Medical Properties Trust Inc. recently revealed that it has signed definitive agreements to acquire the real estate interests of 10 acute care hospitals and one behavioral health facility currently operated by IASIS Healthcare and to be operated by Steward Health Care System LLC when the transaction is completed.
According to a prepared statement about the deal, the $1.4-billion real estate transaction will be immediately accretive to normalized FFO per share by approximately $0.10 (and to net income by $0.05 per share) in 2018 assuming all debt financing. Steward and IASIS separately revealed a simultaneous merger transaction, completion of which is a condition of MPT’s investment.
According to the MPT release, benefits to MPT’s portfolio is that it increases the REIT’s critical mass. “This transaction increases MPT’s pro forma total gross assets by approximately 20% to almost $9 billion,” the release states. “Further, it adds 11 outstanding hospitals and over 2,400 beds to MPT’s portfolio, increasing the total number to 269 and 31,266, respectively.”
In addition, the community-focused hospitals clustered primarily within large metropolitan areas in high-growth urban and suburban markets in the states of Utah, Arizona, Texas and Arkansas offer suitable payor mixes, the release says.
Other benefits, according to the MPT release include: increased acute care percentage; decreased LTACH percentage; single largest hospital exposure; and that it expands the relationship with Steward.
Edward K. Aldag Jr., MPT’s chairman, president and CEO notes that “MPT has grown its assets by approximately 31% annually since 2013, compared to 15% for our healthcare REIT peers, and with this transaction, we eclipse our previous record 2016 acquisition total.”
He continues that “This phenomenal growth, even as we sold almost $800 million of assets in the first half of 2016 to reduce leverage, has resulted in our normalized FFO per share growing over 10% annually compared to 6.7% for our peers for the period. Our dividend growth of 4% annually has also outperformed while our dividend payout ratio declined from 83% to 70% of normalized FFO.”
He also points out that “Steward has similarly achieved remarkable success in growing its company starting with the turnaround of a struggling not-for-profit hospital system in eastern Massachusetts. As Steward implemented its strategic plan to develop an integrated network with various access points along the healthcare continuum, the results were improved outcomes and reduced costs. The combined capabilities of Steward and IASIS will create the largest private for-profit hospital operator in the United States with projected revenues of almost $8 billion in 2018, the first full year of consolidated operations. Consolidation will continue in this dynamic healthcare environment and Steward is in a good position to capitalize on this trend.”
Details of the transaction are as follows: MPT’s interests in the hospitals to be acquired will be subject to a master lease and mortgage loan arrangements with cross default provisions and backed by a corporate guaranty. Nine hospitals will be purchased for $700 million and leased back to Steward under the master lease, which has an expiration date of October 31, 2031, and includes three five-year extension terms, resulting in a GAAP yield of 10.2%. The new mortgage loans, also aggregating $700 million, have the same contractual terms as the leases. Additionally, MPT is making an attractive $100 million preferred equity investment in Steward, which will provide low risk equity-like returns.
MPT’s pro forma investment of $3.3 billion in Steward real estate will include MPT’s existing investment in hospital real estate leased to IASIS, and generate approximately $298 million in annual revenue split 67% rental income and 33% interest income from mortgages. Expected 2018 EBITDAR rent and interest coverage for all Steward hospitals is 2.8 times.
The transaction is expected to close by September 30, 2017, subject to customary approvals and consents. MPT expects to finance the acquisitions with proceeds from a combination of a fully committed $1.0 billion term loan with a term up to two years, its revolving credit facility with present availability of approximately $1.0 billion and the possible issuance of long-term unsecured notes. The Company intends to maintain its prudent leverage position and does not expect net debt to adjusted EBITDA to exceed 5.7 times.
The REIT also recently revealed Q1 numbers, and according to Aldag, he said that the REIT was positioned to substantially increase its acquisition activity beyond its prior guidance. “We have already closed and committed to close on almost $450 million of our initial 2017 estimates in very high quality hospital assets, and our sector-leading balance sheet strength gives us capacity to add as much as another $1.5 billion while maintaining our very low leverage target of 5.5 times net debt to EBITDA,” he said in the Q1 report.