Medical Properties Trust (MPW +1.38%) has experienced a rough couple of years. Two of the real estate investment trust's (REIT) largest tenants went bankrupt, which significantly impacted its rental income. That came at a time when interest rates were rising, making it extremely difficult for the hospital owner to refinance debt as it matured.
These headwinds left the healthcare REIT with no choice but to cut its dividend twice by a total of more than 70%. These issues weighed heavily on its stock price, which has plunged nearly 80%. That's why the REIT currently yields 6.2% despite those two big dividend cuts.
Medical Properties Trust has worked tirelessly over the past few years to address its issues. As these efforts continue to gain traction, the company could start increasing its dividend next year and in those that follow, provided it doesn't experience any further setbacks.
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A healthier tenant base
At the end of 2022, Steward Health Care and Prospect Medical Holdings ranked as Medical Properties Trust's first and third largest tenants by revenue (26.1% for Steward and 11.5% for Prospect). That outsize exposure to those healthcare companies put the REIT in a bind, as both have experienced severe financial hardship in recent years due to rising costs and other issues since the pandemic. Things got so bad that they struggled to pay their rent. Ultimately, both companies filed for bankruptcy.
While this was painful at the time, it allowed Medical Properties Trust to replace those financially troubled tenants with healthier ones. Last year, it transitioned 17 of its former Steward facilities to five new tenants. It has also recently announced a new lease agreement for six California hospitals that it formerly leased to Prospect.
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Key Data Points
As part of those deals, Medical Properties Trust agreed to gradually escalate rental payments, giving the new tenants time to ramp up their operations at the new facilities. The new tenants at the former Steward facilities won't pay their fully stabilized rental rates until the fourth quarter of next year. Meanwhile, it's deferring most of the rent due at the former Prospect hospitals in California for the first year.
However, once all these properties reach their fully stabilized rates at the end of 2026, Medical Properties Trust expects to collect over $1 billion in annual rental income across its portfolio. With a much healthier tenant base, the REIT should collect stable and steadily rising income in the future, supported by inflation-linked contractual escalation clauses. This positions the company for a stronger financial outlook in 2026 and beyond.
A much healthier balance sheet
Medical Properties Trust had to navigate its tenant issues while also dealing with a wave of debt maturities. The REIT worked to stay ahead of this situation by selling assets to repay maturing debt until it could secure new funding to refinance other maturities.
The company sold several hospitals over the past couple of years to raise cash. One of its biggest deals was selling interests in five Utah hospitals to a newly formed joint venture. That deal raised $1.1 billion for the REIT, which it used to repay a $300 million loan and reduce its outstanding credit facility balance.
Property sales alleviated pressure on its balance sheet, enabling Medical Properties Trust to selectively secure new debt funding. Last year, it closed an $800 million, 10-year loan backed by some of its UK hospitals. Meanwhile, the company completed a $2.5 billion debt offering this year. This new debt enabled the REIT to repay maturing debt and bolster its liquidity. Overall, the landlord has raised $5.5 billion in cash over the past year to strengthen its financial position.
A much healthier company heading into 2026
Medical Properties Trust's strategic actions over the past couple of years have enabled the company to establish a significantly healthier tenant base and a much stronger balance sheet. Its rental receipts should steadily increase over the coming year as new tenants pay escalating rental rates. This healthy and growing rental income could allow Medical Properties Trust to consider increasing its dividend starting in 2026, provided its financial improvements persist.
Raising the dividend would likely serve as a major catalyst for the stock price, which has considerable upside potential, given how far it has fallen. These positives combine to make the REIT a compelling choice for investors seeking healthy total return potential in the years ahead.
