I like the deal that Medical Properties Trust (MPW) did this week — thought he market was less enthused. They are purchasing nine acute care hospital properties from Steward Health, which is not far from Gumshoe HQ here in New England, and will also likely have an ongoing relationship with Steward as it tries to expand nationally or regionally (including a right of first refusal on future Steward real estate deals).
MPW is also making a $50 million equity investment in Steward, which is a fast-growing health network that is backed by private equity giant Cerberus, but the big deal is $1.2 million to acquire the real estate. Those hospitals are being purchased at a cap rate of 10.1%, which means they have net operating income of 10.1% of what MPW is paying to buy the properties.
I’ll say that again, 10.1%. That’s huge. Part of the appeal of hospital real estate is that you can get those kinds of high cap rates on these investments, because the properties are not particularly fungible (they wouldn’t be easy to convert to some other use, to turn into offices or apartments if the operator goes bust or defaults)… but you also get some confidence from the fact that acute care hospitals are in constant demand and needed in every community, so they don’t often close down. If you were buying offices, retail stores or apartment buildings in a major urban area the cap rates would likely be in the 4-6% region these days, sometimes much lower for popular or “trophy” apartment buildings or office complexes.
That cap rate makes it pretty easy for Medical Properties Trust to make acquisitions that are accretive — it won’t cost them substantially more to manage this investment, going from managing $6 billion worth of hospital property to $7 billion worth of hospital property doesn’t mean you suddenly have to hire 15% more staff. These are net leases, so MPW is really just lending the money and keeping an eye on the property, and cashing their checks — the operator is responsible for all the maintenance and upkeep and any upgrades or improvements they want to make (that’s sometimes why hospitals do sale/leaseback transactions like this, to finance upgrades or improvements).
MPW stock fell on the news, mostly because they’re raising equity to help pay ...