High-Gain Hedge in Hospitals

Medical Properties Trust, a Real Estate Investment Trust based in Birmingham, is riding high, in spite of a languishing recession that’s been especially anguishing for real estate. The company buys hospitals across the U.S. and net-leases the property back to the hospitals — providing financing that works much like a long-term mortgage. The portfolio includes 32 acute care hospitals, 24 long-term acute care hospitals and 19 inpatient rehabilitation facilities.

Medical Properties Trust (NYSE: MPW) is one of the standouts among Alabama’s public companies, whose performances you can review in this, our annual public companies issue.

Medical Properties Trust’s stock shows the third highest increase, 21.18 percent, on our fiscal year performance rundown (page 30), among non-bank public companies, for the year ending Dec. 31. More recently, they’ve moved to number one, with a 64.89 percent return for the 12 months ending May 31 — the most recent closing date as we went to press.

Ed Aldag, the CEO of Medical Properties Trust, founded the company in 2003. The company raised its first round of capital in 2004 with a 144A offering to qualified institutional investors, then went public in 2005.

Before Medical Properties, Aldag was an executive with and part owner of Guilford Medical Properties Inc., which owned numerous rehabilitation hospitals across the country and net-leased them to national healthcare providers.

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We are an excellent source of capital for hospital operators, who need a very large amount of capital and who have a large amount tied up in capital assets like real estate. We offer them our ability to buy their real estate assets for 100 cents on the dollar and put it back to work in their operations. We get a long-term lease — typically, 15 to 20 years — with a right to extend with three options over five years. So our cost for the hospital is much less than theirs, and what we earn is the spread on that.

Compared to REITs in general, we are a very stable part of the industry. People get sick in good times and bad, and when you’re in a situation like the past few years, with the economy shaky, one of the things you can depend on is the healthcare sector. In good times, it’s a stable investment with not a lot of volatility to it, a good place to be. And in the last few years, it’s been a good defensive stock, as well as a stable part of the portfolio.

Prior to 2008, our stock had a very good run. With the collapse that came in the fall of 2008, our stock went down like everybody’s — ours down to $2.76 per share. The difference between us and everybody else was that our hospitals continued to perform well, and with our lease coverage ratio and payout ratio, unlike other real estate entities that were unable to make payments, we were continuing to do well. We were part of that group that recovered faster than everyone else.

When you’re investing with us, what you’re investing in is part of the healthcare delivery system through a real estate vehicle that provides the most secure position possible, with the first right to revenue, in bad times and in good times.

We’re the only REIT that invests exclusively in hospitals. There are some that invest in post-acute care, inpatient rehabilitation hospitals or long-term acute care hospitals. But there are not any that invest in acute care hospitals. At some time someone will move into acute care hospitals, but that would be more of a positive for us than a negative. Our competition comes from corporate financing institutions — banks and investment banking firms that provide immediate, short-term financing for operations.

Hospitals are certainly a more secure investment compared to assisted living facilities and, to a lesser degree, medical office buildings. With assisted living, in bad times, when Mom and Dad can no longer afford it, they have the option of moving back to live with their children. But people are still going to go to a hospital even when times are tough.

I’m a big believer in diversification as an investment strategy, certainly. But as to Medical Properties Trust, a focus exclusively on hospitals has been part of our business plan from the start. If you look at our management team, all of them are people who came out of owning or operating hospitals. They know hospitals, and they know them well. It’s always been our idea — combining operating knowledge about hospitals with real estate knowledge.

We generally have some sort of capital raise every year. It’s the nature of the beast, the acquisitions we are making. Our business is very capital intensive. Hospitals cost a lot of money to operate. We needed good access to capital, and the public market provided us with that unlike any other market. We can raise $750 million or $1 billion if we have to. There are not many deals out there we couldn’t do because of size. Last year, we made an offering of $400 million to capitalize an investment, but on average the investments are in the $50 million range.

There are a limited number of hospitals, but they are large ticket items, so it is a very large market in terms of dollars — a half a trillion-dollar market — and clearly they do not all want to be owned by third parties like us. A lot of the not-for-profits have never had the opportunity (third-party financing), as opposed to having a philosophy that precludes it. It’s more of a question of the educational process. With for-profits, it’s just another tool that most are familiar with and it’s a matter of their analysis at the time, showing that it is the most efficient use of their capital with all else that is going on.

Our initial funding was in March, 2004, a 144A offering. We rolled out a three-week worldwide road show, mainly Europe and the U.S., presenting to a very large base of investors from the very beginning. We used an investment banking team out of Washington D.C., Freeman, Billings and Ramsey. In 2005, they were joined by J.P. Morgan for the offering that took us public.

The biggest effect the Affordable Care Act has had on our business is that it gave everybody a roadmap, whether they agree with it or not. They know what the options are and know what the rules are. In the short term, the analysts say there are some short-term benefits, especially for those hospitals providing care for patients without insurance. We feel it is a wash.

We are seeing some for-profit consolidations. And there are some acquisitions of for-profit properties, primarily in the Northeast, just because they have more single operators there, and those are generally not as efficient users of capital. There was a report recently that showed that the large and medium-sized for-profit hospitals and large not-for-profit hospitals are best equipped for being able to compete in a competitive environment. We think there will be continued consolidation, and people will need capital, and that’s when we come into play.

The biggest change for us in five to 10 years from now — and it’s part of our original business plan — is that we will invest across borders, outside of the U.S. Other product types are not on our drawing board, but we plan to diversify by investing in healthcare systems outside the U.S.

Chris McFadyen is the editorial director of Business Alabama. 

Interview by Chris McFadyen

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