Medical Properties Trust (NYSE: MPW) recently declared its latest dividend payment. On the one hand, the $0.08-per-share payout puts its dividend yield at more than 7%. However, that payment was nearly 50% below last quarter’s level and more than 70% below where it was in the middle of last year.
The driving factor of the healthcare REIT’s most recent reduction is the impact of the bankruptcy of its top tenant, Steward Health Care. It’s currently working to exit that troubled relationship. That will likely take some time, which is why income-focused investors should avoid this REIT until it puts Steward in the rearview mirror.
The troubles continue
Medical Properties Trust has been working with Steward for years to help shore up its financial situation. Unfortunately, that hasn’t been enough to prevent the hospital operator from filing for bankruptcy. Steward’s financial situation is so dire that the company plans to sell off its operations at 31 hospitals to repay its creditors, which include Medical Properties Trust.
The REIT had been hoping that this would be a relatively quick process and that the new operators would assume Steward’s leases on its hospital properties. That hasn’t been the case. They have run into trouble in Massachusetts, where Medical Properties owns eight properties as part of a joint venture. That has slowed sales processes in other markets.
Things have gotten so contentious that Steward recently sued Medical Properties Trust. The hospital operator believes the REIT is trying to extract all the value of these sales for itself, which won’t leave much for other creditors.
Medical Properties Trust currently has $440 million of secured non-real estate investments in Steward and another $2.3 billion of real estate investments. The REIT believes it will eventually be able to recover all this value by either releasing hospitals to new operators or selling those facilities as part of Steward’s bankruptcy process. However, it will likely take a while, and it could be a bumpy road to recover that value.
Positioning for a better future post-Steward
The REIT’s tenant troubles have forced it to sell other properties to boost its liquidity so that it can repay debt. The company has raised over $2.5 billion of liquidity this year, which has enabled it to repay $1.5 billion in debt, including all 2024 maturities. It also has the liquidity to address all its 2025 maturities.
While Medical Properties Trust has taken steps to shore up its financial situation, the Steward bankruptcy continues to limit its flexibility. For example, the REIT had to amend its credit facility due partly to Steward’s bankruptcy. Its banks reduced its borrowing capacity by over $100 million to around $1.3 billion. They’re also limiting the cash component of its quarterly dividend to $0.08 per share for the next year (or sooner if Steward quickly transitions its facilities to new operators).
The REIT is working toward a future where it will have a stronger portfolio and financial profile. CFO Steve Hamner gave a preview of what the company sees ahead on the second-quarter conference call. He stated, “Looking through the calendar into 2025 and 2026, our expectation is that we will have a stable portfolio of hospital real estate leased to key operators in their respective markets with no exposure to Steward.”
It also expects to have multiple options to satisfy future debt maturities, including refinancing, selling assets, and other strategies. With a stable portfolio and the ability to address debt maturities, Medical Properties would be able to pay a much more sustainable dividend, likely at a much higher level than it will over the next year due to the limitations of its credit facility. However, it needs to reach that point, which has proven elusive.
Wait until Steward is no longer in the picture
Medical Properties Trust is working to eliminate its exposure to Steward, which continues to drag down its dividend. That will take some time. Because of that, income-focused investors should avoid this REIT until it puts Steward in the rearview mirror. Once it does, it should have a much more stable portfolio and financial profile. That should allow it to pay a more sustainable 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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