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Why Steward Health’s bankruptcy filing could be a good thing for medical property trust in the long run

It was news to many Reliance on medical properties (NYSE: MPW) Investors might have expected this: Steward Health files for bankruptcy protection. That development broke through last week, but Steward Health has been one of the most worrying tenants in the real estate investment trust’s portfolio for years. Things are finally coming to a head for Medical Properties Trust (MPT), and that could be a good thing for both the company and its investors.

Steward Health is putting its hospitals up for sale

With more than $9 billion in liabilities, including nearly $1 billion in unpaid bills plus another $290 million in employee wages and benefits, Steward Health is in deep financial trouble. Investors have long suspected this to be the case, as MPT has continuously worked with the company to strengthen its financial position. The latest financial relief MPT has offered to Steward is a $75 million bankruptcy loan.

Steward will try to sell all 31 hospitals in the country, with the aim of closing deals within a few months. MPT CEO Edward K. Aldag, Jr. is optimistic that the process will proceed smoothly: “Regarding Steward’s recent bankruptcy filing, we expect that this process can facilitate an orderly transition of Steward’s operations to new operators.”

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However, given Steward’s difficult financial position, finding candidates for so many hospitals in such a short time frame will not necessarily be an easy task. The risk is that Steward may not be able to find buyers for all the hospitals, and if it does, it will have to fire some of them at a discount. And amid a deteriorating financial situation, more cash injections from MPT may be needed.

A move from Steward could alleviate a major problem for Medical Properties

If hospital sales go well, that could reduce overall risk in MPT’s business. This of course assumes that the new hospital operator(s) is in a stronger financial position than Steward. But there are still many question marks and the process doesn’t have to be smooth by any means.

But in the long run, if this leads to a different composition of MPT’s tenants, it could make the REIT a safer investment. If this means MPT may no longer have to provide significant financial support to a struggling tenant and there will be fewer problems with rent collection, that would be a big win for investors. However, in the short term, there can be many bumps in the road. And there could be more writedowns for MPT in the future, as it has a 10% stake in Steward.

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In MPT’s most recent quarter (for the period ending March 31), the healthcare-focused REIT posted a net loss of $735.4 million. And that included $693.1 million in impairment charges, which MPT says were mainly due to Steward.

MPT’s own financial position has also become a concern, with the company planning to generate up to $2 billion in liquidity transactions this year as it looks to reduce its $10.1 billion debt burden. The good news is that the country has made progress on that front, with a total of $1.6 billion in liquidity transactions to date.

But with there still a lot of risk around Steward and MPT hospitals lending more money, it’s possible the REIT is considering suspending its dividend (which yields more than 11%), at least temporarily, until the situation resolves itself has resolved. That hasn’t happened yet, but if the situation lasts longer than expected, investors should brace for the possibility. At the very least, it is better not to depend on the dividend as it is definitely not safe at this point.

Should you invest in Medical Properties Trust?

Shares of MPT have risen in recent days despite the apparent bad news about Steward. But over the past five years, healthcare stocks are still down a whopping 70%.

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The REIT is certainly not out of the woods, but there is at least some hope that by potentially having new tenants in place of Steward, MPT could become a less risky investment in the long run. But given the uncertainty that still looms, investors may consider simply waiting and seeing how events unfold in the coming months before rushing to buy the stock.

Should You Invest $1,000 in Medical Properties Trust Now?

Consider the following before purchasing shares in Medical Properties Trust:

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David Jagielski has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Why Steward Health’s Bankruptcy Filing Could Be a Good Thing for Medical Properties Long-Term Confidence was originally published by The Motley Fool

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