Medical Properties Trust (NYSE: MPW) expanded aggressively when interest rates were low. The real estate investment trust (REIT) took on a lot of debt to build one of the world's largest portfolios of hospital real estate. That rapid growth allowed the REIT to grow its dividend.
Unfortunately, the healthcare REIT's strategy backfired when rates surged, and some of its top tenants experienced severe financial issues. As a result, the REIT has had to backpedal by selling properties to shore up its financial situation. It recently took another step forward, which bodes well for its ability to maintain its 11.5%-yielding dividend.
Another sale in the books
Medical Properties Trust recently announced the sale of the 50-bed Arizona General Hospital in Mesa, Arizona, and seven freestanding emergency department facilities in the Phoenix area. Dignity Health is paying $160 million for the portfolio, which values the properties at a sub-7.5% real estate capitalization rate. Medical Properties plans to use those proceeds to reduce debt and for general corporate purposes.
The REIT invested $92 million to fund the initial development of these properties between 2015 and 2017 for the previous tenant, Adeptus. However, Adeptus filed for bankruptcy in 2017. Dignity Health leased the facilities from Medical Properties Trust shortly after that. The profitable exit from this investment once again showcases that the REIT owns high-quality properties that other operators value highly.
The sale continues Medical Properties Trust's strategy of bolstering its liquidity this year. It initially expected to close $2 billion in liquidity transactions by year-end. However, it has now raised over $2.5 billion, including closing a 10-year, $800 million loan secured by a portion of its U.K. property portfolio and receiving $1.1 billion of proceeds from selling a 75% interest in its Utah Hospital portfolio. These transactions will enable it to repay and extend maturing debt, giving it a lot more financial breathing room.
More to come
Even though Medical Properties Trust has already exceeded its liquidity target, it has more work to do. The REIT is trying to reduce its exposure to its top two tenants (Steward Health Care and Prospect Medical) due to their persistent financial challenges. Steward's issues resulted in it filing for bankruptcy earlier this year.
Medical Properties Trust is working to find new tenants for all the hospitals it currently leases to Steward. While a recent auction on some properties produced underwhelming results, the REIT remains optimistic it can find new operators for the bulk of its Steward properties. Finding financially stronger tenants would improve its rental income. Meanwhile, some of those new operators will likely want to acquire the underlying real estate, which would provide Medical Properties Trust with additional sources of liquidity.
The company is also working to reduce its exposure to Prospect. The REIT converted some of its real estate investments, loans, and rent deferrals into an interest in Prospect's managed care business. Medical Properties Trust hopes to monetize that stake later this year, which would provide additional liquidity.
Cutting ties with those two tenants would enable the REIT to finally put most of its challenges in the rearview mirror. It has spent the past few years trying to work with those tenants to put them in a better position to succeed. Unfortunately, their challenges have only continued, which has impacted the REIT's cash flow and ability to navigate the impact of higher interest rates on its maturing debt. When those tenants are no longer an issue, the company can focus on rebuilding its portfolio around stronger tenants, which would enhance its ability to sustain its high-yielding dividend.
Another small step forward
Medical Properties Trust continues to make progress on its strategic plan to boost its liquidity. That will help it stay afloat as it deals with the issues facing its two largest tenants. However, it must still cut ties with those tenants to regain solid ground. Because of that, there's some risk that the REIT might need to cut its dividend again if it continues to face setbacks. That makes it a higher-risk investment for income-seeking investors, though one with lots of upside potential if it can successfully end those relationships.
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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.
This 11.5%-Yielding Dividend Stock Takes Another Small Step Toward a Stronger Future was originally published by The Motley Fool