When it comes to health care, real estate investment trusts (REITs) typically target medical office buildings, which can be converted to other uses more easily than an acute-care hospital can. But some privately held hospitals and health systems are turning to REITs as a way to get cash out of a portfolio company, sometimes without exiting.
Through April 2017, two deals have featured a REIT as hospital acquirers, compared with only one announced deal in 2016. Now, behavioral health hospitals are REIT targets.
Ventas‘ (NYSE: VTR) 2015 healthcare REIT spinoff, Care Capital Properties, Inc. (NYSE: CCP), recently moved into the behavioral health care sector. On April 10, the company announced it would pay $380 million to acquire the real estate assets of six behavioral health hospitals from Signature Healthcare Services LLC (dba Aurora Behavioral Health).
The hospitals are located in Arizona, California and Illinois. The properties have recently been expanded or are being expanded to increase bed capacity. With a combined total of 712 beds, the price works out to a stunning $533,708 per bed.
Signature is the largest private provider of freestanding psychiatric services dedicated to behavioral health and substance abuse. It owns eight additional acute psychiatric hospitals in addition to the portfolio Care Capital is acquiring.
Care Capital expects to fund approximately $380 million at closing and will have an option, exercisable beginning in the fourth quarter of 2018, to purchase one additional building for an amount that is expected to be approximately $20 million. The company has also agreed to provide up to $50 million for capital improvement projects in the portfolio over the next several years. Care Capital will also have the right of first offer on future real estate investment opportunities with Signature.
Care Capital will lease the properties to those Signature affiliates on a 10-year triple-net basis, with five renewals of five years each. The initial GAAP yield on the transaction is expected to be approximately 8.7%. The investment was underwritten at 1.5x EBITDAR coverage on cash rent.