Medical Properties Trust (NYSE: MPW) has battled a barrage of issues over the past several years. Chief among them has been the financial challenges of its top tenant, Steward Health Care, which filed for bankruptcy protection earlier this year. These troubles have forced the hospital-focused real estate investment trust (REIT) to cut its dividend twice over the past year, with the most recent reduction trimming its dividend yield down to around 7%.
The healthcare REIT has been working with Steward to find new operators to take over its facilities. While they have encountered obstacles with those efforts, the companies recently agreed to transfer all Steward-operated hospitals to new ownership, with Medical Properties Trust taking the reins at most facilities.
A breakthrough agreement
Medical Properties Trust and Steward have been squabbling over value, with Steward recently suing its landlord to protect the value of its hospital operations. However, they recently agreed in principle to put their differences aside to allow for the transfer of all Steward-operated hospitals to new owners. The agreement has three basic features:
Massachusetts hospitals: Steward will transition six of its hospital operations in Massachusetts to new operators. Medical Properties Trust and its joint venture partner, Macquarie Infrastructure Partners, previously agreed to turn these facilities over to their secured lender.
"Space Coast" hospitals: Steward will retain the proceeds from the sale of its "Space Coast" hospitals in Florida to pay lenders and creditors.
All other leased Steward facilities: Hospitals governed by Medical Properties Trust's master lease with Steward will transfer to new interim operators. Medical Properties Trust will fund all ongoing operating expenses for these locations. Steward and Medical Properties Trust have agreed to release all claims on the secured lease obligations for these facilities.
In a sense, Medical Properties Trust will assume most of Steward's hospital operations. It will fund the operating costs for those facilities, though other hospital companies will operate the facilities for the REIT in the interim. That will give Medical Properties Trust control over the rehoming of those facilities. It will have more time to find the right permanent operators for those hospitals that could either lease the properties from the REIT or buy the operations and underlying real estate.
A major step forward
Medical Properties' goal throughout the bankruptcy process has been to exit its relationship with Steward. This agreement would pave the way to accomplish that objective. Steward will no longer operate any facilities owned by the REIT.
However, while this agreement will accomplish an important goal, it doesn't completely address the situation. Medical Properties Trust will now operate these facilities with the help of interim operators instead of leasing them, so it will be on the hook for the operating costs of these facilities until it transitions them to permanent operators. That could take time.
Furthermore, while the operations should generate some income for the REIT in the interim, those earnings won't be as stable as rental income. Some of the operations could also lose money, which was an issue for some of Steward's facilities.
Those potential issues aside, the agreement is an important step toward getting Steward out of the picture. It will enable the REIT to find more suitable permanent operators for these facilities. It can also wait until the dust settles from the bankruptcy proceedings and potentially get more value back in the future from an eventual sale of the operations or real estate to new operators.
A potential win-win solution
Medical Properties Trust and Steward have agreed to transition all Steward-operated hospitals to new owners. The REIT will take control of several facilities and fund their operations until it can find permanent operators. While it could take some time to reach that point, it now has a pathway to achieve that goal, putting the REIT a big step closer to being in a place where it has a sustainable portfolio, financial foundation, and dividend.
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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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