Reliance on medical properties(NYSE: MPW) has made tremendous progress on its recovery plan this year. It has raised $2.9 billion in liquidity and ended its relationship with its troubled former top tenant Steward Health Care. These steps put the company’s portfolio and balance sheet in a much stronger position.
However, nagging issues with another problem tenant, Prospect Medical, continue to plague healthcare real estate investment trust (REIT). That recurring problem clouded some of the positive developments for Medical Properties Trust during the third quarter.
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Reliance on medical properties currently owns 402 properties leased or mortgaged by 55 hospital operators. Most tenants pay the rent on time. Until the third quarter, this also included Prospect Medical Holdings.
The healthcare company had run into financial problems as a result of the pandemic. This prompted Medical Properties Trust to intervene and provide additional financial support to help the company get back on its feet. In May 2023, Medical Properties Trust reconstituted its investment in Prospect. As part of the agreement, Prospect not had to resume rents on the six California properties it was leasing to September of that year (and it only had to make partial payments until March 2024, when it had to make full rent payments).
Prospect resumed making partial rental payments on time made the full rent ($18 million) and interest ($4 million) payments during the second quarter. However, she stopped paying the rent onthe Hospitals in California during the third quarter. While the underlying operations in these properties improved their profitability, Prospect lost money in the East Coast markets, impacting liquidity. The company is working to exit these markets. In addition, it will receive $100 million in payments from the quality assurance fund in the first quarter of next year. These ongoing catalysts should allow Prospect to resume leasing in the coming months.
While Medical Properties Trust suffered a setback in its relationship with Prospect Medical, the REIT has had a lot of good news in recent months. Ultimately, the biggest positive was ending the relationship with former top tenant Steward healthcare. The REIT has transferred the operations of 17 former Steward hospitals to five new operators. These agreements further diversified rental income while improving tenant quality. The new tenants do not have to pay rent this year. The REIT will begin collecting partial rent in the first quarter of 2025. Rates will increase slowly, to 50% of the full rate by the end of next year and 100% in the fourth quarter of 2026. That will give the new operators time to ramp up.
Medical Properties Trust has also completed several liquidity transactions in recent months, included:
Sold 18 freestanding emergency department (FSED) facilities and one general acute care hospital in Arizona and Colorado for $246 million.
Completed the sale of a hospital in California for $40 million and two FSED properties in Texas for $5 million.
Received a mortgage payment of $100 million related to sale of five hospitals to Prime Healthcare.
Established an insurance claim for property damage related to a storm loss at Norwood Hospital in 2020.
Received $45 million related to the sale of three former Steward Hospitals in Florida.
With these transactions, Medical Properties Trust has now raised $2.9 billion in liquidity this year, significantly exceeding its initial $2 billion target. This capital made the REIT possible to significantly strengthen its balance sheet by repaying and refinancing debt.
However, the REIT’s actions have shrunk its cash flow. In the third quarter, the normalized resources from operating activities (FFO) was just $94 million, or $0.16 per share, compared to $226 million, or $0.38 per share, in the same period a year ago. On a more positive note, FFO should increase over the next two years as Prospect and Steward’s replacement tenants resume leasing. That could allow the REIT to rebuild its dividend, which has been cut twice in recent years absolutely to the current quarterly level of $0.08 per share.
Medical Properties Trust has put one troubled tenant in the rearview mirror. Unfortunately, another continues to cause nagging problems. The hope is that Prospect can quickly address the issues and resume rental payments. In doing so, it will join a number of new tenants who will start paying rent next year, which should steadily increase the REIT’s revenues. That suggests the company is on the slow road to recovery.
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Matt DiLallo holds positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
A recurring condition has flared up again at Medical Properties Trust was originally published by The Motley Fool
