Medical Properties Trust (NYSE: MPW) has been struggling because of tenant issues, which has made it more difficult for the real estate investment trust (REIT) to manage its large debt load. The hospital owner's largest tenant, Steward Health Care, filed for bankruptcy protection earlier this year. The REIT hopes this process will eventually enable it to completely exit its relationship with that troubled tenant .
Unfortunately, it recently encountered another setback as Steward struggles to sell assets. This latest setback could impact the healthcare REIT . It needs to reduce its exposure to Steward, or else it risks potentially needing to cut its dividend again. Its payout currently yields more than 12%, mainly because of the risks it continues to face.
Two steps forward, several more in reverse
Steward has been looking for buyers for the 31 hospitals it currently operates and its physicians' group, Stewardship Health. The company had reached a deal to sell Stewardship earlier this year to UnitedHealth affiliate Optum, but that company recently backed out of the acquisition, partly over regulatory concerns. That sale would have been enough to cover its debts to several of its creditors.
The hospital operator has also held auctions for its hospitals in several states. On a positive note, it found buyers for two of those facilities. AHS South offered to buy Glenwood Regional Medical Center in Louisiana for $500,000, while Pafford Health Systems bid $200,000 for Wadley Regional Medical Center in Arkansas.
Unfortunately, that's where the good news ends. Those sale prices, which need to be approved by the bankruptcy court, will hardly move the needle for Steward. Furthermore, they won't benefit Medical Properties Trust, since the new operators want the REIT to release them from the associated rental agreements . On top of all that, Steward didn't find any buyers for a trio of hospitals in Ohio and Pennsylvania. As a result, the company will need to reconsider its options for those facilities, which could include their closure.
Cause for concern?
The failed auctions for several Steward facilities represent another setback for that company and its landlord, Medical Properties Trust. However, while the company's first round of auctions wasn't a success, that doesn't necessarily mean the sales process will fail.
On its first-quarter call , Medical Properties Trust CEO Ed Aldag was generally positive about finding new tenants for hospitals leased to Steward. He said, "We continue to be pleased with the progress we are making with parties interested in the Steward Hospitals." That progress he's referring to is likely on other properties not involved in the recent auction. It appeared that Steward tried to auction off its less desirable properties while simultaneously running a sales process on more valuable facilities.
In the past, the companies have successfully found new homes for Steward-operated hospitals. Last year, Steward sold its Utah operations to CommonSpirit Health, which agreed to lease the $1.2 billion portfolio from Medical Properties Trust. The REIT subsequently sold a 75% stake in those properties at a $1.2 billion valuation, receiving $1.1 billion in the deal. It used that cash to retire maturing debt and pay down its credit facility.
The companies hope to follow a similar blueprint for most of Steward's remaining hospitals. Selling the operations will give Steward cash to repay its creditors, including money owed to Medical Properties Trust. Meanwhile, the new operators would pay rent or repurchase those facilities from the REIT. Either alternative would support Medical Properties' dividend. Rental income would provide recurring cash flow to help cover the payout. Meanwhile, sales would give it cash to repay debt or recycle into acquiring new income-generating properties leased to financially stronger tenants.
Still playing the waiting game
Steward's first round of auctions generated little interest or cash for the embattled hospital operator. While that's a disappointing outcome, those properties likely weren't its most valuable ones. Finding buyers for those remaining facilities could provide enough money to repay creditors like Medical Properties Trust. Those transactions would also boost the REIT's rental income or cash balance, enhancing its ability to maintain its big-time dividend in the future .
Matt DiLallo has positions in Medical Properties Trust. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy .
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