Medical Properties Trust (MPW -1.09%) has made tremendous progress on its recovery plan this year. It has raised $2.9 billion in liquidity and has exited its relationship with its troubled former top tenant, Steward Health Care. These moves put its portfolio and balance sheet in a much stronger position.

However, nagging issues with another trouble tenant, Prospect Medical, continue to plague the healthcare real estate investment trust (REIT). That recurring problem clouded some of the positive developments for Medical Properties Trust during the third quarter.

A recurring issue flares up again

Medical Properties Trust currently owns 402 properties leased to or mortgaged by 55 hospital-operating companies. Most of its tenants are paying rent on time. Up until Q3, that included Prospect Medical Holdings.

The healthcare company had run into financial troubles following the pandemic. That led Medical Properties Trust to intervene and provide additional financial support to help get that company back on its feet again. In May 2023, Medical Properties Trust reconstituted its investment in Prospect. As part of the agreement, Prospect didn’t have to resume paying rent on the six California properties it leased until September of that year (and it only needed to make partial payments until March 2024 when it needed to begin making full rent payments).

Prospect resumed making the partial rental payments on schedule and made its full rental ($18 million) and interest ($4 million) payments during Q2. However, it stopped paying rent on the California hospitals during Q3. While the underlying operations at those properties improved their profitability, Prospect lost money in its East Coast markets, which impacted its liquidity. The company is working to exit those markets. In addition, it will receive $100 million of quality-assurance fund payments in next year’s Q1. Those pending catalysts should enable Prospect to resume paying rent in the coming months.

Progress elsewhere

While Medical Properties Trust experienced a setback in its relationship with Prospect Medical, the REIT has had plenty of good news over the past few months. The biggest positive was finally severing its relationship with former top tenant Steward Health Care. The REIT transitioned the operations of 17 former Steward hospitals to five new operators. Those agreements further diversified its rent roll while enhancing its tenant quality. The new tenants won’t have to pay rent this year. The REIT will start collecting partial rent in 2025’s Q1. Rates will slowly rise, reaching 50% of the full rate by the end of next year and 100% in 2026’s Q4. That will give the new operators time to ramp up.

Medical Properties Trust also completed several liquidity transactions over the past few months, including:

• Sold 18 free-standing emergency department (FSED) facilities and one general acute care hospital in Arizona and Colorado for $246 million.
• Completed the sale of a hospital in California for $40 million and two FSED properties in Texas for $5 million.
• Received a $100 million mortgage repayment related to selling five hospitals to Prime Healthcare.
• Settled a property damage insurance claim related to a storm loss at Norwood Hospital in 2020.
• Received $45 million related to the sale of three former Steward Hospitals in Florida.

With these transactions, Medical Properties Trust has now raised $2.9 billion of liquidity this year, significantly ahead of its initial $2 billion target. This capital enabled the REIT to significantly strengthen its balance sheet by repaying and refinancing debt.

However, the REIT’s actions have shrunk its cash flow. In Q3, its normalized funds from operations (FFO) was only $94 million, or $0.16 per share, down from $226 million, or $0.38 per share, in the year-ago period. On a more positive note, FFO should rise over the next two years as Prospect and the Steward replacement tenants resume paying rent. That could enable the REIT to start rebuilding its dividend, which it has cut twice in recent years all the way down to the current quarterly level of $0.08 per share.

Slowly recovering

Medical Properties Trust has put one troubled tenant in the rearview mirror. Unfortunately, another one continues to cause nagging issues. The hope is that Prospect will be able to address its problems soon and resume rental payments. As it does, it will join several new tenants that will begin paying rent next year, which should steadily increase the REIT’s income. That suggests the company is on the slow road to recovery.