I recently increased my investment in this diminished dividend-paying stock, offering a robust yield of 8%.
MPW (Medical Properties Trust), representing a 3.23% dip, has been battling a constant barrage of challenges in recent years. Issues with tenants and financial instability have significantly impacted its real estate investment trust (REIT) stock price. Its shares now sell over 80% lower than their peak in 2020, when the pandemic began to affect its hospital tenant base.
This healthcare REIT has shown resilience in overcoming its difficulties. It has replaced strained tenants with financially robust entities and unloaded some properties to strengthen its financial position. As a result, it's seen an improvement in health.
I've recently chosen to add more shares to my portfolio of this high-yielding REIT. I am optimistic that it's about to embark on a recovery journey, which will establish a more durable foundation for its high-yielding dividend.
Leaving its past challenges behind
The majority of Medical Properties Trust's woes can be attributed to its overdependence on two tenants: Steward Health Care and Prospect Medical Holdings. By the end of 2022, these two tenants accounted for more than 35% of its revenue. This became a significant concern when they could no longer meet their rental obligations.
Initially, the REIT attempted to collaborate with these distressed tenants by offering additional financial aid and revising its investment strategy. However, their financial problems worsened, ultimately leading to Steward submitting for bankruptcy.
The REIT managed to discard its ties with Steward earlier this year, allowing it to lease numerous properties formerly associated with Steward to new operators. It has also been working to minimize its exposure to Prospect. The company recently agreed to sell its stake in its managed care business for a sum of $200 million and has taken steps to regain control of three healthcare entities in Southern California by requesting the replacement of board members designated by the REIT following Prospect's default on its debt and failure to pay rental fees on its properties.
Despite its lingering problems with Prospect, Medical Properties Trust has substantially augmented its property portfolio and financial stability over the past couple of years. It has raised around $3 billion in liquidity this year through asset sales and debt restructuring, while also repaying $2.2 billion in debt since the beginning of 2023. Furthermore, it has diversified and improved its tenant base by reoccupying 17 former Steward facilities with five financially strong operators.
Consequently, the company asserts that its "portfolio is well-positioned to generate robust cash flows for MPT and our shareholders over both the short-term and long-term," as declared by senior vice president of operations Rosa Hooper during the REIT's third-quarter conference call. It also boasts the necessary liquidity and options to manage its 2025 debt maturities ($1.2 billion) and beyond. This, in turn, creates confidence in better days ahead.
Preparing for its comeback
Medical Properties Trust still managed to generate $0.16 per share of normalized funds from operations (FFO) during the third quarter, despite all its challenges. This is double its existing quarterly dividend payment ($0.08 per share) and translates to an over 8% yield at its current price. Given its much-improved financial situation and tenant base, the company should have no trouble maintaining its current dividend.
Dividend sustainability is expected to improve substantially over the next couple of years. This is because the tenants that have replaced Steward are currently not making rental payments (neither is Prospect). However, this will change starting next year. Prospect recently sold its managed care business and is due to receive $100 million in quality assurance fund payments in early 2025, which should strengthen its financial position and enable it to resume its rental obligations to Medical Properties Trust.
Meanwhile, the REIT has agreed to forgive rent on the former Steward properties until the end of 2024 to provide the new tenants with time to establish their operations. Partial rental payments will begin next year and incrementally increase, reaching 50% of the stabilized rate by the end of the following year and attaining the fully stabilized rate by the end of 2026. Additionally, the REIT has a few other former Steward properties that it's working to resolve over the next few quarters, either by selling them or securing new tenants to manage the facilities.
As a result, the REIT's cash flow should gradually increase over the next two years. This additional income can be utilized to bolster its financial position, invest in new opportunities or distribute more capital to shareholders in the form of higher dividends or share repurchases. Any of these moves should contribute to elevating shareholder value by boosting the company's ailing stock price.
Pinning hope on a revival
Medical Properties Trust appears to have finally neutralized the majority of its problems. With this newfound stability, it should commence its recovery in the following year as tenants begin resuming rental payments. This should improve the sustainability of its high-yielding dividend. I believe the REIT holds the potential to produce compelling total returns from here, which is why I've recently added more shares to my portfolio, an action I intend to continue as its recovery gains momentum.
In light of its financial improvements and tenant base diversification, Medical Properties Trust is actively seeking to regain control of its Southern California healthcare entities and minimize its exposure to financially troubled tenants, such as Prospect. This strategic move is expected to fortify its financial position and set the stage for a potential comeback.
Optimistic about its recovery, I have decided to invest more in Medical Properties Trust, aiming to capitalize on its high-yielding dividend and potential for compelling total returns as it navigates its path towards financial stability and a stronger stock price. Investing in this REIT provides an opportunity to reap the rewards of its anticipated recovery journey.
