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MPW's Rent Collection Remains Solid Through June

In April, we discussed how the COVID-19 pandemic caused a drop in demand for non-emergency procedures, increasing financial pressure on MPW's hospital tenants.

With many hospitals struggling to earn a profit, it was unclear if MPW's tenants would be able and willing to pay their full rent and keep all of their facilities open.

So far, rent collection has not been a problem for MPW.

On June 22, the REIT reported that it received 96% of June rent, consistent with April and May.

In mid-May, management also expressed optimism that better times were ahead:

"Hospitals around the country and in other parts of the world began this month to again admit patients for elective procedures, we hope signaling that the worst of the hospital crisis is behind us."

– Chairman and CEO Edward Aldag, Jr.

It's too soon to say what late summer or the fall will bring, but the near-term outlook has continued improving for hospital operators (and thus MPW's rent collection prospects).

On June 16, Tenet Healthcare, which operates 65 hospitals and over 500 other healthcare facilities, provided a business update which offered a glimpse at broader industry trends. 

Tenet's hospital admissions were down 33% in April but recovered to about 90% of their pre-COVID levels through the first half of June. 

Emergency room visits were only back to 75% of their normal levels, but that's up from around 50% in April and 65% in May. And hospital surgeries returned to 95% of their pre-virus levels.

While these are favorable trends, Tenet acknowledged that activity could be slowed down in different places if new virus hotspots emerge. After all, the hardest-hit areas have taken longer to bounce back.

"All I can say is that in the markets that have been strongly impacted by COVID over the last 2 months, they are slower to recover for all of the reasons described. Some of that's just prudent in terms of the fear that if you don't have a declining number of cases, you don't want the hospitals to get overwhelmed. And of course, a lot of people are making their decisions based upon what they see on television about New York City or something like that. So the recovery has been slower for all of those reasons in those areas."

– Tenet COO Saumya Sutaria

With lockdown measures easing, hospitalizations for COVID are now rising in 17 states across the country, though Tenet said its facilities are "not overwhelmed" at this point.

Tenet also noted it has learned to better manage COVID patients in a manner in which it does not impact the rest of the hospital.

As a result, there's some hope that an increase in hospitalizations would not necessarily have to result in another widespread suspension of elective procedures.

Even if surgeries can continue being performed in the event of a spike, there is demand risk due to ongoing fluctuation in patient comfort levels with visiting hospitals.

It's also difficult to know what portion of the recovery is being driven by previously deferred cases, which could result in a future air pocket in elective procedure demand.

As for MPW, over 90% of its properties had a rent coverage ratio (i.e. cash flow, or EBITDARM, to rent expense) between 2x and 3x at the end of 2019.

This provided its tenants with some flexibility to absorb a period of lower demand for high-margin elective procedures.

However, MPW's tenant concentration keeps visibility especially low. MPW's three largest tenants account for nearly 50% of the REIT's portfolio.

If any of them needed to restructure their leases, that could have a sudden and material impact on MPW's dividend coverage.

With volumes remaining below pre-COVID levels, it's hard to say how financially stressed these key operators are and the implications that could have on future rent collections.

It's also worth noting that MPW's largest tenant, Steward Health Care (around 25% of rent), changed ownership in early June.

A group of the company's physicians bought a controlling stake in the business from private equity firm Cerberus Capital Management.

It's unclear what the new owner's plans are for Steward or why the transaction was executed in the middle of a pandemic.

There's no obvious evidence this deal will materially impact the amount of rent MPW collects from Steward going forward, but we will continue monitoring this development.

Overall, the ongoing recovery in elective procedures bodes well for MPW's hospital tenants.

Coupled with steady rent collection, this gave management confidence to declare MPW's regular quarterly dividend on May 21.

The environment remains fluid, though. A new surge in COVID hospitalizations could apply a second round of pressure to elective procedures.

Until we have more clarity on the financial health of MPW's tenants and how the virus impacts elective procedures in the months ahead, we are unlikely to change MPW's Borderline Safe Dividend Safety Score.

However, as we said in April, MPW should be able to maintain its current dividend with ease, assuming there are no major surprises.

MPW's long-term outlook arguably hasn't changed either. Investors just have to remain comfortable with some short-term uncertainty that will hopefully continue to fade.

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