Medical Properties Belief (NYSE: MPW) has battled a barrage of points over the previous couple of years. The largest downside has been the monetary problems with its high tenant, Steward Well being Care.
The bankrupt hospital proprietor has struggled to pay lease, which is without doubt one of the elements that compelled the true property funding belief (REIT) to chop its dividend twice within the final two years. Even with these deep cuts, the REIT nonetheless affords a dividend yield above 6% as a result of practically 80% crash in its share worth from its peak just a few years in the past.
The healthcare REIT just lately reached a main milestone in its efforts to exchange Steward with financially stronger tenants. Consequently, the REIT can have much more visibility into its future money movement and talent to pay dividends.
The good substitute
Medical Properties Belief has reached a worldwide settlement settlement with Steward Well being Care, its secured lenders, and the unsecured collectors committee. The deal restores the REIT’s management over its actual property, severs its relationship with Steward, and facilitates the rapid transition of operations to substitute tenants at 15 hospitals. The settlement covers 23 hospitals total, and the REIT is working to search out different options for the remaining ones.
The REIT has reached new agreements with 4 tenants that can instantly lease and function 15 hospitals in Arizona, Florida, Louisiana, Ohio, and Texas. The agreements worth the true property at $2 billion. They’re going to present Medical Properties Belief with $160 million of annualized money rental funds upon stabilization on the finish of 2026, which is about 95% of the lease Steward would have owed on these properties on the time.
The brand new leases have a median preliminary time period of 18 years. Assuming these tenants stay financially wholesome, the leases will provide the REIT with very secure rental earnings for practically twenty years.
Medical Properties Belief agreed to forgo lease on these properties for the rest of this yr to expedite the retenanting course of and provides the brand new operators time to ramp up. Additional, when rental funds begin subsequent yr, they’re going to start low and regularly escalate. The brand new tenants will solely pay about 50% of the contractual rental fee by the tip of subsequent yr, which is able to proceed escalating till the tip of 2026 after they’ll attain 100% of the contract fee.
Tons left on the to-do record
Discovering new tenants for 15 hospitals previously leased to Steward is a big step ahead for Medical Properties Belief. These agreements present it with visibility into its future rental earnings streams from these amenities.
Story continues
Nonetheless, the REIT nonetheless has a number of gadgets to deal with earlier than it is again on a extra sustainable long-term basis. It is nonetheless figuring out options for 2 hospital building tasks it had been funding for Steward. As well as, Steward had closed 4 amenities earlier than it filed for chapter, whereas one other two had just lately closed as a result of uncertainty of that course of.
These closed amenities had a lease base of $300 million. The REIT can also be in discussions on options for these properties, which may embody retenanting the amenities or promoting the true property.
Along with finalizing its exit from Steward, the REIT must take further steps to shore up its monetary basis. It has been promoting off non-Steward properties lately to construct liquidity in order that it might repay debt because it matures.
Whereas it has made glorious progress on that technique this yr (it raised over $2.5 billion, exceeding its $2 billion goal), it has extra work to do. For instance, it nonetheless must monetize its funding within the managed-care enterprise of Prospect Medical Holdings, one other financially challenged tenant. That sale would allow the REIT to get better extra of its funding in properties leased to that tenant.
As soon as it shores up its monetary basis, the REIT can return its concentrate on rising shareholder worth. That would come with making accretive new investments and growing its dividend.
A significant step ahead
Medical Properties Belief has lastly put its relationship with Steward prior to now. That is giving it much more readability on its future money movement. Whereas the REIT does have extra work to do, it has completed a lot of the heavy lifting. Due to that, it is beginning to get engaging for income-seeking buyers.
Its present dividend stage is far more sustainable and will develop considerably by 2026 because the REIT collects full lease on its former Steward amenities. Whereas extra risk-averse buyers may wish to wait some time earlier than shopping for for much more readability, these with the next danger tolerance may earn robust complete returns from right here if issues proceed trending in the precise route.
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Matt DiLallo has positions in Medical Properties Belief. The Motley Idiot has no place in any of the shares talked about. The Motley Idiot has a disclosure coverage.
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