Why the Steward Health Bankruptcy Filing May Be a Good Thing for Medical Properties Trust in the Long Run | The Motley Fool

It was news that many Medical Properties Trust (MPW -2.15%) investors may have been expecting: Steward Health is filing for bankruptcy protection. That development broke last week, but for years now, Steward Health has been one of the most concerning tenants in the real estate investment trust’s portfolio. Things are finally coming to a head for Medical Properties Trust (MPT), and that might be a good thing for both the company and its investors.

Steward Health is putting its hospitals up for sale

At more than $9 billion in liabilities, including almost $1 billion in unpaid bills plus another $290 million that it owes in employee wages and benefits, Steward Health is deep financial trouble. Investors have long suspected this to be the case because MPT has been working with the company on an ongoing basis to strengthen its financials. The latest financial support MPT has offered to Steward is a $75 million bankruptcy loan.

Steward is going to attempt to sell all of the 31 hospitals it has in the country, with the goal being to get deals done within the next few months. MPT CEO Edward K. Aldag, Jr. is optimistic the process will be a smooth one: “Regarding Steward’s recent filing for Chapter 11 bankruptcy, we expect this process may facilitate an orderly transition of Steward’s operations to new operators.”

However, given Steward’s troubling financial position, it may not necessarily be an easy task to find suitors for that many hospitals in such a short time frame. The risk is that Steward may not be able to find buyers for all the hospitals, and if it does, it may have to offload some of them at a discount. And amid a worsening financial situation, it may require more cash infusions from MPT.

Transitioning away from Steward could alleviate a big headache for Medical Properties

If the hospital sales go well, that could lessen the overall risk in MPT’s business. This assumes, of course, that the new hospital operator(s) are in a stronger financial position than Steward. But there are still many question marks and the process may not necessarily be a smooth one by any means.

But in the long run, if it leads to a different make up of MPT’s tenants, that could make the REIT a safer investment. If it means MPT may not have to offer significant financial support anymore to a struggling tenant and there are fewer rent collection issues, that would be a big win for investors. In the short run, however, there could be plenty of bumps along the road. And there could be more write-downs coming in the future for MPT given it has a 10% stake in Steward.

In MPT’s most recent quarter (for the period ending March 31), the healthcare-focused REIT incurred a net loss of $735.4 million. And included within that was $693.1 million in impairment charges, which MPT says was primarily due to Steward.

MPT’s own financial position has become a concern as well, with the company planning to generate up to $2 billion in liquidity transactions this year as it looks to reduce its $10.1 billion debt load. The good news is that it has made progress on that front, with its liquidity transactions to date totaling $1.6 billion.

But with a lot of risk still around Steward’s hospitals and MPT loaning out more money, it’s possible that the REIT may consider suspending its dividend (which yields more than 11%), at least temporarily, until the situation resolves itself. That hasn’t happened just yet but if the situation drags out longer than expected, investors should brace for the possibility. At the very least, you’re better off not relying on the dividend, as it’s by no means safe right now.

Should you invest in Medical Properties Trust?

Shares of MPT have been rising in recent days despite the seemingly bad news about Steward. But over the past five years, the healthcare stock is still down a mammoth 70%.

The REIT is by no means out of the woods, but there’s at least some hope that by potentially having new tenants in place of Steward, MPT may become a less risky investment in the long run. But given the uncertainty that still looms, investors may want to consider simply waiting and watching to see how events unfold over the next few months before rushing to buy the stock just yet.