future. While it could begin raising its payout immediately, it might opt to wait to see how the year plays out before rebuilding the dividend. Either way, I predict that the REIT will raise its payout before the end of this year.
A healthy dose of income
Now that Medical Properties Trust's challenges seem to finally be in the past, I believe the REIT will start raising its already attractive 7%-yielding dividend in the coming months. That makes it an enticing option for those seeking a lucrative and growing income stream backed by one of the largest hospital real estate portfolios in the world.
