HomeMost PopularMedical Properties Trust Vs. CareTrust REIT: One On The Rise, The Other...

Medical Properties Trust Vs. CareTrust REIT: One On The Rise, The Other In Decline

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Have you ever wondered whether investing in hospitals or nursing homes is the better choice? What if I told you that nursing home landlord CareTrust REIT (NYSE:CTRE) has significantly outperformed hospital landlord Medical Properties Trust (NYSE:MPW) not just in the past year, but over the last 8.5 years as well?

The market has been concerned about MPW’s large debt load and upcoming debt maturities. To avoid refinancing at high interest rates, the REIT has chosen to sell assets to pay down its debt. While this strategy helps reduce debt, it has resulted in a drop in revenue. Additionally, hospital operators face challenges from declining revenue due to services being outsourced and rising expenses, particularly from labor costs. MPW’s portfolio is also heavily dependent on financially unstable private equity-backed tenants.

On the other hand, senior care facilities, specifically skilled nursing facilities (SNFs), have seen a turnaround. Occupancy, revenue, and staffing are all on the rise. CTRE’s SNF operators are well-positioned for growth in this recovering market.

Considering these factors, while MPW may seem inexpensive compared to CTRE, it’s crucial for investors to approach MPW cautiously and consider CTRE as a potentially better investment option. Let’s delve deeper into the reasons why.

Operating Hospitals: A Challenging Business

The hospital industry is complex, influenced by various factors such as patient demand, insurance reimbursement rates, government policies, and ownership structures. Even before the pandemic, hospitals faced difficulties, including falling reimbursement rates, leading to poor financial conditions.

Rising labor costs, inflationary expense increases, and a trend towards receiving care outside of hospitals have further strained hospital operators. These challenges have persisted despite temporary relief from federal funding during the pandemic.

Moreover, hospitals owned by private equity firms may experience financial struggles and a decline in the quality of care. The impact of private equity ownership on healthcare quality and outcomes is inconclusive.

The Private Equity Problem

While not all private equity (PE) firms are problematic, some engage in value extraction at the expense of businesses’ long-term viability. Hospitals owned by PE firms have demonstrated mixed performance and have often faced financial hardships that result in closures or rent reductions.

For MPW, many PE-backed tenants in their portfolio have experienced financial strain and subpar financial and operational quality. The financial performance of these tenants may lead to defaults or reductions in rent for MPW.

Steward Health, a prominent tenant of MPW, has faced financial challenges and has been associated with lower-quality ratings from the Centers for Medicare and Medicaid Services. Other major hospital operators with higher margins and better-operated facilities, such as HCA Healthcare and Universal Health Services, do not lease from MPW.

Skilled Nursing Facilities/Nursing Homes on the Rise

In contrast to hospitals, senior care facilities, particularly skilled nursing facilities (SNFs), are experiencing a resurgence. Despite hardships during the pandemic, SNFs are rebounding, with increasing employment and occupancy rates.

Unlike hospitals, there are no equivalent-quality alternatives to address the long-term care needs of seniors. With aging demographics and limited new developments in the senior care industry, the outlook for SNFs is positive.

CareTrust REIT’s portfolio is well-positioned in the SNF industry, with a high-quality operator like Ensign Group and improving occupancy rates. CTRE has also demonstrated higher rent coverage and better rent collection compared to its peers.

Final Thoughts

While Medical Properties Trust may appear attractive due to its low stock price, it comes with significant risks. The challenges for hospital operators, including MPW’s tenants, are likely to persist. On the other hand, CareTrust REIT offers a more favorable investment option for dividend investors seeking consistent growth and a focus on financially stable operators in the senior care industry.

Considering the differences between these two real estate investment trusts (REITs), caution should be exercised when investing in MPW, particularly for risk-averse investors. CTRE presents a more promising investment opportunity, especially given the positive outlook for SNFs and the company’s solid fundamentals.

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