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Behind Medical Properties Trust’s $2B Hospital Buy

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Medical Properties Trust Inc. recently revealed that it had entered into definitive agreements to acquire the real estate of 30 acute care hospital facilities located throughout the United Kingdom for an aggregate purchase price of approximately £1.5 billion, or approximately $2.0 billion.

According to a release at the time, the facilities are leased under long-term inflation protected net leases to affiliates of BMI Healthcare, the largest private operator of acute hospitals in the United Kingdom. In a related transaction, affiliates of Circle Health are to acquire BMI and assume operations of its 52 facilities in the United Kingdom. Circle, an operator of UK acute hospitals and successful MPT tenant, has committed to a multi-million pound program of investment in facility infrastructure, technology and people as part of the transaction.

The lease arrangement is expected to provide a GAAP-basis yield of 8.9%. The acquisition was underwritten by MPT to provide initial lease payment coverages of approximately 2.0 times recent EBITDAR, with the expectation of expanding coverage as Circle implements its strategic and operational initiatives. The hospitals will be leased under a master lease structure guaranteed by Circle with an initial fixed term of 30 years, two 5-year extension options, and annual rent escalators linked to UK consumer price inflation. MPT expects to fund the acquisition with cash on hand, including proceeds from recent U.S. dollar equity and sterling-denominated bond offerings and borrowings under an unsecured sterling-denominated term loan facility. The transaction is expected to close in the first quarter of 2020 subject to customary closing conditions.

“These hospitals represent a unique collection of facilities that are critical to the delivery of acute health services across the United Kingdom,” said Edward K. Aldag, Jr., MPT’s Chairman, President and CEO. “We are confident in the growing opportunities for private hospital operators in UK healthcare. We look forward to advancing our relationship with our UK operators in contributing to improved facility efficiency, quality of care and health outcomes for all hospital patients throughout the United Kingdom.”

Benefits of transaction include the following:

Achieves Immediate Accretion. The strong cash and GAAP returns, along with MPT’s attractive cost of capital will result in immediate improvement of per share net income and funds from operations.

Increases UK Footprint. This transaction significantly increases the Company’s footprint throughout the United Kingdom, resulting in a total investment of approximately $2.5 billion in the UK. The UK market is highly attractive for future growth with its appealing demographics and unwavering governmental and social commitment to providing healthcare to its population.

Reduces Tenant Concentration. MPT’s total gross assets increases to approximately $16.2 billion and exposure to its largest tenant declines to 25%, down from almost 40% at the beginning of 2019.

Based on year-to-date transactions in 2019, along with an assumed capital structure that results in a net debt to EBITDA ratio of approximately 5.5 times, MPT expects an annual run-rate of $1.24 to $1.27 per diluted share for net income and $1.65 to $1.68 per diluted share for Normalized Funds from Operations (“NFFO”).

A reconciliation of NFFO guidance to net income and a reconciliation of pro forma total gross assets to total assets are included in the financial tables accompanying this press release.

These estimates do not include the effects, if any, of unexpected real estate operating costs, changes in accounting pronouncements, litigation costs, debt refinancing costs, acquisition costs, currency exchange rate movements, interest rate hedging activities, write-offs of straight-line rent or other non-recurring or unplanned transactions. These estimates may change if the Company acquires or sells assets in amounts that are different from estimates, market interest rates change, debt is refinanced, new shares are issued, additional debt is incurred, other operating expenses vary, income from our equity investments vary from expectations, or existing leases do not perform in accordance with their terms.

MPT will be acquiring the real estate portfolio from an affiliate of BMI pursuant to the terms of a share purchase agreement, which also contemplates that an additional five non-core properties will be disposed of either prior to or following the closing.