Most acquisitions in the Hospital sector are made by another hospital or health system. In 2016, 59% of U.S. hospital acquirers were not-for-profit organizations, down from 65% in 2015 but still the majority.
Lately, real estate investment trusts (REITs) have taken an interest in the hospital sector, where there seems to be no end to the supply of struggling standalone hospitals. Eight deals were announced by REITs in 2016, involving 19 hospitals, for a approximately $1.5 billion.
Many of the target hospitals or systems were owned by private equity firms which wanted out. That was the case in September 2016, when Cerberus Capital Management sold off the real estate assets of its portfolio company, the nine-hospital Steward Health Care System, LLC in Boston, Massachusetts for $1.25 billion. Medical Properties Trust (NYSE: MPW) did the sale/leaseback.
That deal followed the August 2016 sale by Healthcare Partners Investments, LLC of its two acute care hospitals and seven integrated medical facilities in Oklahoma City, Oklahoma for $116.5 million. Carter Validus Mission Critical REIT acquired the assets, capping its fourth transaction in the hospital sector in 2016.
Two REIT deals for hospitals have been announced in the first six weeks of 2017, an indication that this type of capital raise is becoming more acceptable to distressed hospitals.
Global Medical REIT, Inc. (NYSE: GMRE) paid $24.5 million for the real estate interests of the 33-bed, 58,000-square-foot Great Bend Regional Hospital. Its physician owners formed Great Bend Surgical Properties LLC to run it, but announced the sale/leaseback in January 2017.
In February, MedEquities Realty Trust, Inc. (NYSE: MRT) acquired the real estate assets of Advanced Diagnostics Hospital East, LLC. The 23,300-square-foot, short-stay facility opened in December 2015 on 1.6 acres. It has four operating rooms, two special procedure rooms, four inpatient rooms and four recovery rooms.
MedEquities’ $12.5 million investment is in the form of a newly originated interest-only loan, with an interest rate of 9.6% and secured by a first mortgage on Advanced Diagnostics Hospital East. Beginning on October 1, 2017, MedEquities will have the exclusive option to purchase the hospital for $12.5 million pursuant to a 15-year triple-net lease at an initial annual lease rate of 9.6% with annual escalators.
During the term of the lease, MedEquities will have the right of first refusal to acquire and/or the option to fund any new medical facility development involving the hospital or its management team.
