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This Ultra-High-Yield Dividend Stock’s Biggest Headwind Is About to Become a Big Tailwind
Medical Properties Trust (NYSE:MPW) shares have taken a beating in recent years. The stock is down nearly 80% from its 2022 peak. That’s pushed its dividend yield to more than 10%, even after it cut its payout by nearly half last year.
The biggest drag on its shares has been the financial troubles of tenant Steward Health Care, which recently Filed bankruptcy. However, the healthcare REIT the relationship with Steward should soon turn from a headwind to a major tailwind as new operators take over most of these facilities. This move could act as a significant catalyst for the stock while giving investors more clarity on the long-term outlook for the dividend.
Rents are not the problems plaguing these properties
Steward’s recent bankruptcy was a major topic of conversation on Medical Properties Trust’s first-quarter earnings call. The REIT’s management team highlighted two key points about archiving the conference call. First, CEO Ed Aldag highlighted that “no mention was made of rent as a contributor to Steward’s distress” in the bankruptcy filing. He said rent, which “represents only a small fraction of a hospital’s total revenue, is virtually never the main cause of financial stress for hospitals.” Administrator stress comes from other factors, such as rising labor taxes, cost inflation, and reimbursement rates. Additionally, he noted, if Steward or another hospital operator didn’t pay rent, they would make interest and principal payments on their hospitals because “the buildings aren’t free.”
The other key takeaway is that “We believe bankruptcy will facilitate the leasing or sale of Steward Hospitals in an orderly and timely manner,” Aldag said on the call. He noted that the company is pleased with the progress it is making with Steward Hospitals stakeholders. The CEO estimates that by the end of Steward’s bankruptcy, close to 100% of the properties it currently leases to tenants will be in the hands of other operators. While the company has not been able to set a firm timeline for this process, it expects to replace Steward with more qualified operators in many of its hospitals by the end of September. This deadline coincides with the time when the REIT would need to obtain another waiver on its line of credit.
Two ways to increase value
Due to its financial problems, Steward has been making only partial rent payments for the hospitals it leases from Medical Properties Trust. This has impacted the REIT’s cash flow, causing concerns about its ability to maintain its debt and pay dividends.
The story continues
However, this weight should decrease in the coming months. Medical Properties Trust hopes to find financially stronger operators for Steward’s hospitals. It believes these new operators will assume or sign new leases at rates consistent with what Steward has historically paid for these properties. These lease payments will boost the REIT’s cash flow, increasing its ability to pay interest on its debt and dividends.
Another potential outcome is that the new operators will also acquire the associated properties of the Medical Properties Trust. A sale to a new operator would generate cash for the REIT, which it could use to strengthen its financial base. A related outcome would be for Medical Properties Trust to subsequently sell a leased property to a financial investor. For example, CommonSpirit Health purchased Steward’s hospital operations in Utah last year, which it agreed to lease from Medical Properties Trust. The REIT recently sold a 75% stake in those hospital properties to an institutional asset manager for $1.1 billion. The REIT used these resources to pay down debt and strengthen its financial flexibility. However, you will maintain the income and advantage of the 25% stake you still have.
Sales of Steward Hospitals would add to the REIT’s growing liquidity. Medical Properties Trust initially aimed to raise $2 billion through asset sales this year. It reached 80% of that goal in early April and now expects to exceed its goal based on its current visibility into future sales. This would give it plenty of liquidity until 2025 to meet future debt maturities.
A great weight will soon be lifted
Steward’s bankruptcy should facilitate an orderly transfer of its hospitals to financially stronger operators. These new operators will begin paying full rental fees on the facilities or repurchasing them from the REIT, increasing their cash flow and liquidity. This process should eventually allow the REIT to arrive at a stabilized core portfolio of income-generating hospitals, while consolidating its financial base. This will finally give investors more long-term clarity on the dividend rate, which should boost its share price.
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Matt DiLallo holds positions at Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This Ultra-High-Yield Dividend Stock’s Biggest Headwind Is About to Become a Big Tailwind was originally published by The Motley Fool