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This 11.5% dividend stock takes another small step toward a stronger future
Medical Property Fund (NYSE: MPW) expanded aggressively when interest rates were low. The real estate investment trust (REIT) took on a lot of debt to build one of the largest portfolios of hospital properties in the world. This rapid growth allowed the REIT to increase its dividend.
Unfortunately, the Healthcare REITs The strategy backfired when rates soared and some of its key tenants ran into serious financial trouble. As a result, the REIT had to pull back by selling properties to shore up its financial position. It recently took another step forward, which bodes well for its ability to maintain its 11.5% dividend.
Another sale in the books
Medical Properties Trust recently announced the sale of the 50-bed Arizona General Hospital in Mesa, Arizona, and seven freestanding emergency department facilities in the Phoenix area. Dignity Health is paying $160 million for the portfolio, which values the properties at a real estate capitalization rate below 7.5%. Medical Properties plans to use the proceeds to reduce debt and for general corporate purposes.
The REIT invested $92 million to fund the initial development of these properties between 2015 and 2017 for the previous tenant, Adeptus. However, Adeptus filed for bankruptcy in 2017. Dignity Health leased the facilities from Medical Properties Trust shortly thereafter. The profitable exit from this investment once again shows that the REIT owns high-quality properties that other operators value highly.
The sale continues Medical Properties Trust’s strategy to shore up its liquidity this year. It had initially expected to close $2 billion in liquidity transactions by the end of the year. However, it has now raised more than $2.5 billion, including the closing of an $800 million, 10-year term loan secured by a portion of its U.K. property portfolio and received $1.1 billion in proceeds from the sale of a 75% stake in its Utah Hospital portfolio. These transactions will allow it to pay down and extend maturing debt, giving it significantly more financial breathing room.
More to come
While Medical Properties Trust has already exceeded its liquidity target, it has more work to do. The REIT is trying to reduce its exposure to its two main tenants (Steward Health Care and Prospect Medical) due to their persistent financial challenges. Steward’s troubles resulted in its bankruptcy filing earlier this year.
Medical Properties Trust is working to find new tenants for all the hospitals it currently leases to Steward. While a recent auction of some properties produced below-expected resultsThe REIT remains optimistic that it can find new operators for most of its Steward properties. Finding financially stronger tenants would improve its rental income. Meanwhile, some of these new operators will likely want to acquire the underlying property, which would provide Medical Properties Trust with additional sources of liquidity.
The story continues
The company is also working to reduce its exposure to Prospect. The REIT has converted some of its real estate investments, loans and rent deferrals into a stake in Prospect’s managed care business. Medical Properties Trust expects to monetize that stake later this year, which would provide additional liquidity.
Cutting ties with these two tenants would allow the REIT to finally put most of its challenges behind it. It has spent the past few years trying to work with these tenants to put them in a better position to succeed. Unfortunately, their challenges have only continued, which has impacted the REIT’s cash flow and ability to navigate the impact of higher interest rates on its maturing debt. Once these tenants are no longer an issue, the company can focus on rebuilding its portfolio around stronger tenants, which would increase its ability to sustain its high-yield dividend.
Another small step forward
Medical Properties Trust continues to make progress on its strategic plan to increase its liquidity. This will help it stay afloat while it deals with the issues facing its two largest tenants. However, it still needs to cut ties with these tenants to regain solid ground. Because of this, there is some risk that the REIT will need to cut its dividend again if it continues to face setbacks. This makes it a high-risk investment for income-seeking investors, albeit one with plenty of upside potential if it can successfully exit these relationships.
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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.
This 11.5% dividend stock takes another small step toward a stronger future was originally published by The Motley Fool