Medical Properties Trust (MPW -0.26%) has battled a barrage of headwinds over the past few years. Financial troubles with some of its top tenants and balance sheet issues have weighed heavily on the stock. That caused short-selling hedge funds to pile on by making some allegations that the real estate investment trust (REIT) engaged in some improper activity.
The healthcare REIT's board of directors took these allegations seriously, hiring an outside consulting firm to dig into the matter. After investigating for over a year, they found no evidence that the company's management team did anything wrong, which gives the board complete confidence in the REIT's leadership team.
Diagnosing the issues
Short-selling hedge fund Viceroy Research and others have made some serious allegations against Medical Properties Trust over the past couple of years. In response, the REIT's board of directors hired Wachtell, Lipton, Rosen & Katz, a leading global consulting firm, to assist with a financial forensic audit of its actions. The board placed no restrictions or limitations on their ability to investigate the claims against the company.
The board released its findings after some media outlets recently published stories that resurfaced many allegations against the company. They found absolutely no evidence of any wrongdoing on the part of Medical Properties Trust's management team.
For example, there was a claim that the REIT significantly overpaid for the hospital real estate it acquired, notably from former top tenant Steward Health Care. However, the firm found no evidence of this. Quite the contrary, hospital sales and retenanting transactions in recent years have proven the underwritten values of the properties the REIT acquired.
Medical Properties Trust recently took back 23 properties from Steward after it filed for bankruptcy and subsequently leased 15 of those properties to four new tenants at rates representing 95% of what Steward would have paid on those facilities, preserving its $2 billion investment in those properties.
The board also found no evidence of the short-seller's other claims, including that the REIT owned property in Malta or manipulated acquisitions to meet compensation targets. The investigation also found no evidence of any concern about the management team's integrity. Instead, they took great care to preserve jobs, patient care, and shareholder value during the Steward bankruptcy process. With Steward now out of the picture, the REIT can move forward with a more resilient and diversified portfolio of hospital real estate.
A look at what actually went wrong (and the lessons learned)
While Medical Properties Trust didn't do anything improper, they made some mistakes over the years. A big one was over-concentrating the portfolio on its largest tenants, several of which ran into financial troubles following the pandemic. Two of its top tenants have struggled to pay rent in recent years, which came at a time when the REIT needed to refinance the debt it incurred to acquire properties.
With interest rates surging, it couldn't refinance maturing debt, given its tenant troubles. That led it to sell properties attached to stronger operators to repay debt, further increasing its concentration on weaker tenants. Those issues also forced the REIT to cut its dividend a couple of times.
However, it has learned from those mistakes. It has now completely severed its relationship with Steward and replaced it with several other quality tenants. It's also working to reduce its exposure to another financially weaker tenant. As a result, the company now has a much stronger tenant base.
It has also taken several steps to shore up its financial foundation by selling hospitals and refinancing some debt to bolster its liquidity. Because of that, it's in a good position to address its upcoming debt maturities. Meanwhile, with interest rates starting to fall, it should be easier to address future debt maturities.
Now that its portfolio and balance sheet are much stronger, the REIT's high-yielding dividend (recently around 7%) is growing more sustainable. It should be in a position to start rebuilding that payout in the next year since its most recent cut was due to Steward's bankruptcy. With Steward now out of the picture, the REIT could raise its payout as those new operators start making rental payments.
Confidence is rebuilding
Viceroy and others made serious allegations against Medical Properties Trust's management team. After a lengthy investigation, a third-party consultant found no truth whatsoever to the claims. That should help rebuild investors' confidence in the REIT's management team.
While they did make some mistakes along the way, they are fixing those issues. The REIT's balance sheet and portfolio are growing stronger, putting it in a better position to pay its high-yielding dividend, which it should eventually be able to start increasing.
