Shares of hospital real estate investment trust (REIT) Medical Properties Trust (MPW -1.10%) rallied this week, appreciating 15.1% through 12:46 p.m. ET Thursday, according to data from S&P Global Market Intelligence.
Medical Properties has had a very rough year, as higher interest rates and a prominent delinquent tenant forced the company to cut its dividend in half last August. And given that Medical Properties' dividend yield has already skyrocketed to 12.8% by virtue of its falling stock price, it appears investors think yet another cut may be in the offing.
Yet this week, the beaten-down REIT got a bit of good news on that delinquent tenant, lifting shares. However, the stock is by no means out of the woods just yet.
Steward Care sells a division, and may pay up
The large tenant that had been delinquent on its rent was Steward Care, which at one point had previously accounted for 20% of Medical Properties' revenue. On Wednesday of this week, The Boston Globe reported that the troubled hospital network had struck a deal to sell its managed care business, Stewardship Health, to the Optum division of insurance giant United Health. Collaborative Care Holdings, a division of Optum, disclosed the pending sale to the Massachusetts Health Policy Commission late Tuesday.
The sale may free up cash for Steward, whose main business is running its national network of 33 hospitals. And that cash would likely find its way to Medical Properties. Earlier this year, Medical Properties management said that a sale of the division would allow Steward to repay all its outstanding obligations. Obviously, getting that cash would help fill the hole left by Steward's back rent in Medical Properties' financials, which should help the stock recover.
But don't break out the champagne just yet
It should be noted that even though Medical Properties spiked this week, the stock remains more than 50% below its 52-week highs.
While the sale of Steward's managed care business would no doubt be a positive, it is only a one-time event. Going forward, there is likely to be more skepticism as to the sustainability of Medical Properties Trust's revenue stream, as Steward and all its other clients will need to be able to pay rent on an ongoing basis and might not always have excess assets to sell. This episode has also highlighted the risk of customer concentration for Medical Properties, so that may harm valuation going forward.
Furthermore, even Collaborative Care Holdings' disclosure didn't specify a price for the deal, nor the timing of when it may close. If Steward is distressed, the division's sale price may be well below fair market value for that type of asset. And the deal still needs to get the blessing of the Massachusetts HPC as well.
So overall, while this was a positive week for Medical Properties, investors shouldn't necessarily expect a full recovery. It will take more time and earned trust from Medical's clients for that to happen, even if this sale goes through.
