The Evolution of Medical Properties Trust's Appearance is Becoming Clearer. Is Now the Moment to Invest for Dividend Earnings?
Over the past few years, Medical Properties Trust (MPW) has faced significant challenges, resulting in a -3.70% decrease in its value. Problems with tenants and rising interest rates have negatively impacted its financial health, causing its stock to lose over 80% of its peak value.
However, the healthcare-focused real estate investment trust (REIT) has taken active steps to overcome these challenges. It has revamped its portfolio, tenant base, and financial structure to establish a more stable future. Let's delve into this REIT and the implications for its high-yielding dividend.
A new chapter
During its third-quarter call, Medical Properties Trust's management team discussed the company's transformation. CEO Edward Aldag highlighted the company's significant stride with its global settlement with Steward and its creditors, thereby regaining control of its real estate and severing ties with Steward.
Back in 2016, the REIT invested approximately $5.3 billion into real estate attached to Steward. It has recouped 45% of this investment through asset sales and other transactions involving this portfolio. Moreover, it has collected roughly $1.9 billion in rent and mortgage payments over the years. Today, it possesses about $2.3 billion worth of properties that were previously associated with Steward, excluding development projects.
Since then, the company has assumed ownership of most of the remaining properties leased to Steward and has re-leased over 90% of these locations (17 hospitals to 5 new tenants). These new tenants will begin paying partial rent from the next year. By the end of 2025, the rental payments will reach 50% of the stabilized rate, and by 2026, they will reach 100%. These properties will generate around $160 million in annual rent by 2026.
When combined with the rest of its portfolio, this annual rent is expected to surpass $1 billion by 2027. This rent will emanate from a more diverse and financially solid tenant base. The aforementioned figure doesn't include the rental potential of four other former Steward properties ($170 million) and two other development properties. The company is currently negotiating with potential tenants regarding these properties.
Strengthening the financial base
This year, the REIT has significantly improved its liquidity through a series of strategic transactions. CFO Steve Hamner announced on the call, "As of now, we have executed over $2.9 billion in profitable asset sales and other monetization transactions, including $350 million during the third quarter."
Recent transactions included the sale of 18 freestanding emergency rooms and a general acute hospital for $246 million and a $100 million mortgage loan repayment. These transactions have helped Medical Properties Trust strengthen its financial standing. Hamner stated on the call, "Since the beginning of 2023, we have repaid $2.2 billion in debt." The company ended the third quarter with $275 million in cash and $880 million available on its revolving credit facility.
It is now in a favorable position to manage future debt maturities, including $1.2 billion in 2025. Furthermore, it expects to garner more cash in the coming quarters. Recent sales of former Steward hospitals in Florida have resulted in around $45 million in cash proceeds. It also sold a hospital in California for $45 million and two freestanding emergency departments for $5 million.
In addition, Hamner mentions on the call, "And we have signed non-binding LOIs [letters of intent] and offer sheets for profitable sales that would generate additional cash proceeds. The aggregate of these transactions approximates another $400 million."
Although he did not specify the assets under consideration, the company later revealed that Astrana Health agreed to purchase the majority of Prospect Medical Holding's managed care business for $745 million. The REIT will receive $200 million from this sale ($150 million in the first half of the next year and $50 million by 2027). This additional liquidity will further reinforce its financial standings.
On the road to recovery
Due to tenant and balance-sheet challenges, Medical Properties Trust had to lower its dividend twice in the recent past. However, it has now resolved most of its issues. It now boasts a more stable portfolio and a more robust financial foundation. Consequently, its dividend (which yields over 7%, despite the cuts) appears sustainable.
The REIT should be in a position to reconstruct its dividend over the next two years as it begins receiving rent from the former Steward facilities. This makes it an appealing option for income-seeking investors. Although it presents a higher level of risk compared to other REITs, it offers a substantial reward potential in terms of dividend income and the prospect of a stock price recovery.
Following its successful recovery efforts, Medical Properties Trust (MPW) is expected to regain a substantial portion of its lost investment. By 2026, the annual rent generated from re-leased properties associated with Steward will reach $160 million, contributing significantly to the REIT's total annual rent, which is projected to surpass $1 billion by 2027.
In an effort to strengthen its financial position, MPW has executed over $2.9 billion in profitable asset sales and monetization transactions since the beginning of this year. The company's improved liquidity, coupled with additional income from the sale of Prospect Medical Holding's managed care business, will provide a solid basis for future debt maturities and dividend reconstruction, making it an attractive option for income-seeking investors.
