MedEquities Realty Trust (MRT) is an attractive healthcare REIT that offers a big 7.2% dividend yield. It is growing rapidly, and it trades at compelling price-to-book and price-to-forward-AFFO ratios. And apparently, hedge funds like it too. This article provides an overview of the bull case for MedEquities, highlights some of the significant risks, and then offers an idea about how to invest in this potentially big opportunity. We have ranked MedEquities #6 on our list of Top 7 high-yield healthcare REITs worth considering.
Founded in 2014, MedEquities completed its initial public offering (“IPO”) in October of 2016, right before the US presidential election and a hawkish US Fed laid the hammer down on the REIT sector in general (more on this later). The company invests mainly in skilled nursing facilities (“SNF”) and acute care hospitals (“ACH”), as shown in the “Asset type breakdown” section of the following graphic.
And as the title of the above graphic suggests, MRT isn’t dealing with many of the “legacy” assets that trouble other higher acuity healthcare REITs. Specifically, because MRT is so new, it isn’t dealing with challenges caused by more stringent healthcare reimbursement policies that continue to plague some of the more seasoned REITs in the space (more on healthcare regulatory reforms later).
This next graphic shows more of the positive attributes of MRT, including its well-covered dividend, its conservative leverage, and its substantial liquidity.
And for more color, this next chart provides more details o MedEquities five operators.
Very importantly, as this next chart shows, MedEquities operates in a space that is poised to benefit from significant long-term demographic growth.
And MedEquities plans to capitalize on this growth opportunity through more acquisitions, particularly in the hospital and skilled nursing segments of the market (areas where other REITs have demonstrated aversion) as shown in this next chart.
One key consideration of the above chart is the $600+ billion of institutional quality healthcare real estate. Relative to other real estate sectors (e.g. office, commercial, industrial) healthcare is very un-saturated, which means there is a lot of space for healthcare REITs to grow. And as shown in this next chart, MedEquities has the balance sheet (i.e. financial wherewithal) to support significant growth.
For more perspective, this next chart shows MRT’s strategic priorities (including growth, prudent asset management, balance sheet management, and shareholder returns.
We like the MedEquities growth story, but we’re keen on its valuation too. For perspective, this table shows MRT’s price-to-forward-AFFO (Adjusted Funds From Operations) ratio versus other healthcare REITs, and it is attractive, in our view.
The companies in the chart are all healthcare REITs, but they have varying exposures across the acuity spectrum.
The market has generally been perceiving higher risk (related to healthcare reform) and assigning lower valuations, to skilled nursing facilities operators such as Omega Healthcare Investors (OHI) and MRT (more on this risk later). However, MRT has less legacy assets considering it was formed in 2014 (and IPO’d in late 2016) which means they own more high quality healthcare real estate, as described in our earlier chart. However, trading just over 10 times 2017 AFFO is very cheap in our view
Remember, REITs in general have been trading significantly lower following the November US election, and higher interest rate expectations from the Fed, as shown in the following chart.
We believe the fears of higher interest rates (REITs rely heavily on borrowing) are already baked into REIT prices. And the strong rally in growth (and non-dividend stocks), aka the “Trump Rally,” is starting to slow, and now is an attractive time to invest in REITs in general.
For further perspective, the following table shows the price-to-book-value of MRT versus other healthcare REIT peers, and again it is attractive, trading at just over one times its book value.
Apparently, hedge funds like MRT too. According to this article by Insider Monkey, 14 hedge funds recently had positions in MRT, including some large well know names like Tudor Investments and Millennium Management. However, more recently, BlueMountain Capital Management took a very large position (around 8.2% of shares outstanding) and holds two board seats at MRT.
Generally speaking, we’re not overly impressed when our holdings overlap with hedge funds, however it is something to keep on your radar. We’re encouraged to know our interests seem aligned with the money at BlueMountain, but it also presents a risk as described below.
We’d be remiss not to review some of the more significant risks facing MRT. For example, BlueMountain’s position in MRT is a risk as described by MRT in its recent annual report:
BlueMountain has the ability to exercise substantial influence over us, including the approval of certain acquisitions.
As of February 22, 2017, BlueMountain Capital Management, LLC (“BlueMountain”)Tags: MedEquities Realty Trust