Reliance on medical properties (NYSE: MPW) is one of the largest hospital owners in the world. The Real Estate Investment Trust (REIT) owns 436 facilities in nine countries and has leased or mortgaged its properties to 53 hospital operators.
While the healthcare REIT has a honestly well-diversified portfolio, it has become a tale of two portfolios. These are the best of times for the international portfolio and those in the US that are not leased to Steward Health Care or Prospect Medical Holdings.
Unfortunately, times remain the worst for properties rented to these two tenants (which are to be below largest). These issues have weighed heavily on the REIT, causing its share price to fall push up the dividend yield (recently over 13%). They have also overshadowed the underlying strength of the rest of the portfolio.
The healthy portfolio
Medical Properties Trust had approximately $17.4 billion in assets at the end of the first quarter. More than $11 billion of the assets consisted of hospitals and health care facilities leased to tenants with rent or mortgage debt. This stabilized portfolio generates stable cash flow that the company uses to pay dividends and pay down debt.
It has leased these properties to operators who benefit from solid market conditions. The REIT noted in its first-quarter earnings press release that its “operations in the United Kingdom and in Continental Europe continues to benefit from strong growth in reimbursement rates, overall volumes and high take-up rates.” This helps offset cost headwinds, allowing most operators to report rising profits.
Meanwhile, the American portfolio, with the exception of the hospitals leased to Steward and Prospect, has seen an increase in the number of admissions. Although reimbursement rates in the US are not growing as fast as those in Europe, they are accelerating. Additionally, operators are seeing lower labor costs, as well as success in limiting overall cost inflation.
Given this dynamic, Medical Properties Trust leased hospital properties to these operators hold on their value. That has allowed the REIT to sell healthy properties to boost its liquidity.
It recently sold five properties in California and New Jersey to Prime Healthcare for $350 million. It also sold a 75% stake in five Utah hospitals leased to a subsidiary of CommonSpirit Health to an institutional asset manager for $1.1 billion. CommonSpirit took over these hospital operations from Steward last year.
The unhealthy wallet
The remainder of the company's portfolio consists of properties leased to Steward ($3.2 billion) and Prospect ($1.1 billion). It also has nearly $2 billion in other assets, such as investments in operating companies (including Prospect's managed care business).
These possessions are not to generate a lot of income for the REIT. Prospect paid just $7 million in cash rent and interest in the first quarter. Meanwhile, Steward paid $9 million in rent and $2 million in various working capital and other loans. That was just a small portion of the $271 million in total revenue the REIT posted in the period.
Unfortunately, Steward's news has gone from bad to worse. The hospital operator recently filed for bankruptcy, backed by $75 million in debtor-owned financing by Medical Properties Trust. The REIT hopes this move will help Steward transfer some of its operations to new operators.
That strategy has proven successful in the past, when Steward sold its Utah operations to CommonSpirit, which signed a new lease with Medical Properties Trust. That deal ultimately allowed Medical Properties Trust to offload 75% of its stake in that property this year to raise cash.
If Steward can sell additional hospital operations to financially stronger tenants, it would turn these properties from a liability to an asset for the REIT. Medical Properties Trust could start collecting the full rental income on those properties. It could also sell these properties (back to the new operator or to a financial buyer) to raise additional money for debt reduction.
The company may also have received some disappointing news about Prospect. Third-party appraisers lowered the estimated market value of that company's managed care business by about $60 million. The REIT is counting on it the eventual monetization of that company to recoup the value of its investment with Prospect, including deferred rent.
Waiting for recovery
Most of Medical Property Trust's properties are performing well. However, the REIT continues to face headwinds from two troubled tenants. Are working with these companies to help them solve their problems, hopefully returning the entire portfolio to full health possibly.
While that will take some time, the underlying stability of the REIT's healthy portfolio shows that it could be a solid investment once it gets through this rough patch.
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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 one disclosure policy.
This ultra-high yield dividend stock is the tale of two portfolios was originally published by The Motley Fool
