Trust medical properties (NYSE: MPW) is mine largest investing in a single real estate investment trust (REIT). I built that position upwards for a decade and a half by steadily buying more shares of the healthcare REIT. The main draw was the high-yielding dividend.
That investment has paid for itself in a long time. However, the healthcare REIT has come under enormous pressure in recent years due to an issue that I have completely overlooked: tenant concentration. Medical Properties Trust leased a significant percentage of its hospital portfolio to two tenants, costing the company and its shareholders a lot of money when it ran into financial problems. That taught me to pay a lot of more attention to customer concentration and quality when investing in any company.
Not diversified enough
Medical Properties Trust is one of the largest owners of hospital real estate in the world. It owns hundreds of facilities leased to many different hospital operators. However, two tenants represented a meaningful percentage of total assets and revenues for many years. For example, at the end of 2022, the REIT’s leasing role consisted of:
|
Operator |
Properties |
Percentage of total assets |
Percentage of revenue |
|---|---|---|---|
|
Steward Healthcare |
41 |
24.2% |
26.1% |
|
Circle Health |
36 |
10.5% |
11.9% |
|
Prospect medical holdings |
14 |
7.5% |
11.5% |
|
Priory Group |
32 |
6.6% |
5.3% |
|
Springsteen |
19 |
5% |
5.8% |
|
50 operators |
302 |
38% |
39.4% |
|
Other investments |
0 |
8.2% |
0% |
|
Total |
444 |
100% |
100% |
Data source: Medical Properties Trust.
While the REIT had more than 50 tenants, five provided more than 60% of revenue. That became a problem when Steward Health Care and Prospect Medical Holdings ran into financial problems.
These issues led the REIT to work with these major tenants to help them deal with their financial problems. For example, in May 2023, Medical Properties Trust reconstituted its $1.6 billion real estate investment leased to Prospect Medical Holdings in a series of transactions. It converted some leases into an equity stake in that company’s managed care business. Meanwhile, it temporarily suspended rents in California, with partial repayments resuming last September and full rents starting last March.
Medical Properties Trust also tried to keep Steward afloat by providing financial assistance and temporarily reducing rent. However, these efforts were not enough and Steward filed for bankruptcy earlier this year. The REIT had finally succeeded broke off its relationship with Steward last monthwhich allowed it to find new tenants for many of the properties it previously rented to that company.
The REIT’s problems with two of its largest tenants weighed heavily on its stock price (shares are down nearly 80% from their peak a few years ago). It has had to sell properties rented to financially stronger tenants to repay maturing debts. It too Dividend cut twice.
Lessons learned
The biggest lesson I learned from investing in Medical Properties Trust is carefully consider customer concentration and quality when investing. The higher the concentration of one customer, the greater the risk that the customer’s problems will become a problem for that investment. If a company has a high concentration of financially disadvantaged customers, this could also affect my investment in the future.
Medical Properties Trust learned this lesson the hard way. That has led it to focus on diversifying its tenant base by attracting higher quality tenants. Last year, for example, it agreed to lease its entire Utah hospital portfolio to CommonSpirit Health after the health care company acquired Steward’s operations in those facilities. CommonSpirit has strong investment-grade credit, which enhances the company’s ability to meet its financial obligations. By securing such a high-quality tenant for these facilities, the REIT was able to sell a majority stake in the property to another investor to raise additional funds. Meanwhile, it recently agreed to replace Steward at 15 other properties with four high-quality operators as part of its bankruptcy settlement with Steward.
As a result of that agreement, the REIT achieved the goals it set out in its second quarter earnings conference call. CFO Steve Hamner stated: “To look via the calendar to 2025 and to 2026, our expectation is that we will have a stable portfolio of hospital properties, leased to key operators in their respective markets, without exposure to Steward.” With that goal achieved, the REIT can focus on rebuilding its portfolio by adding new properties leased to high-quality operators. continue the diversification of its tenant base. That should also allow the country to rebuild its dividend.
Are important dig a little deeper
I didn’t pay enough attention to Medical Properties Trust’s tenant concentration as I built my position, which proved costly. However, I learned a valuable lesson: analyze a company’s customer base and quality, as that can have a meaningful impact on future results. Medical Properties Trust has learned that precious lesson too. With tenant quality improving and rental income more diversified, the company is in a much better position to deliver the stable income and growth I initially expected when I built my position. Therefore, I plan to hold on to it, believing that it can eventually make a full recovery.
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Matt DiLallo holds positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Buying Medical Properties Trust Taught Me a Costly Lesson was originally published by The Motley Fool
