Medical Properties Trust (NYSE: MPW) is my largest investment in a single real estate investment trust (REIT). I built that position up over a decade and a half by steadily buying more shares of the healthcare REIT. The main draw was its high-yielding dividend.
That investment paid off for a long time. However, the healthcare REIT has come under tremendous pressure in recent years due to an issue I completely overlooked: tenant concentration. Medical Properties Trust leased a significant percentage of its hospital portfolio to two tenants, which cost the company and its shareholders dearly when it ran into financial troubles. That taught me to pay much closer 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 several hundred facilities leased to many different hospital operators. However, two tenants comprised a meaningful percentage of its total assets and revenues for many years. For example, at the end of 2022, the REIT’s rent roll consisted of:
|
Operator |
Properties |
Percentage of Total Assets |
Percentage of Revenues |
|---|---|---|---|
|
Steward Health Care |
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% |
|
Springstone |
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 over 50 tenants, five supplied more than 60% of its revenue. That became an issue as Steward Health Care and Prospect Medical Holdings ran into financial troubles.
Those issues led the REIT to work with these large tenants to help them navigate their financial problems. For example, in May 2023, Medical Properties Trust reconstituted its $1.6 billion investment in properties leased to Prospect Medical Holdings in a series of transactions. It converted some leases into an equity interest in that company’s managed care business. Meanwhile, it temporarily suspended rents in California, with partial repayments resuming last September and full rent commencing this past March.
Medical Properties Trust also tried to keep Steward afloat by providing financial assistance and temporarily reducing its rent. However, those efforts weren’t enough, and Steward filed for bankruptcy earlier this year. The REIT was finally able to sever its relationship with Steward last month, which enabled it to find new tenants for many of the properties it formerly leased to that company.
The REIT’s issues 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 leased to financially stronger tenants to repay maturing debt. It also cut its dividend twice.
Lessons learned
The biggest lesson I’ve learned from investing in Medical Properties Trust is to carefully consider customer concentration and quality when investing. The higher the concentration of a single customer, the greater the risk that the client’s issues will become a problem for that investment. Likewise, if a company has a high concentration of financially weaker clients, that could also impact my investment in the future.
Medical Properties Trust has learned this lesson the hard way. That’s led it to focus on diversifying its tenant base by bringing in higher-quality tenants. For example, it agreed to lease its entire Utah hospital portfolio to CommonSpirit Health last year after the healthcare company acquired Steward’s operations at those facilities. CommonSpirit has strong investment-grade credit, which enhances its ability to meet its financial obligations. Securing such a high-quality tenant for those facilities enabled the REIT to sell a majority interest in the real estate to another investor to raise additional cash. 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 has achieved the objectives it laid out in its second-quarter earnings conference call. CFO Steve Hamner stated, “Looking through the calendar to 2025 and into 2026, our expectation is that we will have a stable portfolio of hospital real estate leased to key operators in their respective markets with no exposure to Steward.” With that goal achieved, the REIT can focus on rebuilding its portfolio by adding new properties leased to high-quality operators to continue diversifying its tenant base. That should also enable it to rebuild its dividend.
It’s important to 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 client base and quality because that could have a meaningful impact on its future results. Medical Properties Trust learned that costly lesson as well. With its tenant quality improving and its rent roll more diversified, it’s in a much better position to deliver the stable income and growth I initially expected as I built my position. That’s why I plan to continue holding, believing it can eventually make a full recovery.
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Matt DiLallo has 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
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