Medical Properties Trust To Invest $950 Million In Behavioral Health Platform

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Medical Properties Trust, Inc. (the “Company” or “MPT”) recently announced that it has entered into definitive agreements to acquire 18 inpatient behavioral health hospital facilities and an interest in the operations of Springstone, LLC (“Springstone”) from Welsh, Carson, Anderson & Stowe (“WCAS”) for total consideration of $950 million.

Springstone, based in Louisville, Kentucky, is a leading provider of behavioral health services in the United States distinguished by its purpose-built, inpatient facilities in carefully selected markets and care delivery across the full behavioral care acuity spectrum.

The hospitals, along with additional facilities that Springstone expects to develop and acquire, are expected to be master leased pursuant to terms that are anticipated to provide a GAAP-basis yield exceeding 9.0% and lease payment coverage of approximately 1.75x in the near-term. The lease is expected to include an initial 20-year term with CPI-based annual rent escalators subject to a 2% floor.

The Company expects to initially fund the total cash consideration using cash on hand and borrowings under its revolving credit facility and additional financing arrangements, which may include issuances of debt and equity securities, placement of new secured loans on the acquired real estate, or a combination thereof. The sources of financing actually used will depend upon a variety of factors, including market conditions. The transactions are expected to close during the second half of 2021, subject to customary closing conditions, including certain regulatory approvals.

“The Springstone investments give MPT a major presence in the rapidly expanding United States behavioral health care market, which has been underserved in our society despite importance on the same level as acute and post-acute care hospitals,” said Edward K. Aldag, Jr., MPT’s Chairman, President, and CEO. “MPT’s acquisition of the 18 purpose-built inpatient facilities, much like our recent investment in the Priory portfolio in the United Kingdom, appropriately targets the highest level of acuity within the behavioral care continuum, and we believe that our investment in the operating company will result in additional attractive real estate opportunities.”

MPT anticipates that Springstone will continue to be operated by the same senior management team that has created this distinct portfolio of entirely de novo, purpose-built inpatient and outpatient behavioral health facilities in carefully selected markets. It is expected that these highly experienced individuals, led by Executive Chairman Bill Wilcox, CEO Phil Spencer and CFO Greg Miller, will co-invest alongside MPT in the operating company and be responsible for the day-to-day operations of Springstone, which will be essentially unchanged going forward.

“We’re so appreciative of the job the management team did to build this business. We started this company from scratch 10 years ago and are incredibly proud to have built over 50 facilities, created more than 4,000 jobs, and treated tens of thousands of patients with the highest quality care,” said Brian T. Regan, Head of Healthcare and Partner at WCAS. “It was important to us that the management team has the opportunity to be part of Springstone’s ownership and to continue leading the company and its employees to the next phases of growth.”

Philip Spencer, Springstone’s CEO, added, “Over the past decade, Springstone has helped tens of thousands who struggle with mental health and addiction challenges, thanks to the support of Welsh, Carson, Anderson & Stowe and the dedication of our team of compassionate professionals. We look forward to working with MPT to expand our behavioral healthcare model to serve even more communities.”

Benefits of Transaction

Expected to Achieve Immediate Accretion. The strong cash and GAAP returns related to the sale-leaseback transaction and an accretive cash return on MPT’s investments in the operating company, along with MPT’s attractive cost of capital, are expected to result at closing in immediate improvement in per share net income and funds from operations.

Projected to Create an Unmatched Competitive Advantage in Accelerating United States Behavioral Health Care Market. Springstone provides a full continuum of behavioral care including inpatient, partial hospitalization, and intensive outpatient programs and has targeted diversified geographies with positive demographic trends and a commercial-heavy payor mix. These factors, along with its scale and the purpose-built nature of its facilities, differentiate Springstone from competing operators.

The COVID-19 pandemic has accelerated growth in demand for mental health services in the U.S., evidenced by improving Springstone operations throughout 2020. Like in the U.K., the U.S. government and payors alike acknowledge the need for incremental funding for behavioral health care. Multiple Avenues for Growth Including Development and Expansion Projects. Increasing demand for behavioral health services is expected to continue to generate additional attractive development and expansion projects not underwritten in this transaction.

Improved Portfolio Diversification. MPT’s largest individual property investment now represents only 2.6% of pro forma total gross assets. The consummation of the Springstone transaction is subject to customary closing conditions, including applicable regulatory approvals and the finalization of agreements with current management. MPT cannot give assurances that the transactions will be successfully consummated as described above or at all. Barclays and Guggenheim Securities, LLC acted as financial advisors to MPT.

About Medical Properties Trust, Inc.

Medical Properties Trust, Inc. is a self-advised real estate investment trust formed in 2003 to acquire and develop net-leased hospital facilities. From its inception in Birmingham, Alabama, the Company has grown to become one of the world’s largest owners of hospitals with 442 facilities and roughly 45,000 licensed beds in nine countries and across four continents on a pro forma basis. MPT’s financing model facilitates acquisitions and recapitalizations and allows operators of hospitals to unlock the value of their real estate assets to fund facility improvements, technology upgrades and other investments in operations. For more information (including additional details related to the Springstone investment as part of an updated investor presentation), visit the Company’s website at www.medicalpropertiestrust.com.

 

Source: HREI

Health Care-Centric, Mixed-Use Development In Fort Myers, Florida, Gains Traction With Land Deals

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More than three years after Hope Hospice and Community Services Inc. unveiled plans for a 46-acre, health care-centric development in Fort Myers, the mixed-use project has gained significant traction.

And with a trio of recent land deals involving more than one quarter of the total project, only five acres of Hope Preserve remain uncommitted. The three recent parcel sales, which sold for a combined $8.72 million, will result in three new medical office and physicians practices and a traditional office building.

Together, the new projects will contain 148,000 square feet of new commercial space. One of the new buildings, a two-story, 21,000-square-foot office building, will become the corporate headquarters for Stevens Construction Inc.

“Hope Preserve will allow us to be more central to all the areas that we serve,” says Mark Stevens, the company’s president. “And it’ll be a much more visible location for us. We’ve been in the same location for 16 years, and we love it there, but this was just a tremendous opportunity.”

The new 14541 Hope Center Loop quarters, which Stevens will own, will double its office footprint to 10,000 square feet. The balance of the space in the building will be marketed for lease by Fort Myers-based commercial real estate brokerage firm LSI Cos. Inc.

“The company plans to complete the building around the end of this year,” said Stevens.

Designed by Southview Studios, Stevens’ new offices will also contain a training room, indoor and outdoor team lounges, multiple bathrooms and a shower facility, conferences and offices that feature floor-to-ceiling glass.

Meanwhile, a second, medical office building also is slated for the 3.71-acre parcel that Stevens acquired for $2.1 million. There, Stevens intends to develop a 27,000-square-foot building. Completion is scheduled for late Spring of 2022. Radiology Regional has committed to lease the two-story building’s first floor, with LSI marketing the second floor.

Additionally, following its own $4.88 million land deal for 7.06 acres, Orthopedics Specialists of Southwest Florida intends to develop a building between 60,000 square feet and 80,000 square feet in Hope Preserve. Stevens is on tap to construct that building, as well, beginning sometime next year.

The final perimeter parcel of the project, at the intersection of Metro Parkway and Ben C. Pratt/6 Mile Cypress Parkway, was sold in mid-May to Hodges Mantz Properties LLC, an entity formed by a pair of Southwest Florida physicians.

Hodges Mantz paid $1.74 million for a 2.5-acre tract, which is zoned for a medical use, in Hope Preserve. LSI Cos. President Justin Thibaut and agent Christi Pritchett represented Hope Hospice, while VIP Realty Group’s Jack Liptak negotiated for the buyer.

The planned new buildings join The Preserve, a continuing care retirement community with assisted living, skilled nursing and memory care units, at Hope Preserve.

Thibaut notes that with the activity, only 5.1 acres remain available within Hope Preserve. Owner Hope Hospice, which acquired the property in 2010, also is likely to build a hospice house on the site eventually. The end-of-life, nonprofit provider today care for roughly 4,000 people daily.

At least one restaurant and a 124-key hotel also are planned for Hope Preserve. The hotel replaces 92 apartments that were originally envisioned for the development.

All of the activity comes as Gulf Coast Regional Medical Center is completing a $315 million, 275-bed expansion less than a mile away. Thibaut expects the hospital expansion’s draw to only intensify when it opens in the coming months.

“Hope Preserve is in a prime position for users who are looking to be near a major medical center,” Thibaut says. “There’s really been a resurgence of medical office users to areas where retailers traditionally would go.”

Stevens believes his growing firm and the growth at Hope Preserve will dovetail nicely. The company, which operates four offices in Fort Myers, Sarasota, Tampa and Orlando and specializes in health care and hospitality projects, currently has 39 separate projects under construction valued at $94 million, with another $152 million set to begin within the next year.

“The market in Southwest Florida is growing, and with projects that are in many cases are larger in scale and scope than ever before,” Stevens says. “That’s been especially good for us and allowed us to grow right on the targeted pace we’d set a couple of years ago. And with Hope Preserve, we’re just super excited to be on the ground floor of such a dynamic project.”

 

Source: Business Observer

Medical Office Property Remains An Investor Darling, Post COVID-19

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Once again medical office assets have proven their resilience against recessions.

According to a new CBRE report on medical office trends, investment sales of medical office properties experienced a moderate drop compared to most major property types last year as the pandemic gripped the United States. What’s more, investor appetite for medical office product appears to be growing in spite of a dip in healthcare employment in 2020. With a 50 percent drop in patient visits to medical office clinics in 2020, healthcare employment declined by 6.4 percent, according to Oxford Economics data. That was still significantly below an 11.2 percent decline in employment for the broader economy.

“Demand for medical office space for clinical healthcare services experienced a brief decline in 2020, particularly in the early months of the pandemic, when non-emergent outpatient services were suspended,” says Lorie Damon, managing director, healthcare advisory practice at real estate services firm Cushman & Wakefield. “Nevertheless, occupancy remained strong. Since then, healthcare providers that had planned to add new sites, relocate existing sites or acquire additional entities, have continued to do so.”

In fact, demand for space has accelerated as vaccinations were rolled out and new growth opportunities in the medical office sector have emerged as patients who deferred care last year returned, Damon notes.

“Medical office has been the ‘steady Eddie’ through two recessions,” emphasizes Chris Bodnar, vice chairman and co-head of healthcare & life sciences capital markets at CBRE.

In CBRE’s 2021 survey of healthcare real estate’s most influential REITs, institutional investors, private capital investors and developers, 80 percent of respondents said the sector is recession-proof. Property fundamentals data supports this view. Last year, medical office landlords collected more than 95 percent of rent due, according to data firm Revista LLC.

Bodnar says that medical office isn’t prone to huge rent peaks or valleys and last year’s rents were mostly flat. But about half of CBRE’s survey respondents are expecting a 2 to 3 percent increase in rent growth this year. The expectation for rent growth is based on pent-up demand for new space by medical providers that had put expansion plans on hold during the pandemic. A bump in rents for new product is also anticipated—partially due to an increase in construction costs that will be passed through to tenants.

Healthy Outlook

With medical office occupancy remaining stable throughout the pandemic, Damon notes that rents are already rising in some markets that have limited supply and steady demand for quality space. According to Bodnar, with little new product developed in 2020, there is now a dire shortage of new medical office space, which should push up rents.

“Oversupply in this sector was rare even pre-COVID-19,” Bodnar says. “As medical office developers are very disciplined—they don’t build on spec. Rather, they like to create an ecosystem of healthcare tenants that work together—or compliment each other—and then build around that nucleus. With the trend toward consumer-directed healthcare growing, particularly among millennials, providers are seeking space in locations convenient to the populations they serve.”

He notes physician groups and other providers are using GIS (Geographic Information Systems) modeling to look at demographics, population and insurance coverage to help determine where they should expand and how many physicians should be located in a new market. For example, with many young families with small children migrating to the suburbs, pediatricians may find this an optimal location to grow market share.

“Retail centers are on the list of potential sites, as existing space offers greater speed to market than new development,” Bodnar says. “Retail centers also typically offer attractive rental rates.”

Physicians and other healthcare providers prefer open-air centers, as they provide good visibility and can place signage directly above the space so patients can easily find them, according to Bodnar. Other advantages include nearby amenities, convenient access and abundant parking.

Damon notes, however, that medical office tenants’ criteria for space vary depending on the type of practice, patient population served and strategic goals. So, while retail and mixed-use centers are preferred by some types of physicians, they are not suitable for every type of healthcare service.

Growing Demand

Last year, investment sales of medical office properties fell by 12.7 percent, according to CBRE—far below the more than 40 percent drop in volume for traditional office buildings.

According to Cushman & Wakefield’s healthcare capital markets team, which is led by Gino Lollio and Travis Ives, investors have a very positive view of medical office, and many investors new to the sector are aggressively seeking acquisitions. But overall, acquisition activity has been somewhat constrained, largely due to supply constraints rather than a lack of investor appetite.

New investment funds pursuing medical office acquisitions are generally seeking core or core plus assets, with strong tenant bases and significant weighted average lease terms remaining, according the Cushman & Wakefield’s markets experts. These funds are mostly geography-agnostic, though some prefer the Sunbelt states.

Most investors in medical office real estate prefer buildings of 25,000 sq. ft or larger, located on or in close proximity to a hospital campus and anchored by a health system or a leading physician practice, according to Cushman & Wakefield’s team. Buildings within 250 feet of a hospital tend to provide the greatest rent premiums, as reimbursement by the Centers for Medicare & Medicaid Services (CMS) is 40 percent greater than for those facilities vs. off-campus healthcare practices.

The Cushman & Wakefield’s team notes that with strong competition for available assets, cap rates have compressed over the last year as investor demand increased. Yields have compressed as well, though compared to other commercial asset types, medical office yields remain attractive to investors.

According to CBRE data, the average cap rate on sales of medical office assets compressed by about 20 basis points year-over-year in 2020, with the average cap for portfolio sales declining by 100 basis points to about 5.52 percent. The average cap for individual sales dropped to 6.61 percent. Over the same period, the average price per sq. ft. for medical office buildings increased by 5.5 percent.

According to Bodnar, because of strong property fundamentals and a positive outlook, an increasing number of investors are switching their real estate allocations from traditional office buildings to medical office. Those new to the sector are often partnering with experienced medical office developers and operators.

Among CBRE’s 64 survey respondents who answered the question, a total of $10.9 billion in equity has been allocated to healthcare real estate investment and development activity in 2021. That’s approximately 11 percent below the results of the 2020 survey, but 6 percent above the survey administered in 2019. And of the 64 firms respondents to this specific question, only 13 are a healthcare REIT or an institutional healthcare investor.

For example, in January, MedCraft Investment Partners announced it was launching a $500 million joint venture for medical office acquisitions, and, according to The Wall Street Journal, Kayne Anderson Real Estate is getting ready to close a $2.5 billion fund and expects to allocate about half of it to medical offices.

Among the biggest private equity players, Blackstone and KKR have already made significant investments in life sciences real estate and are now seeking additional allocations in the medical office sector. In addition, Nuveen Real Estate, a global real estate investment management firm, has partnered with Healthcare Realty Trust, a REIT focused on managing, acquiring and developing outpatient medical facilities, to enter the medical office sector.

However, Cushman & Wakefield’s team notes that many of the large institutional funds now entering the medical office space are looking for immediate scale, preferably via large portfolio transactions or platform acquisitions.

 

Source: Wealth Management