What happened
Shares of Medical Properties Trust (NYSE: MPW) had declined by over 10% by 11:30 a.m. ET on Friday. Weighing on the healthcare REIT was a report in the Wall Street Journal regarding its top two tenants.
So what
The Wall Street Journal reported today that hospital systems Steward Health Care and Prospect Medical Holdings had hired financial advisors to assist them with refinancing their credit lines. They rank as Medical Properties Trust's two largest tenants. Steward supplied more than 27% of the REIT's rental revenue, while Prospect accounted for about 10%.
The report said that Steward had hired Guggenheim Securities to refinance its asset-based loans, which mature at the end of this year. The company's lenders gave the hospital operator a one-year extension late last year. Meanwhile, Prospect Medical has hired Houlihan Lokey to help it refinance debt. Those investment banks specialize in assisting financially troubled companies in finding solutions.
Medical Properties has been providing financial support to both tenants. It funded a $150 million loan to Steward, $100 million of which Steward recently repaid following the sale of its Utah properties. Meanwhile, the REIT provided a $50 million loan to Prospect in the first quarter. Prospect also isn't currently paying rent on properties in Pennsylvania leased from Medical Properties Trust.
The REIT is providing this additional assistance while these tenants work to shore up their financial profiles.
Now what
Medical Properties Trust's tenant issues have plagued it over the past year. It's working with its leading tenants to help them get through this challenging time. The REIT is also working to reduce its exposure to both tenants. Steward's Utah sale will reduce Medical Properties' exposure to the hospital operator to 20% of its rent. Meanwhile, the REIT has a deal to sell Prospect's Connecticut properties, which will close soon. It also eventually expects to recoup the rent owed by that tenant and sell the Pennsylvania properties.
The company hopes these moves will strengthen its portfolio over the long term. However, there's a lot of near-term uncertainty as its tenants try to shore up their financial foundations. That could continue to weigh on the REIT's share price. Further, there remains a risk that the company could eventually reduce its high-yielding dividend.
With that in mind, income-seeking investors might want to wait on the sideline to see how all this plays out before buying the REIT for dividend income.
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Matthew DiLallo has positions in Medical Properties Trust and has the following options: short September 2023 $8 puts on Medical Properties Trust. The Motley Fool has positions in and recommends Houlihan Lokey. The Motley Fool has a disclosure policy.
