The U.S.’ federal Public Health Emergency for COVID-19 will officially expire on May 11.
That’s three years and two months after the World Health Organization (WHO) officially declared COVID-19 a pandemic on March 11, 2020.
So today, just five days ahead of COVID-19’s three-year anniversary, I’d like to examine the financial state of the healthcare system as it pertains to the real estate investment trust (REIT) sector.
You might think that hospital real estate would be a great investment. After all, hospitals play a vital role in keeping the general population healthy. They provide everything from preventative care to lifesaving medicine and services in emergency situations. Without a hospital nearby, people could die.
But many face struggles you might not know about unless you dig under the surface…
Here at Intelligent Income Daily, we’re focused on bringing you the safest income investments on the market. And protecting your wealth is one way to guarantee you’ll have the money to pay for your health.
Today, I’ll illustrate the complex reality of hospitals’ financial situations through an embattled hospital REIT… And why you should think twice before pouncing on the stock’s double-digit yield…
Plus, I’ll reveal an opportunity to play the sector in a safer way.
The Health of the Largest Hospital REIT
Medical Properties Trust (MPW) has approximately $19.7 billion in total assets and is one of the world’s largest owners of hospitals. The REIT was formed in 2003. And over the past 20 years, it has expanded to a portfolio of over 440 facilities across the U.S., Europe, and Australia.
The company leases hospitals to operators on a “triple-net” basis, which means the tenant is responsible for maintenance, taxes, and insurance. And lease contracts often last decades. Its current weighted average lease term is nearly 18 years.
At first glance, these are solid economics. The REIT has operated without any major problems for many years.
But Medical Properties Trust has some problems with diversification.
There are several large tenants each representing 5–10% of the portfolio. But its largest tenant, Steward Healthcare, makes up nearly a quarter of its assets and revenues.
Medical Properties Trust also took the unusual step of making loans to some of its tenants, and even taking an equity position in Steward.
While hospitals were caught off guard by the pandemic, increased funding from the CARES Act helped them stay afloat. But the surge in Omicron cases in early 2022 – plus the rapid increases in drug prices and labor costs due to inflation – pushed many hospital operators into the red.
One of Medical Properties Trust’s smaller tenants, Pipeline Health, filed for bankruptcy. Steward Health and Prospect Medical Holdings – its second largest tenant – also struggled to turn a profit in some hospitals.
On top of that, a short seller released a report accusing the company of shady business practices… And S&P is considering downgrading the company’s credit rating. All this combined with the ongoing bear market has investors spooked. And the stock has crashed nearly 60% since last January.
But things may be slowly improving.
According to a report from financial consulting firm Kaufman Hall, hospitals are still in the red. But they’re slowly inching closer to breakeven and are doing much better than they were early last year.
And things are looking up for Medical Properties Trust, too.
- Pipeline Health assumed its lease in bankruptcy, which means Medical Properties Trust will be paid in full.
- Three of the hospitals leased to Prospect Medical Holdings are being sold, recovering the investment in those properties.
- Steward Health got an extension on its line of credit and sold five of its hospitals to CommonSpirit Health. This reduces its concentration in Medical Properties Trust’s portfolio to less than 20%.
However, despite these improvements, Medical Properties Trust is expecting to see a short-term decrease in cash flows as it works through its tenant problems.
The company’s guidance indicates that its funds from operations (FFO, a common metric used to value REITs) could drop by as much as 12% compared with last year. That could put the 11% dividend at risk of a cut.
So although the stock seems cheap, investors should be cautious.
An Alternative Way to Play It
There’s a better way to secure a high yield from Medical Properties Trust while it’s trading at a discount…
It involves Contractually Obligated Money (COM) that must be paid before shareholders see a single cent in dividends.
That’s right. With COMs, Medical Properties Trust would be obligated to pay you before shareholders. And the best part? You don’t have to invest in Medical Properties Trust’s stock.
So you’ll be protected from volatility in the healthcare sector and from short-term disruptions within the company itself. Whether the share price of the company goes up or down, you profit.
To understand how COMs work, check out my presentation here. I reveal how you can profit from downturns and generate healthy double-digit yields… all while managing risk and limiting exposure to the broader markets. I even give you a free pick at the very end.
This is how we target the safest investments over the long term in industries that will be around for decades.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
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Source: Wide Moat Research