Medical Properties Trust (NYSE: MPW) has battled a barrage of issues over the past couple of years. The most important problem has been the financial problems with its top tenant, Steward Health Care.
The bankrupt hospital owner has struggled to pay rent, which is definitely certainly one of the facets that forced the actual estate investment trust (REIT) to cut its dividend twice throughout the last two years. Even with those deep cuts, the REIT still offers a dividend yield above 6% resulting from the nearly 80% crash in its share price from its peak numerous years ago.
The healthcare REIT recently reached a major milestone in its efforts to interchange Steward with financially stronger tenants. Consequently, the REIT can have so far more visibility into its future money flow and skill to pay dividends.
The good alternative
Medical Properties Trust has reached a worldwide 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 alternative tenants at 15 hospitals. The agreement covers 23 hospitals overall, and the REIT is working to get hold of alternative solutions for the remaining ones.
The REIT has reached latest agreements with 4 tenants that will immediately lease and operate 15 hospitals in Arizona, Florida, Louisiana, Ohio, and Texas. The agreements value the actual estate at $2 billion. They’ll provide Medical Properties Trust with $160 million of annualized money rental payments upon stabilization on the tip of 2026, which is about 95% of the rent Steward would have owed on these properties on the time.
The brand latest leases have a mean initial term of 18 years. Assuming these tenants remain financially healthy, the leases will supply the REIT with very stable rental income for nearly 20 years.
Medical Properties Trust agreed to forgo rent on these properties for the remaining of this yr to expedite the retenanting process and provides the brand latest operators time to ramp up. Further, when rental payments start next yr, they’ll begin low and steadily escalate. The brand latest tenants will only pay about 50% of the contractual rental rate by the tip of next yr, which may proceed escalating until the tip of 2026 once they’ll reach 100% of the contract rate.
Lots left on the to-do list
Finding latest tenants for 15 hospitals formerly leased to Steward is a serious step forward for Medical Properties Trust. Those agreements provide it with visibility into its future rental income streams from those facilities.
Nevertheless, the REIT still has several items to cope with before it’s back on a more sustainable long-term foundation. It’s still understanding solutions for two hospital construction projects it had been funding for Steward. In addition to, Steward had closed 4 facilities before it filed for bankruptcy, while one other two had recently closed resulting from the uncertainty of that process.
Those closed facilities had a lease base of $300 million. The REIT may also be in discussions on solutions for these properties, which could include retenanting the facilities or selling the actual estate.
Together with finalizing its exit from Steward, the REIT must take additional steps to shore up its financial foundation. It has been selling off non-Steward properties these days to construct liquidity so that it may repay debt since it matures.
While it has made excellent progress on that strategy this yr (it raised over $2.5 billion, exceeding its $2 billion goal), it has more work to do. For example, it still must monetize its investment throughout the managed-care business of Prospect Medical Holdings, one other financially challenged tenant. That sale would enable the REIT to get better more of its investment in properties leased to that tenant.
Once it shores up its financial foundation, the REIT can return its consider growing shareholder value. Which will include making accretive latest investments and increasing its dividend.
A serious step forward
Medical Properties Trust has finally put its relationship with Steward previously. That’s giving it so far more clarity on its future money flow. While the REIT does have more work to do, it has finished most of the heavy lifting. Resulting from that, it’s starting to get enticing for income-seeking investors.
Its current dividend level is far more sustainable and can grow substantially by 2026 since the REIT collects full rent on its former Steward facilities. While more risk-averse investors might wish to attend a while before buying for far more clarity, those with the subsequent risk tolerance could earn strong total returns from here if things proceed trending in the perfect direction.
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Matt DiLallo has positions in Medical Properties Trust. The Motley Idiot has no position in any of the stocks mentioned. The Motley Idiot has a disclosure policy.
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