Medical Properties Trust (MPW +1.27%) stock has gotten clobbered over the past few years. Shares are down nearly 80% from their peak in 2022. That has driven its dividend yield up to over 10%, even after it cut its payout by nearly half last year.
The biggest weight on its stock has been the financial troubles of top tenant Steward Health Care, which recently filed for bankruptcy. However, the healthcare REIT's relationship with Steward should soon go from a headwind to a major tailwind as new operators take over most of those facilities. This shift could act as a significant catalyst for the stock while finally giving investors more clarity on the dividend's long-term outlook.
NYSE: MPW
Key Data Points
Rents aren't the issues plaguing these properties
Steward's recent bankruptcy was a key topic of conversation on Medical Properties Trust's first-quarter earnings conference call. The REIT's management team made two key points about the filing on the call. First, CEO Ed Aldag highlighted that "no mention was made of rent as a contributor to Steward's distress" in the bankruptcy filing. He said that rent, which "represents only a small fraction of a hospital's total revenue, is virtually never the primary cause of financial stress for hospitals." Steward's stress has come from other factors, like surging labor rates, inflating costs, and reimbursement rates. Furthermore, he noted, if Steward or another hospital operator wasn't paying rent, they'd make interest and principal payments on their hospitals because "buildings are not free."
The other major takeaway is that "We believe that bankruptcy will facilitate the retenanting or sale of Steward Hospitals in an orderly and timely fashion," stated Aldag on the call. He noted that the company is happy with the progress it's making with those interested in Steward's hospitals. The CEO estimates that by the end of Steward's bankruptcy, close to 100% of the properties it currently leases to the tenant will be in the hands of other operators. While the company couldn't put a firm timeline on this process, it expects to replace Steward with better-qualified operators at many of its hospitals by the end of September. That timeframe coincides with when the REIT would need to get another waiver on its credit facility.
Two ways to enhance value
Because of its financial troubles, Steward has only been making partial rent payments on the hospitals it leases from Medical Properties Trust. That has impacted the REIT's cash flow, causing concerns about its ability to maintain its debt and pay dividends.
However, this weight should lift over the coming months. Medical Properties Trust expects to find financially stronger operators for Steward's hospitals. It believes these new operators will assume or sign new leases at rates consistent with what Steward historically paid on those properties. Those lease payments will boost the REIT's cash flow, enhancing its ability to pay the interest on its debt and dividends.
Another potential outcome is that the new operators will also acquire the associated real estate from Medical Properties Trust. A sale to a new operator would generate cash for the REIT, which it can use to strengthen its financial foundation. A related outcome would be for Medical Properties Trust to sell a retenanted property later to a financial investor. For example, CommonSpirit Health bought Steward's Utah hospital operations last year, which it agreed to lease from Medical Properties Trust. The REIT recently sold a 75% interest in those hospital properties to an institutional asset manager for $1.1 billion. The REIT used those proceeds to repay debt and strengthen its financial flexibility. Meanwhile, it will retain the income and upside on the 25% stake it still owns.
Sales of Steward hospitals would add to the REIT's growing liquidity. Medical Properties Trust initially aimed to raise $2 billion through asset sales this year. It achieved 80% of that target by early April and now expects to exceed its goal based on its current visibility into future sales. That would give it lots of liquidity heading into 2025 to address future debt maturities.
A big weight will soon lift
Steward's bankruptcy should facilitate an orderly transfer of its hospitals to financially stronger operators. Those new operators will either start paying full rental rates on the facilities or repurchase them from the REIT, increasing its cash flow and liquidity. This process should eventually enable the REIT to get down to a core stabilized portfolio of income-generating hospitals while also firming its financial foundation. That will finally provide investors with more long-term clarity on the dividend rate, which should give its stock price a boost.
