The past several years have been extraordinarily challenging for Medical Properties Trust (MPW -2.03%). The hospital-focused real estate investment trust (REIT) has battled tenant-related headwinds, which put pressure on its cash flow and balance sheet. That came when interest rates surged, making it very difficult for the company to refinance maturing debt. As a result, it had to take several actions to shore up its portfolio and financial profile, including selling properties and cutting its dividend a couple of times.
Those initiatives have helped cure its ailing balance sheet, and now the healthcare REIT is finally on the road to recovery. That also means its 5.4%-yielding dividend is safe.
A very successful year
Medical Properties Trust’s CEO, Edward Aldag, discussed the company’s progress in addressing its issues on the fourth-quarter conference call. He noted: “We entered 2024 with a plan to execute $2 billion in liquidity transactions. We significantly outperformed that target by executing approximately $3 billion in liquidity transactions during the year, sales that repeatedly provided third-party validation of our real estate underwriting.”
The REIT sold several properties last year, raising cash to repay maturing debt. That took some pressure off its financial profile, allowing the REIT to refinance other maturing debt. Last May, it closed an $800 million 10-year loan secured by a portfolio of U.K. hospital properties, which it used to repay debt maturing in late 2024 and early 2025, extending those maturities out several more years.
Additional actions put the company in the position to continue shoring up its liquidity. Aldag commented: “In early 2025, we were able to further strengthen our liquidity issuing more than $2.5 billion of seven-year secured bonds at a blended coupon of 7.88%. With this successful offering, we now have more than enough liquidity to cover all upcoming debt maturities through 2026.” That bond sale enabled the REIT to completely address the largest tranche of its maturing debt, giving it a lot more breathing room.
A stronger portfolio
In addition to addressing its balance sheet, Medical Properties Trust has spent much of the past year working with two financially challenged tenants, both of which ultimately declared bankruptcy. The REIT replaced its largest tenant with six new operators. Those new tenants are already seeing improving volumes, increasing patient satisfaction, and stabilizing staffing and supplies. They will start paying rent on the properties this year, with the rates ramping up through the end of next year, when rents will stabilize at about 95% of the rate paid by its former top tenant.
Meanwhile, the REIT recently agreed to a settlement allowing the other bankrupt tenant to market and sell its hospital operations and the associated real estate. This agreement positions the REIT for enhanced recoveries through either the sale of its real estate holdings or new leases with operating tenants.
“As a result of our team’s extraordinary efforts throughout the year, we now have a stronger balance sheet and a more diverse operator mix, Aldag stated on the call. He further commented:
The vast majority of our portfolio continues to generate predictable rent payments. And as we said last quarter, assuming no additional changes to our portfolio and inclusive of our share of real estate joint ventures, we expect total annualized cash rent of more than $1 billion once our new tenants are fully ramped. With our debt maturities covered through 2026, the road is clear for the rebound to take shape. The future is bright for MPT, and we look forward to the year ahead.
The company expects its portfolio to produce strong and growing cash flow over the next two years as new operators ramp up their rental payments while existing tenants pay escalating rents from contractual increases. That positions the REIT to grow value for shareholders. It can use its rising post-dividend free cash flow to create additional value for investors through potentially making new investments in hospital real estate, buying back some of its beaten-down shares, or rebuilding its dividend.
Ready to rebound
Medical Properties Trust’s tenant and balance sheet issues have weighed heavily on its stock price and dividend. Shares currently sit 75% below the all-time high, while two dividend cuts have the payout down 72%. However, with its portfolio expected to generate growing cash flows, the REIT’s value should start rising. That recovery could also enable it to start rebuilding its dividend. Medical Properties Trust is a compelling option for those seeking a potentially high-income, high-upside investment opportunity.
Matt DiLallo has positions in Medical Properties Trust and has the following options: short March 2025 $4 puts on Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.