The Half Trillion Dollar Healthcare Market that Just One Company is Addressing
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Did you know that there is more than $400 billion worth of acute-care hospital real estate in the US? That real estate is almost entirely owned by cash crunched operators that are facing ever rising costs with an equally fast rising need to perform at the highest level. Just one company is addressing the growing need to provide capital to these hospital operators by entering into sale-leaseback transactions. That company is Medical Properties Trust (NYSE: MPW), and while they have a healthy supply of growth opportunities ahead, are they a good investment? Let’s see what a SWOT analysis turns up:
Strengths
The management team at Medical Properties is acutely focused on owning hospitals as opposed to nursing homes or medical office buildings. These assets are the backbone to providing the most critical aspects of the healthcare delivery system, especially those with the highest intensity of care. Hospitals are stable assets that are part of the fabric of their community.
Hospitals have much more favorable leasing dynamics than other medical properties with an EBITDAR coverage ratio of 5.5 times at MPT. Not only do they enjoy strong lease coverage, but their assets are operated by some of the top public and private hospital operators in the country. They include HealthSouth (NYSE: HLS), the nation’s largest owner and operator of inpatient rehabilitation hospitals, and Community Health Systems (NYSE: CYH), one of the largest owners or operators of general acute care hospitals in the country with 135 hospitals in 29 states. Both are multi-billion dollar enterprises and are solidly profitable with stable credit ratings.
A final and all important strength is found in their balance sheet. They are modestly levered at 48% debt to equity and a debt to EBITDA ratio of 5.1, just above their internal targets. Further, they have no meaningful debt maturities until 2015 when their $400 million revolver comes due, and a majority of their debt doesn’t come due until after 2018. Meanwhile their cost of capital has been declining while their pipeline of acquisition targets is exceptionally strong. Finally, their average lease maturity through 2020 is just 3% per year.
Weakness
The company is heavily concentrated in three major markets, which encompass 57% percent of their assets. Further, their customer concentration at the top is such that their top tenant is 20% of assets, while their number two tenant is 19% of assets before dropping to a more reasonable single digit percentage of total assets for the rest of their tenant base. Finally, their number two tenant, Earnest Health, is a company in which they’ve taken a direct investment in the hospital operations as well as the real estate, which increases their risk.
Opportunities
There are more than 5,000 hospitals in the US, and they represent more than a $400 billion addressable market in the acute care sector alone for Medical Properties. Currently the company has invested about $2.4 billion across 79 properties and is the only Real Estate Investment Trust to invest exclusively in this market.
As I mentioned previously, MPT is not opposed to investing directly in the hospital operators, and to date they’ve invested $110 million. These investments are expected to generate high teens’ returns and represent another very large addressable market for the company.
Threats
While hospitals are the bedrock of the community, they are known for the long wait time at the emergency rooms. One threat that I’ve seen at least on a more localized level is the rise of the express urgent care centers. These centers set up shop in local strip malls and offer state-of-the-art care without the wait. If they do become the standard first line of care in suburban communities, it could impact the profitability of hospitals and their ability to pay rent to companies like Medical Properties.
Right now MPT is the only REIT dedicated to hospital ownership. Leading health care property investor Health Care REIT (NYSE: HCN) currently has invested just 5% of their assets into hospitals. If they and others in the industry decided to shift their growth strategy away from senior housing and into growing their hospital portfolio it could make it more difficult for MPT to acquire hospitals on favorable terms.
Finally, a private equity firm like Blackstone (NYSE: BX) could decide to make a push into their market. Blackstone currently has more than $54 billion in real estate assets under management, with another $13 billion to invest. While healthcare real estate is not a current area of focus, they do have the firepower to go after this market if they feel they could earn above average returns.
Bottom Line
Medical Properties Trust is well managed and appropriately capitalized to continue unabatedly in capturing even more of this half trillion dollar market. Meanwhile they pay a very healthy 7% dividend that should finally be poised to rise over the next year. I think they are an excellent way to invest in healthcare by providing a solution to rising costs instead of being part of the problem.
latimerburned owns shares of Medical Properties Trust. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
