Using Twitter to Test $MPW Investment Thesis, Momentum Trading Realities, 1849 Gold Rush, Scopia Influences $ACOR
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How I used Twitter to test my $MPW investment thesis
This episode is somewhat spontaneous and the topic comes out of a tweet conversation started by a Twittezen going by the handle Bluegrass Capital.
Bluegrass tweeted out an interesting slide put together by OUTFRONT, a Real Estate Investment Trust that owns billboards, transit franchises, and land and leases the space to advertisers and wireless carriers. The slide shows that REITs business model compared to some general REIT types.
There have been times in the past where you could buy the debt of a private company and the company’s assets were guaranteed by the United States government – a story for another time.
There are few private industries that rely on the government for cash flow, it is true. But to make a blanket statement like that is somewhat asinine. US Treasuries are the safest debt securities in the world today, and they rely on the government. If you bought a portfolio of FFELP loans, they are backed by the full faith and credit of the U.S.
General statement about not relying on the government for cash flow
Conclusion: Reimbursement risk is not enough to make a hospital real estate un-investible. There are plenty of profitable operators who change with the times and remain profitable.
I’ll also point out that it is not in the government’s interest to put hospitals out of business. They will continue to exist long after we are dead. Operators have been dealing with fluctuating reimbursement rates for decades, this is not a new phenomenon.
You can go through the tenant base of MPW and determine what type of organizations run the hospitals in their portfolio. Most of MPW’s tenants are not completely reliant on reimbursements for their cash flow.
- Medicare and Medicaid for patients covered by those Federal programs
- Local tax revenues for some of the local governmental hospitals
- Insurance companies
- Out-of-pocket payments from patients
With the exception of the Federal hospitals, which are funded entirely from Federal tax revenues, hospital funding comes from a variety of sources, including:
- The Federal government owns about 200, including military hospitals and veterans hospitals.
- State and local governments own about 1,000
- Another 1,000 are owned by for-profit companies
- The remaining 3,000 are owned by not-for-profit organizations
There are little more than 5,000 hospitals in the United States. In round numbers, the ownership breaks down like this (as reported by American Hospital Association’s AHA Hospital Statistics publication:
Hospitals are similar to utilities in that they physically occupy space in towns with lots of distance between hospitals. But they are different in that not all of their income is from reimbursement.
There really is a lot of confusion about how reimbursement rates will change over time. No one can predict how hospital’s cash flows will change. However, there are many industries that still thrive even though their income is heavily regulated (utilities).
Perceived regulatory risk in reimbursement rates
Another conclusion: If the “tenant” concern is a popular opinion, then more the better for those of us who understand the true risk
My conclusion is that the risk in MPW’s tenant pool are manageable and not a reason to not invest.
- If you own the real estate, and your cash flows are lease payments from your tenants, then the credit quality of tenants is a key to success for sure.
- MPW’s tenant base are hospital operators.
- MPW has 31 different operators as tenants across ___ different hospitals
- Since MPW owns the land and building, it can change operators if one is having a problem
- One operator tenant filed for bankruptcy and it had little impact on MPW because of bankruptcy protections
- Tenants MUST pay rent to landlords to stay in the property during a Chapter 11
- Any rent that was owed prior to the filing must be paid in order to cure the lease and stay in the facility during and post bankruptcy
- If a tenant rejects the lease, it can be renegotiated, or the tenant must immediately vacate, in which case MPW would just bring in one of the other operators it knows to be the new tenant.
- The Adeptus bankruptcy is a good case-study in landlord protections and optionality – re-leasing, purchase of Adeptus by an investment firm with deep pockets
- In leasing a facility, MPW has specific credit worthiness metrics they look at and track. Hospitals that look like they are on the bubble are tracked closely and MPW works with the operators.
Perceived risk in the tenant base
I sent some time thinking about each of these themes in NA’s response.
- Perceived risk in the tenant base
- Perceived regulatory risk in reimbursement rates
- A general statement about disinterest in ideas where one is reliant on the government for cash flows.
There were three clear themes in NA’s response:
What NA gave me in this response is a lot of food for thought (thanks NA), and here is what I mean.
As a contrarian investor, I will occasionally test an idea or thesis by inserting it into a conversation to see the reactions. What I am NOT looking for is validation. Confirmation bias is powerful and I do my best to avoid it. What I am hoping for is to find only first level thinking about an idea that requires second level thinking.
“Way down. Hospitals are loaded with risk in the tenant base and reimbursements. Anytime u rely on the government for payment, I steer clear.”
Here is what NA said:
“Where does a healthcare REIT like $MPW fall on the spectrum, do you thinbk?
I noticed that healthcare REITS were not on the slide and so I asked the discussion where these REITS would fall in the spectrum, and I received an interesting response from a Twittezen with the handle NA.
Be open to looking at every opportunity and not brush one aside just because of a general feeling about something. Do not place weight on the opinions of others, but do not ignore them either. Use them as a basis for further learning or more testing of a hypothesis.
DISCLOSURE: Long MPW
Ask JB: What are your thoughts on momentum trading strategies and software?
Listener Elvis tweeted this question: I am curious to hear your opinion on trend following, momentum, and some of the software that offer that type of guidelines.
JB Says: Trend following and momentum are types of trading strategies promoted by makers of software that purports to help you be successful with such strategies. I don’t trade in that manner. Most traders will not make money, and anyone selling a system that purports to help you win, would be better off never telling anyone about their winning system. That is how you know the system will not work for you. They are the guys selling the picks and shovels to the gold miners. The stores made money, and the gold miners did not. Here’s how you can tell that they are lying to you…their lips are moving!
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