Medical Properties Trust(NYSE: MPW) has experienced a series of setbacks in recent years. Several tenants ran into financial troubles, which impacted their ability to pay rent. On top of that, interest rates surged, affecting the company’s ability to refinance maturing debt at acceptable rates. As a result, the real estate investment trust (REIT) has had to cut its dividend twice over the past couple of years, slashing it from $0.29 per share each quarter to the current rate of $0.08 per share.
These issues have weighed heavily on the healthcare REIT’s stock price. That’s why it still offers an enticing dividend yield of more than 7%. The good news is that the company’s dividend payment could be on the upswing in 2025.
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Medical Properties Trust issues largely stem from tenant concentration. A significant percentage of its properties had leases with two tenants: Steward Health Care and Prospect Medical Holdings. They experienced financial challenges following the pandemic due to surging staffing and other costs. That impacted their ability to pay rent on the hospitals they leased from Medical Properties Trust.
The REIT worked closely with both tenants to help them address their issues. For example, last year, it reconstituted its investment in properties related to Prospect. It exchanged some real estate value for a stake in its managed care business. The REIT also allowed Prospect to pay partial rent on its California properties for a period. Meanwhile, Medical Properties Trust provided loans to both companies to help them fund their operations.
Despite its efforts, Steward declared bankruptcy earlier this year. Meanwhile, Prospect ran into additional financial issues this year, impacting its ability to pay rent again.
Medical Properties Trust was able to work with Steward and its other creditors on a solution that enabled the REIT to take back control of most of the real estate it had leased to the hospital operator. That enabled the company to transition the operations to new tenants. It has transferred 17 former Steward hospitals to five new tenants.
The REIT won’t charge the new operators rent this year. Instead, partial rental payments will commence in the first quarter of 2025 and slowly escalate. They’ll reach 50% of the stabilized rate by the end of next year and hit the full level at the end of 2026.
Meanwhile, Prospect Medical’s financial situation should start improving in the coming quarters. While the company didn’t pay rent on the hospitals it leases from Medical Properties Trust in California during Q3 due to issues with its East Coast operations, those West Coast locations are seeing improving earnings. In addition, Prospect expects to receive $100 million of quality-assurance fund payments in Q1 of next year, which should bolster its liquidity.
On top of that, Prospect finally found a buyer for its managed care business. It agreed to sell the majority of that platform to Astrana Health for $745 million plus the assumption of certain liabilities. Medical Properties Trust expects to receive about $200 million of these proceeds. It should get the majority of that cash in the first half of next year, with an additional $50 million expected by 2027.
As a result of these transactions, Medical Properties Trust’s rental income should steadily rise over the next two years. Meanwhile, the additional cash proceeds from the sale of Prospect’s managed care business will further enhance its liquidity. The company had previously completed $2.9 billion of liquidity transactions this year, including hospital sales, debt refinancings, and loan repayments. The company has used this liquidity to repay debt and enhance its financial flexibility.
With its cash flow expected to rise and its balance sheet on a stronger foundation, Medical Properties Trust could be in a position to start increasing its dividend in 2025. Despite all its issues, the company still generated $0.16 per share of normalized funds from operations (FFO) in Q3, more than double its current dividend level. As it begins to rebuild its FFO (it was $0.38 per share in the year-ago period), it will be in an even better position to also start building back its dividend payment.
Sickly tenants have had a major impact on Medical Properties Trust over the past few years. However, it has severed its relationship with one troubled tenant, while another should get healthier in the coming months. Because of that, the REIT’s cash flow should improve in 2025, which could allow it to start reversing some of its dividend cuts. That makes it an intriguing option for investors seeking a high income stream with high upside potential.
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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.
