Medical Properties Trust (NYSE: MPW) has battled a barrage of issues over the past couple of years. The biggest problem has been the financial issues of its top tenant, Steward Health Care.
The bankrupt hospital owner has struggled to pay rent, which is one of the factors that forced the real estate investment trust (REIT) to cut its dividend twice in the last two years. Even with those deep cuts, the REIT still offers a dividend yield above 6% due to the nearly 80% crash in its share price from its peak a few years ago.
The healthcare REIT recently reached a major milestone in its efforts to replace Steward with financially stronger tenants. As a result, the REIT will have a lot more visibility into its future cash flow and ability to pay dividends.
The great replacement
Medical Properties Trust has reached a global settlement agreement with Steward Health Care, its secured lenders, and the unsecured creditors committee. The deal restores the REIT's control over its real estate, severs its relationship with Steward, and facilitates the immediate transition of operations to replacement tenants at 15 hospitals. The agreement covers 23 hospitals overall, and the REIT is working to find alternative solutions for the remaining ones.
The REIT has reached new agreements with four tenants that will immediately lease and operate 15 hospitals in Arizona, Florida, Louisiana, Ohio, and Texas. The agreements value the real estate at $2 billion. They'll provide Medical Properties Trust with $160 million of annualized cash rental payments upon stabilization at the end of 2026, which is about 95% of the rent Steward would have owed on these properties at the time.
The new leases have an average initial term of 18 years. Assuming these tenants remain financially healthy, the leases will supply the REIT with very stable rental income for nearly two decades.
Medical Properties Trust agreed to forgo rent on these properties for the remainder of this year to expedite the retenanting process and give the new operators time to ramp up. Further, when rental payments start next year, they'll begin low and gradually escalate. The new tenants will only pay about 50% of the contractual rental rate by the end of next year, which will continue escalating until the end of 2026 when they'll reach 100% of the contract rate.
Lots left on the to-do list
Finding new tenants for 15 hospitals formerly leased to Steward is a significant step forward for Medical Properties Trust. Those agreements provide it with visibility into its future rental income streams from those facilities.
However, the REIT still has several items to address before it's back on a more sustainable long-term foundation. It's still working out solutions for two hospital construction projects it had been funding for Steward. In addition, Steward had closed four facilities before it filed for bankruptcy, while another two had recently closed due to the uncertainty of that process.
Those closed facilities had a lease base of $300 million. The REIT is also in discussions on solutions for these properties, which could include retenanting the facilities or selling the real estate.
In addition to finalizing its exit from Steward, the REIT needs to take additional steps to shore up its financial foundation. It has been selling off non-Steward properties in recent years to build liquidity so that it can repay debt as it matures.
While it has made excellent progress on that strategy this year (it raised over $2.5 billion, exceeding its $2 billion target), it has more work to do. For example, it still needs to monetize its investment in the managed-care business of Prospect Medical Holdings, another financially challenged tenant. That sale would enable the REIT to recover more of its investment in properties leased to that tenant.
Once it shores up its financial foundation, the REIT can return its focus on growing shareholder value. That would include making accretive new investments and increasing its dividend.
A major step forward
Medical Properties Trust has finally put its relationship with Steward in the past. That's giving it a lot more clarity on its future cash flow. While the REIT does have more work to do, it has finished most of the heavy lifting. Because of that, it's starting to get enticing for income-seeking investors.
Its current dividend level is much more sustainable and could grow substantially by 2026 as the REIT collects full rent on its former Steward facilities. While more risk-averse investors might want to wait a while before buying for even more clarity, those with a higher risk tolerance could earn strong total returns from here if things continue trending in the right direction.
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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.
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