The situation at hospital real estate investment trust Medical Properties Trust, Inc. (NYSE:MPW) deteriorated this week after the company made an important update about its lease situation as it relates to one of its largest tenants, Steward Health Care System. The update caused Medical Properties Trust’s stock price to crash 30% last Friday.
As a consequence to rent collection issues with this particular tenant, I believe Medical Properties Trust’s dividend is at risk of getting slashed again in the short-term and the trust may announce a second adjustment to its dividend when it reports earnings, likely later in February.
Though MPW now truly sells at an impaired valuation multiple, the risks have greatly increased after the Steward Health Care System update, necessitating a change in my stock classification to Hold.
My Rating History
Yet again, Medical Properties Trust made an unfortunate news announcement, this time about one of its failing top tenants, Steward Health Care System which forced the hospital real estate investment trust to provide bridge financing to the operator and warn about a potential rental shortfall.
I was previously focused on Medical Properties Trust’s liquidity and debt situation and thought that the situation was slowly improving at the trust.
Newly disclosed payment issues with Steward Health Care System change the narrative here quite drastically and I am concerned that Medical Properties Trust might adjust its dividend pay-out a second time in the near term. In the past, I have been consistently positive on the trust and the probability of a turnaround.
Steward Health Care System Update
Medical Properties Trust caused a ruckus with an update last week when it disclosed new payment problems related to the trust’s operator Stewart Health Care System.
The update caused investors to rush for the exits which in turn triggered a 30% stock price fall. Stewart Health Care System is Medical Properties Trust’s top tenant and accounted for roughly 20% of assets and sales.
Medical Properties Trust has suffered from operator issues for a while, but the latest update is particularly concerning since it means that the trust is looking at a potentially substantial cash shortfall if the situation does not get resolved.
As was already known due to previous reporting, Steward Health Care System paid only partial rent for September and October to Medical Properties Trust. As of December 31, 2023, Steward has stacked up an unpaid rent bill amounting to $50 million which obviously poses substantial sales and dividend risks for the trust.
As a remedy to its largest tenant’s payment issues, Medical Properties Trust is providing additional liquidity to its top operator and is funding a $60 million bridge loan. The operator may seek to sell some of its non-core assets and is arguably looking at a potential re-letting of hospital operations in order to rectify the situation.
Medical Properties Trust did provide some assurance in its update, however, and said that the trust expects to receive partial rent payments in February in the amount of $9 million and another $44 million on top in the second quarter.
It is safe to say, however, that the tenant situation has deteriorated with Medical Properties Trust’s update from Thursday and the company may see, as a consequence, a substantial deterioration in its dividend pay-out ratio in 2024.
How May This Situation Play Out?
In the best case, the lifeline Medical Properties Trust offered its top operator could help restore Steward Health Care Systems’ liquidity. Ideally, Steward Health Care Systems makes up for its unpaid rent as the year progresses, and Medical Office Properties might avoid a second dividend cut.
On the flip side, Medical Office Properties may face a complete rental shortfall as it relates to Steward Health Care Systems which would impair its pay-out metrics drastically and might necessitate a second dividend cut.
Medical Properties Trust’s stock now sells, without a shadow of a doubt, at a very much impaired valuation multiple. Based on the trust’s third quarter results, the hospital REIT is set for a twelve months run-rate AFFO of $1.20 per share. This implies, based on a stock price of $3.55, a leading AFFO multiple of 3.0x.
Given the lack of a clear baseline level of AFFO at the moment, I think Medical Properties Trust is best reclassified as a Hold.
Dividend Reset Risk Is Now The Biggest Risk
A rent shortfall could put Medical Properties Trust’s dividend at risk. In my last coverage on the hospital real estate investment trust I pointed to the trust’s improved dividend coverage ratio which fell to 50% on an AFFO-basis following Medical Properties Trust‘s dividend cut in the fourth quarter.
Medical Properties Trust slashed its dividend pay-out, due to tenant issues and rent collection concerns to $0.15 per share, down from $0.29 per share, reflecting a decrease of 48%.
As a consequence, the trust’s pay-out ratio, based on adjusted funds from operations, fell from 97% in 1Q-23 to 50% in 3Q-23. Medical Properties Trust also stated that all Steward-related payments in 3Q-23 amounted to $0.11 per share in adjusted funds from operations.
Stripping these payments out of the trust’s AFFO would leave us with a modified AFFO-based pay-out ratio of 79%. The newly disclosed payment issues with Steward Health Care System, however, put this reset dividend at risk nevertheless.
To me, the biggest risk right now is a second consecutive dividend reset that could further cause the trust’s market value and stock price to crash.
Obviously, Medical Properties Trust’s stock is selling at a distressed adjusted funds from operations multiple and Friday’s 30% crash clearly demonstrated investors’ concerns about the development with one of its top tenants.
Though the dividend may still be covered by adjusted funds from operations moving forward, the change in the tenant situation is likely to weigh heavily on the company’s short-term liquidity, particularly because the trust has decided to bail out its tenant and provide crucial bridge financing to Steward as well.
As a consequence, it just cannot be ruled out that the hospital real estate investment trust will announce a new dividend reset when it reports earnings at the end of February.
To account for the new development at Medical Properties Trust, I am modifying my stock classification to Hold until the trust provides more details about its cash, liquidity and adjusted FFO situation next month.