Medical Properties Trust (NYSE: MPW) has offered a double-digit dividend yield for over a year. That big yield was a sign that the market didn't believe the real estate investment trust (REIT) would be able to maintain its dividend level, even after cutting it by nearly 50% last August.
The market's skepticism proved to be correct. The healthcare REIT is indeed reducing its dividend again. The cut, which could prove temporary, is due to the bankruptcy of its top tenant.
One step forward and another back
Medical Properties Trust has spent the past few years working simultaneously to address two issues. Its two largest tenants have been under a lot of financial pressure, which has impacted their ability to make full rental payments. Their issues, along with surging interest rates, have forced the REIT to take steps to shore up its liquidity, with an initial aim to raise $2 billion this year.
On a positive note, the REIT has exceeded expectations in boosting its liquidity this year. It has raised over $2.5 billion by selling several hospitals, forming a new joint venture, and completing a secured financing agreement on several U.K. hospitals. These moves allowed it to repay $1.5 billion of debt, including all its 2024 maturities.
However, persistent financial pressure facing its top tenant, Steward Health Care, resulted in that company filing for bankruptcy earlier this year. As a result of that and the REIT's asset sales, Medical Properties Trust has amended its credit facility to better align with its current capital allocation strategy.
The amendment will see the facility's capacity fall from $1.4 billion to less than $1.3 billion. As part of the agreement, Medical Properties Trust has agreed to limit the cash component of its quarterly dividends to no more than $0.08 per share (roughly 47% below the current level of $0.15 per share) through the end of next September.
That reduction will allow the REIT to retain more cash while it works with Steward to transition its hospitals to other operators. If the company transitions the hospital operations more quickkly, the REIT has the right to terminate the dividend-reduction provision early.
A bumpy transition
Medical Properties Trust had hoped that Steward would quickly find new operators for its hospitals that would either assume the existing leases or buy the properties from the REIT. Unfortunately, that hasn't been the case.
A recent auction of five hospitals proved to be a bust. Steward only received acceptable bids for two of the facilities, which were at very low prices (and the tenants wanted Medical Properties Trust to release them from the leases). Steward will likely close the other three facilities.
Meanwhile, unexpected restrictions by regulators impacted the process of transferring ownership of eight hospitals in Massachusetts to other operators. As a result, Medical Properties Trust expects to relinquish its 50% ownership of these properties to its lender.
On a more positive note, Steward paid $19 million of rent in May and June and was also current on its obligations related to the Massachusetts properties. It also made all scheduled payments in July. Meanwhile, its other financially troubled tenant, Prospect Medical Holdings, paid $18 million in rent and another $4 million of interest, satisfying all past due amounts in the first quarter and what it owed the REIT in the second quarter.
The long road to recovery continues
Medical Properties Trust's tenant troubles have continued as Steward is having problems finding new operators for its facilities. That has forced the REIT to amend its credit facility, which requires it to limit its dividend until Steward completes the transition of its operations to other companies.
The hope is that this will be a quick transition. However, given the troubles Steward is already having, it could take a while to complete the exit. Because of that, the REIT will likely remain very volatile until it can finally put an end to its relationship with Steward.
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Matt DiLallo has positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
No Surprise: This Ultra-High-Yielding Dividend Stock Cuts Its Payout Again was originally published by The Motley Fool